Legal Formalities To Accomplish While Starting A New Business in India

In my last Article, I touched upon the various issues involved while taking a call on starting a new business. Once, the decision has been made to start a business, the most important consideration is to have serious understanding of various licenses, registration, permits, approvals, consents, NOCs (by whatever name it might be referred to, let me warn you, it all amounts to same) etc required for starting a new business.

There are different licenses required for manufacturing units and for the service sector require when you are starting new business.

In this article, we will review the legal formalities to accomplish which is a compulsory mandate for a new business

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Form of business entity:

Depending upon the size and nature of business and the people involved (referred as promoters), first and foremost, a decision is required to me made about the form of business entity. If you want to start small and you are alone a proprietorship is most hassle free and requires minimum cost of establishment and maintenance. If you are more than one then a partnership firm or Limited Liability Partnership (‘LLP’) could be considered. The difference being that in case of an LLP, the partner’s liability is limited to the assets in the name of the business and his personal assets are protected. We advice that in case the nature of business could involve some risk which could result in any form of litigation it is advisable to go for an LLP.

The cost of formation of LLP and maintenance is only marginally higher then that of a partnership. Also in terms of regulations there are no headaches like in case of a company. The ultimate option is a company. Whether a public or private limited company or a One Person Company (OPC). A company was originally most favoured due to the limited liability benefit. However, now LLP have come in with that advantage. A company can be opted for if the size of the investment is large or there are several people involved. The ownership change is most easily effected in case of a company. It also has a better outlook when considered from the point of view of lenders or creditors. A one person company is a new introduction. It allows a single person to start a company. One must note that a company has higher cost of formation and maintenance particularly with reference to the compliance needs. One needs to be careful to ensure that all the regulatory requirements are adhered to.

Please note that one can always start with a particular form of organization and in due course convert to any other form of organization. There are particular ways in which this can be executed.

Also apart from sole proprietorship, all other forms of business entity have fixed guidelines for their incorporation/registration.

Pan Number from Income Tax Department

The second step is to obtain a PAN number for the business entity from income tax department. This is not applicable for a sole proprietor as in the eyes of law he and the proprietary concern are the same. Hence his personal PAN is sufficient. However a sole proprietorship firm can have a business name. Most of the process is now online and can be obtained within 7-10 working days.

Udyog Aadhaar Acknowledgement (UAM) – The newly formed business entity needs to obtain UAM  from Ministry of Micro, Small & Medium Enterprises or Industrial Entrepreneurs’ Memorandum (IEM) from the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, depending upon the scale in which the business entity may fall. UAM can be applied online.

Application for Allotment/Transfer/Sublease of plot/shed, Execution of Lease Agreements:

The most critical thing to start a manufacturing unit is land. If the land is within a notified industrial area, then there is a procedure for allotment of land by the Industrial Development Corporations. Legal documentation for a new business is a long drawn manual process, wherein after the application form is submitted with the IDC, it is reviewed by the Screening Committee which reviews the project Report and the Supporting documents. Thereafter the application is placed before the multi-member Scrutiny Committee which decides on the matter and there after the Corporation issues the Allotment Letter and starts the process for execution of Deed of Lease.

Application for Grant of Connection for Water & Power for Construction:

The process for water & power connection for construction of manufacturing facility is again manual and after various inspections, these are granted.

Approvals of the Building Plans from various concerned authorities and Occupancy Certificate after the completion of the construction- There is a requirement to submit copies of the Building Plans to various statutory authorities such as Industries Development Corporation, Fire Department, Town & Country Planning, Inspectorate of Factories, Pollution Control Boards etc to seek approval of the Building Plans before construction and after construction, for obtaining Occupancy Certificate.

Consent to Establish (CTE) and Consent to Operate (CTO) from the State Pollution Control Boards:

Depending upon the type of industry, the business entity needs to apply for and obtain Consent to Establish (CTE) and Consent to Operate (CTO) from the State Pollution Control Boards. The process is online but takes comparatively long time since the site is required to be inspected and the process needs to be understood in detail.

NOC from the Department of Fire & Emergency Services:

All factory buildings require fire safety measures to some extent, especially fire extinguishers. Presence of first aid fire fighting arrangement helps checking fire at its initial stage till the fire brigade arrives. For this reason it is mandatory for a manufacturing business unit to obtain NOC from the Department of Fire & Emergency Services. Process is claimed to be online but it is still being handled manually.

Factory License from the Inspectorate of Factories/Shop & Establishment Registration:

This is a mandatory requirement wherein the Inspectorate not only approves the factory layout plans but also lists out the conditions subject to which the factory can be set up. Various conditions prescribing the factory buildings, workmen safety and working conditions are required to be followed by the business entity. The process is manual and long drawn and requires multiple visits to the Inspectorate.

Registration with Employees Provident Fund Organisation and Employees State Insurance Corporation, under Contract Labour (Regulation And Abolition) Act, 1970- Registration with EPFO and ESIC are mandatory registrations required for business units to provide Social Security benefits to the working class. The process is online and still being simplified.

Registration with Commercial Department, Excise Department for manufacturing or service operations:

The process is online and very much settled now. While the registration with excise department is mandatory for any manufacturing unit in the process of excisable goods, registration with Commercial Department is necessary for administration and levy of commercial taxes.

Availing Importer Exporter Code from Directorate General of Foreign Trade (DGFT):

The first requirement before any business starts an import/ export business, it is required to obtain an Importer Exporter Code from Directorate General of Foreign Trade. An IEC is necessary for import/export of goods.

Registration with Local Bodies and Municipal Corporations if the business entity is not in a notified industrial area.- In the event, the business entity does not fall under the notified area, then it is required to obtain Registration with Local Bodies and Municipal Corporations.

After you comply with all of the above and if you have energy left in you we wish you all the very best for your new business.

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