Legal Aspects for a Start-Up


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Presentation made in Mumbai, India at the Power Of Ideas Workshop organised by the CIIE, IIM-A and the Economic Times

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  • - Sleeping partners, only capital share partners,
  • Dividend % Tfr to General Reserve10% - 12.5% 2.5%12.5% - 15% 5%15% - 20% 7.5%>20% 10%
  • Professional Tax<=Rs5,000 nil<=Rs10,000 Rs175 / month>Rs10,000 Rs200 / month (Feb Rs300)
  • Professional Tax<=Rs5,000 nil<=Rs10,000 Rs175 / month>Rs10,000 Rs200 / month (Feb Rs300)
  • Professional Tax<=Rs5,000 nil<=Rs10,000 Rs175 / month>Rs10,000 Rs200 / month (Feb Rs300)
  • U/s 79A of Companies Act, 1956
  • Temporary Facilitation Offices:Delhi, Mumbai, Kolkata, Chennai, Hyderabad, Bangalore, Ahmadabad, Pune, Kanpur and Jallandhar
  • Rule 9 and Rule 8
  • S. 17(2) contains an inclusive definition of the term ‘perquisite’, and sub-clause (iii) thereof states that the term includes the value of any benefit or amenity granted or provided free of cost or at a concessional rate by an employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income under the head ‘Salaries’ (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds fifty thousand rupees.The proviso below the above clause reads as under :"Provided that nothing in this sub-clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government".The Central Government issued the ‘guidelines’ referred to in the proviso above by Notification No. 323/2001 (R.No. 142/48/2001-TPL) dated October 11, 2001, effective from April 1, 2000, which enumerates the various aspects that ought to be included in any Employees Stock Option Plan or Scheme. The guidelines, inter alia, provide for the following :
  • Legal Aspects for a Start-Up

    1. 1. Legal Aspects for a Start Up<br />Presented by CA Mehul Mukati<br />for<br />ET Power Of Ideas Workshop<br />CIIE, IIM - Ahmedabad<br />
    2. 2. Outline<br />SSI vs MSME<br />Choosing your vehicle<br />Companies<br />Taxation<br />Other Legal aspects<br />2<br />
    3. 3. SSI vs MSME<br />SSI – Small Scale Industries<br />MSME – Micro, Small and Medium Enterprises<br />Certification / Registration<br />3<br />
    4. 4. Entity Choice<br />Service area or product development<br />No of people – partners, employees, etc<br />Time to test your service / prototype your product<br />4<br />
    5. 5. Formation<br />* High degree of legal compliance / formalities<br /># surcharge applicable if revenues > Rs1 crore<br />5<br />
    6. 6. In all forms of entity<br />Need to maintain proper income and expenditure records<br />Obtain tax numbers:<br />PAN / TAN / Service Tax / VAT / Sales Tax<br />PAN / TAN / Service Tax process simplified<br />Anyone can apply online and then send the documents to the relevant office<br />OR<br />Go to the nearest facilitation centre and submit the form and documents<br />6<br />
    7. 7. Partnership<br />Proper agreement (deed)<br />Capital share<br />Profit share vs Loss share<br />Duties, responsibilities, and authority<br />Salary paid to partners deductible as expense<br />Taxable in hands of individual<br />7<br />
    8. 8. Limited Liability Partnership (LLP)<br />Agreement Deed / Incorporation Agreement (as previous)<br />LLP Act, 2008<br />Minimum 2 partners, at least 1 resident<br />DPIN to be obtained<br />audit subject to limits<br />Annual Filings<br />Statement of Accounts and Solvency to be filed within six months from end of financial year<br />Annual Return to be filed within 60 days of end of financial year<br />8<br />
    9. 9. Limited Liability Partnership (LLP)<br />Exemptions from audit available<br />Turnover<br />Contribution<br />But needs to be certified by designated partners<br />Maximum Remuneration*<br />Profit ≤ Rs3 lakhs Rs1.5 lakhs/90% of profit<br />Profit > Rs3 lakhs 60% of incremental profit<br />* same as a traditional partnership firm<br />9<br />
    10. 10. Private Limited Company<br />All Directors need DIN<br />Other mandatory provisions:<br />Quarterly board meetings<br />Intimation to Registrar of Companies<br />Audit<br />More Legal Requirements<br />10<br />
    11. 11. Annual Filing – RoC<br />Balance Sheet<br />Profit and Loss Statement<br />Annual Return<br />Compliance Certificate<br />If capital between Rs10 lakhs and Rs2 crore<br />11<br />
    12. 12. Other Filings – RoC<br />Mortgage<br />Cost Audit Report, if applicable<br />Increase in Authorised / Paid Up Capital<br />Change in Directors, if any<br />12<br />
    13. 13. Companies Act<br />Board Meetings<br />At least one each quarter<br />No maximum limit<br />Whole-time / promoter directors no sitting fees<br />Can be held anywhere and at any time<br />Registers to be maintained<br />Audit requirement<br />Audit fees cannot be % based<br />Auditor can claim reimbursement of expenses<br />13<br />
    14. 14. Companies Act<br />Annual Return to be filed within 60 days of General Meeting<br />Can accept deposit only from Director / Member / Relative<br />AGM to be held within max 15 months<br />On working day and during working hours<br />Appointment of Statutory Auditor<br />Change in Directors<br />14<br />
    15. 15. Companies Act<br />Can issue DVR shares<br />Cool off period 3 profitable years<br />Specific format of P&L / Balance Sheet<br />15<br />
    16. 16. Companies Act – No Worry On<br />Audit Committee<br />Directors rotation / retirement<br />Ceiling on managerial remuneration<br />Time-limit for managing director<br />16<br />
    17. 17. Dividends<br />To be deposited in separate bank account within 5 days and paid within 30 days<br />Prerequisites<br />Provision for depreciation<br />Transfer to general reserve<br />No default in redemption of preference shares<br />Need to pay DDT @ 16.22%<br />Not Taxable in the hands of recipient<br />17<br />
    18. 18. Income Tax – Due Dates<br />Advance Tax payments<br />Calculated on the estimated profit for the year<br />15th June 15% ---<br />15th Sept 45% 30%<br />15th Dec 75% 60%<br />15th Mar 100% 100%<br />Annual Returns to be filed<br />Audited / Partner of such firm 31st Oct<br />All others 31st July<br />Ensure loss returns are filed in time<br />18<br />
    19. 19. Income Tax - Requirements<br />Maintain Books of Accounts for 8 years<br />Form of entity does not matter<br />Audit Limits based on revenues<br />Business > Rs60 lakhs (Rs40 lakhs)<br />Profession > Rs15 lakhs (Rs10 lakhs)<br />Mandatory for companies irrespective of revenue<br />Statutory Dues / Taxes can be claimed only if paid within respective due dates<br />Remember: advantageous if bills are generated in name of entity<br />19<br />
    20. 20. Income Tax – Expenses Claim<br />Depreciation on WDV : vehicle, computers & peripherals, mobile<br />30 September vs 31 March<br />Can be carried forward indefinitely<br />Service Tax/Sales Tax/VAT Input<br />Availability of set-off<br />Rentals<br />Receiver can claim flat maintenance cost of 30% of rentals: no bills are needed<br />Income tax applicable only on balance amount<br />20<br />
    21. 21. Income Tax – Expenses Claim<br />Other Company Expenses<br />can vary from puja expenses in the office, newspapers, office materials, water, electricity, telecom, security, etc.<br />Claimed by the company and not by the directors<br />Proper bills will be needed in company name<br />Salaries & Reimbursements<br />Employees<br />Directors / Promoters<br />21<br />
    22. 22. Income Tax –Salary Payments<br />Optimum Salary: Rs3.30 lakhs / year<br />New tax slab limit Rs. 1.8 Lakh<br />80C benefits Rs1.1 Lakh<br />Medical insurance Rs15,000/Rs35,000?<br />Others: medical, conveyance, children education<br />If above 60 / 80 yrs Rs4.15 / 6.15 lakhs<br />Other Direct Payments to Directors<br />Rentals<br />Consultation Fee<br />Commissions 1% / 3% of Net Profits<br />22<br />
    23. 23. Income Tax – Deductions<br />Sec 80HHC – Export of Goods<br />Export of goods / merchandise<br />Certificate issued by Export House / Trading House<br />Sec 80HHE – Software / Tech Services Export<br />Buyer / Auditor certificate<br />Common to above<br />Payment in Convertible Foreign Currency<br />Proportionate to Total Revenue / Profits<br />23<br />
    24. 24. Income Tax – TDS<br />Onus on payer to deduct TDS<br />TDS to be deducted on all bills / payments<br />TDS to be deposited each quarter / month<br />PAN not quoted = higher TDS<br />24<br />
    25. 25. Income Tax – TDS<br />25<br />
    26. 26. Service Tax<br />Wide range of services covered, including most common – consultancy, advisory, etc.<br />Exception: Export, if receipts in foreign currency<br />Applicable if revenue ≥ Rs10 lakhs<br />Based on providers’ revenue<br />Need to register<br />once revenue crosses Rs9 lakhs in previous year<br />Within 30 days<br />Set-off available – now a grey area<br />Effective Rate = 10.3%<br />26<br />
    27. 27. Service Tax Procedure<br />Apply to Superintendent of Central Excise<br />Single Registration for all services<br />PAN mandatory for ST registration<br />Need to issue bill / invoice within 14 days of completion of service<br />Signed and numbered<br />Details / description of service provided<br />Service tax amount to be shown separately<br />Name & Address of provider / receiver of service<br />ePayment mandatory if ST ≥ Rs.10 lakhs<br />27<br />
    28. 28. Service Tax<br />Payment<br />5/6th of quarter end (ex Mar) Individual / Firms<br />5/6th of month (ex Mar) Others<br />Returns: Half Yearly – 25th Oct / 25th Apr<br />ST applicable on full bill value<br />Including TDS deducted<br />28<br />
    29. 29. Excise Duty<br />Excise Duty<br />Only manufacturers<br />Payment by 5th / 6th of next month / quarter<br />SSI Quarterly; others each month<br />Returns<br />SSI 10th after end of quarter; others 10th of next month<br />29<br />
    30. 30. RBI / FEMA<br />RBI Regulations / FEMA<br />Imports: Equipment<br />Exports: Software / Services<br />30<br />
    31. 31. Provident Fund (PF)<br />Mandatory if<br />≥ 20 employees and<br />Salary ≤ Rs6,500/month<br />Exceptions<br />Company PF Trust<br />“excluded” employee<br />Deductions<br />12% of Basic + DA<br />Matching contribution by employers<br />31<br />
    32. 32. Shops & Establishments Act<br />Mandatory in all cases (except if it is a factory)<br />Fees depends on number of employees<br />32<br />
    33. 33. ESIC<br />Mandatory if<br />Manufacturing using power ≥ 10 employees<br />Others ≥ 20 employees<br />Salary ≤ Rs15,000 / month<br />33<br />
    34. 34. Professional Tax<br />State subject<br />Maharashtra, Karnataka, West Bengal, Andhra Pradesh, Gujarat, Tamil Nadu, Madhya Pradesh<br />In Maharashtra<br />Mandatory in all cases<br />Amount depends on Salary<br />34<br />
    35. 35. Things to Remember<br />Always issue a Bill / Invoice<br />Name & Address: both provider and receiver<br />Serial Number<br />PAN / TAN number<br />Service Tax Registration Number<br />Description of service / goods: each class separately<br />TDS / Service Tax / Education Cess / Higher Secondary Education Cess separately shown<br />35<br />
    36. 36. Private Company Sweat Equity<br />Only of class of shares already issued<br />Special Resolution passed in General Meeting<br />Resolution to specify<br />number of shares<br />consideration, if any<br />class / classes of directors / employees to whom such equity shares are to be issued<br />Company should be at least 1 year old<br />To be at a fair price calculated by an independent valuer<br />36<br />
    37. 37. Thank You<br />CA Mehul Mukati<br />Axia Advisory Services Pvt Ltd<br />
    38. 38. DIN Process<br />Only eForms with scanned documents<br />eForm can be submitted by person, if he/she has valid DSC<br />eForm can be digitally signed by CA / CS as proof of having verified documents<br />If so done, DIN will be approved immediately<br />38<br />
    39. 39. Normal Procedure (1/2)<br />Obtain DSC / DIN<br />File for approval of proposed name to ROC<br />Get MoA & AoA vetted by ROC and printed<br />Apply for stamping of the MoA & AoA<br />Obtain CoI from RoC<br />Open Bank Account<br />Obtain a company seal<br />Obtain PAN / TAN<br /><ul><li>Value Added Tax (VAT) / Sales Tax / Service Tax</li></ul>39<br />
    40. 40. Normal Procedure (2/2)<br />Register under<br />Shops and Establishment Act <br />Profession Tax<br />Employees' Provident Fund Organization (EPFO)<br />ESIC (medical insurance)<br />Factories Act<br />Filing for Government Approval before RBI/FIPB for Foreigners and NRI's<br />40<br />
    41. 41. How to e-File Documents<br />Company representative<br />Upload e-Forms on MCA21 portal through the ‘Annual Filing Process’ link <br />Prepare e-Form and submit on CD to Temporary Facilitation Offices (10-12 cities only) / Registrar’s Front Offices (RFO). <br />Prepare e-Form and submit through Certified Filing Centers<br />Either the director who has DSC or practicing CA / CS can file on behalf of the Company<br />41<br />
    42. 42. Private Company Sweat Equity<br />Procedure<br />IP / know-how / value addition valued by valuer;<br />Valuer to justify valuation in report;<br />Company to send valuation report to shareholders<br />Treated as managerial remuneration, if:<br />Sweat equity shares issued to director / manager;<br />Issued for non-cash without resulting in an asset<br />42<br />
    43. 43. Private Company Sweat Equity<br />Taxation: Not a Perquisite, if<br />Plan / Scheme as per SEBI Guidelines<br />For both unlisted and listed companies<br />Person holding >10% equity ineligible<br />Copy of Plan / Scheme submitted to CIT<br />Submission only, no approval required<br />Conditions of Plan / Scheme have not changed<br />Regulatory Compliance<br />Within 30 days of allotment<br />43<br />