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Legal Formalities to Start a Business Every Startup Should Know

legal formalities to start a business

You might have a clear business plan and a talented team, but failing to fulfill legal formalities to start a business might cause it to crash in a single day.

Many start-ups in India skip or neglect the legal structure process, which leads to major issues. Thus, it’s crucial to be familiar with all the legal paperwork required to start a business. Every sort of business has different financing requirements, and experts can offer some advice to help you calculate how much money you’ll need.

The Fundamental Legal Formalities to Start a Business

Here is a list of some of the fundamental legal procedures that you will need to pay attention to before starting a business in India.

Corporate Formalization

The first consideration you must make to comprehend your business is what kind of business you intend to conduct and what its nature is. Though a sole proprietorship isn’t supposed to be a startup under the startup India strategy, will you do a partnership, limited liability partnership, or private limited company? You must be aware of the sort of business property you fall under and the laws that apply to it because every firm has its own unique set of legal rules and regulations.

Protection of Trademarks and Intellectual Property (IP) Rights

If you’ve created something exceptional, you should protect it. Your novel product or process may be protected by a patent. Submit a trademark application to receive exclusive rights to your products. To protect your business and increase revenue, carry out timely IP audits and file accurate trademarks, copyrights, and patent claims. It is one of those legal formalities to start a business that you shouldn’t be neglecting!

Labor Laws

Whatever number of employees are there in your company, you must constantly be aware of the labor regulations. These regulations cover topics like minimum salaries, holidays, maternity leave, bonus payments, provident fund payments, and other such things. Startups may be excused from labor inspection under the new company regulations established by the Startup India program if they complete a self-declaration for labor laws.

Recognizing Accounting and Tax Legislation

Taxes are an essential part of any startup firm. An entrepreneur must be aware of all tax laws before launching a business. Several different taxes may be applicable for some new businesses, including state taxes and local taxes. Knowing taxation and other legal formalities to start a business in advance can be helpful because different companies and operating sectors attract varying taxes.

As part of the “Startup India” initiative, the Indian government recently provided many tax advantages for new and fledgling businesses. A startup company can benefit from this effort by receiving a three-year income tax exemption, as well as tax breaks from capital gains and expenditures exceeding Fair Market Value.

Foreign Direct Investment (FDI)

Although there are some norms and restrictions for foreign venture capital investors, the Indian government supports foreign investment for businesses (FVCI). The Foreign Exchange Management Act (FEMA), 2000, and its third amendment, Schedule 6, are the same laws that were utilized to regulate investments in 2016 and allow foreign firms to contribute 100% of the capital to an Indian startup.


Creating bylaws also falls under the important legal formalities to start a business category. It is necessary to create bylaws to define how start-ups will operate. Bylaws assist in establishing a positive, productive workplace culture internally and reduce difficulties. In addition, bylaws can be used to add new CEOs or Directors to a startup. Therefore, bylaws as a whole can resolve all conflicts between team leaders, stakeholders, and personnel.

Be Sure to Manage Contracts Properly.

A legally valid contract must contain a written record of all of your commitments. A contract makes it simple to take action in the case of a default or inaction, as well as to enact and enforce actions. Under the Indian Contract Act, of 1872, all engagements are contracts if they are entered into with the freely given consent of parties able to contract, for a lawful basis with a legal goal, and are not expressly declared to be void. 

Nondisclosure Contract

Recently, the significance of signing a non-disclosure agreement has grown among the parties/partners that are involved. Entrepreneurs may divulge sensitive data such as corporate secrets, price, client lists, specs of proprietary software, and so on when negotiating with possible investors or contractors.

According to Indian Business Law, an NDA is required to stop the exploitation of confidential company information. A Non-Disclosure Agreement (NDA) enables business owners to hold NDA signees accountable for misusing proprietary information for their own or another’s professional gain, which is regarded as a breach of the agreement. It has become one of the most critical legal formalities to start a business!

Regardless of whether the business is beginning or well-established, understanding and abiding by current laws is the first step to assuring smooth startup business operations. If you enjoyed reading this startup blog, you can find more blogs on various topics by visiting our home page at Purple Pennon.


Are startups in India profitable?

Startups have invested a total of $6.6 billion in 2018, $10 billion in 2020, and $36 billion in 2021. There have been several companies among the numerous in our nation that have distinguished themselves and generated the most revenue.

What does the government define as a “Startup” for its programs?

An organization will be regarded as a “Startup” whether it is a Private Company, Registered Partnership Firm, or Limited Liability Partnership.
a) Up to five years following the date of incorporation or registration,
b) if any financial year’s turnover did not exceed INR 25 crore, and
c) It is working to innovate, create, implement, or commercialize new goods, procedures, or services that are based on intellectual property or technology. The entity shouldn’t have been created by dismantling or reorganizing an existing company. Neither a sole proprietorship nor a public limited company is acceptable as a startup. Being a private limited company, a one-person business is qualified to be referred to as a “startup.” Refer to notification G.S.R. 180(E) from February 17, 2016, for more details.

How long will the identification of your company as a “Startup” be in effect?

When 10 years have passed since the date of a business’s incorporation or registration, or if the preceding year’s turnover exceeded one hundred crore rupees, the entity no longer qualifies as a startup.

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