ENTREPRENEURSHIP DEVELOPMENT

KOE083
Unit 5
• Laws concerning entrepreneur viz, partnership laws,
business ownership
• Sales and income taxes and workman compensation act.
• Role of various national and state agencies which render
assistance to small scale industries.

UNITED COLLEGE OF ENGINEERING & RESEARCH,

PRAYAGRAJ
 Laws concerning entrepreneur
• A startup can be in the form of partnership, sole
proprietorship, etc.
• Though a startup venture does not fall into proper
corporate culture in starting, it does have the legal
responsibilities to be fulfilled while starting and engaging
in the business for growth and proper legal advancements.
• An entrepreneur faces and tries to solve a lot of problems
in business but he/she should not forget the eyes of laws
on all decisions.
There are basic legal responsibilities and acts which are
divided into 8 legal points for every business efficient
working.
1) Business Structure Formalization
2) Licensing Business
3) Taxation And Accounting Laws
4) Labour Laws
5) Intellectual Property Rights Protection
6) Foreign Investments
7) Business Contract Management
8) Winding Up Of Business
1) Business Structure Formalization
There are different forms of business structure such as :
a. Proprietorship
b. Partnership
c. Limited liability partnership
d. Private limited company.

• There are different basic legal details such as registration, legal status, taxation,
member liability, number of members allowed, etc. Example:- legal status
explains that the proprietorship and partnership do not have different legal
entities and liability is on the promoter himself and in limited liability
partnership, a private limited company separate legal entity is recognized and
the promoters are not responsible personally for the liabilities.
2) Licensing Business
• The common licensing applied for most of the business
under the law is the Shop and Establishment Act, 1953
– An establishment is a commercial entity such as a shop,
hotel, restaurant, newspaper printing, cinema theatre,
public amusement parks, stock brokering, trading services,
etc.
– The primary objective of enacting this act was safeguarding
the labour who are engaged in unorganized sector and
provide the shops and commercial establishments with a
legal framework for regulation.

UNORGANIZED ORGANIZED
3) Taxation And Accounting Laws

Different business needs different tax policy to be applied according to

the tax and business structure applied.
For tax exemptions in a startup, the first 7 years' lifespan has can be
availed for tax benefits.
The organization must be registered as the limited liability
partnership, company.
The total turnover for the starting years must not be more than 25
crores annually.

Every firm or business needs to maintain proper accounts and tax

audits to adhere to the taxation rules applied and adhered to in the
country.
4) Labour Laws
• As every business firm has employees or
labour which helps in proper and efficient
functioning daily. Many laws related to labours
like minimum wages act, gratuity, Provident
funds payment, paid holidays to workers,
maternity benefits, harassment at workplace,
payment of bonus, etc.
Even the government has provided an exemption from labour inspection for
a startup if they apply all the major 9 labour laws of the country regularly
for worker's benefit:
• The Industrial Disputes Act, 1947
• The Trade Unit Act, 1926
• The Inter-State Migrant Workmen (Regulation of Employment and
Service) Act, 1979
• The Payment of Gratuity Act, 1972
• The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
• The Employees’ State Insurance Act, 1948.
• Building and Other Constructions Workers’ (Regulation of Employment
and Conditions of Service) Act, 1996
• The Industrial Employment (Standing Orders) Act, 1946
• The Contract Labour (Regulation and Abolition) Act, 1970
5) Intellectual Property Rights Protection
Startups many times come up with unique unusual ideas that
can be protected in this world using certain laws. Our
innovative product, improved process or procedure of making
something in a better way can be counted as our innovative
property rights.
– Patents (The Patents Act, 1970)
– Trademarks (The Trade Marks Act, 1999)
– Copyright (The Copyrights Act, 1957)
– Trade Secrets (Section 27 of the Contract Act )
– Industrial Designs (The Design Act, 2000)
– Geographical Indications (The Geographical Indications of Goods
(Registration and Protection) Act, 1999)
6) Foreign Investments
For encouraging foreign investment in the startup there
are regulations for Foreign Venture Capital Investors
(FVCI).
Schedule 6 of the Foreign Exchange Management Act
(FEMA), 2000, and the third amendment in this same
act in 2016 has used for regulating investments.
Any investor from abroad may contribute to the 100% of
the capital of the Indian startup engaged in any activity
or business under Schedule 6 of Notification No. FEMA.
7) Business Contract Management
The proper legal contract is judged under the Indian
Contract Act, 1872.
For making a valid contract the conditions in Section
10 of the Contract Act must be fulfilled. The first
contract in business is the employment contract
which should be effectively made.
The salary, stock options, scope of work, non-
disclosure agreement, etc should be discussed
properly.
8) Winding Up Of Business
– The winding-up process is a systematic process
with 3 modes of winding-up which are
• fast track exit
• court or tribunal route, and
• voluntary closure.
• Fast Track Exit: no assets liabilities left and no
past business must be entertained. Name
removed from Registrar of Companies (ROC)
• Voluntary closure : all the accounts must be
settled by the company that is the
shareholders and the creditors must be on the
same line.
• Court or Tribunal closure : prolonged court
proceedings, hectic procedure, The Insolvency
and Bankruptcy Bill, 2015
 The Indian Partnership Act 1932
• The Indian Partnership Act 1932 defines a
partnership as “a relation between two or more
persons who agree to share the profits of a
business run by them all or by one or more
persons acting for them all. As we go through
the Act we will come across five essential
elements that every partnership must contain”.
Kinds of Partnership
1] Partnership at Will
• When forming a partnership if there is no clause about the
expiration of such a partnership, we call it a partnership at
will.
• According to Section 7 of the Indian Partnership Act 1932,
there are two conditions to be fulfilled for a partnership to
be a partnership at will. These are
– There is no agreement about a fixed period for the existence of
a partnership.
– No provision with regards to the determination of a partnership
2] Partnership for a Fixed Term
• Now during the creation of a partnership, the partners may
agree on the duration of this arrangement. This would mean
the partnership was created for a fixed duration of time.
• However, there may be cases when the partners continue
their business even after the expiration of the duration. They
continue to share profits and there is an element of mutual
agency. Then in such a case, the partnership will now be a
partnership at will.

Partnership for a Fixed Term Partnership at Will

3] Particular Partnership
• A partnership can be formed for carrying on
continuous business, or it can be formed for one
particular venture or undertaking. If the
partnership is formed only to carry out one
business venture or to complete one undertaking
such a partnership is known as a particular
partnership.
• After the completion of the said venture or
activity, the partnership will be dissolved.
4] General Partnership
• When the purpose for the formation of the
partnership is to carry out the business, in
general, it is said to be a general partnership.
• Unlike a particular partnership in a general
partnership the scope of the business to be
carried out is not defined. So all the partners
will be liable for all the actions of the
partnership.
 Common types of business ownership

1. Sole proprietorship
2. Partnership
3. Limited liability company
4. Private corporation
5. Cooperative
6. Nonprofit corporation
 1. Sole Proprietorship
A sole proprietorship is owned and operated by one individual. The owner of a
sole proprietorship doesn't need the approval of a board or partner to make
daily business decisions. They also get to keep and determine what to do
with the business' profits.
• Advantages
– They're simpler to form than other businesses because it doesn't require a lot of
paperwork.
– The owner has sole control of all processes and decision-making.
– Filing taxes for this type of business is easier than for other types of businesses.
• Disadvantages
– The owner accepts all responsibility for business losses.
– The owner is responsible for raising capital for startup costs.
– It may be harder to sell the business.
 2. Partnership
• A partnership is a form of ownership that involves two or
more (MAX 50, Rule 10 Companies (Misc.) Rules 2014)
owners controlling a business.
• The joint owners may run the day-to-day activities by
themselves or through appointed representatives.
• In a partnership, the owners sign a formal agreement that
clearly states a partner's rights, shares and responsibilities.
– Limited liability partnership
– Unlimited liability partnership
• Limited liability partnership:
– In a limited liability partnership, individual partners don't accept losses caused by another,
meaning no legal entity can seize or sell one partner's possessions to pay for the other partner's
debts.
• Unlimited liability partnership:
– In an unlimited liability partnership, both partners are responsible for the business. If one
partner is directly responsible for a loss, all other partners pay for the debt, even if they aren't
directly responsible for the losses.
• Advantages
– They provide the potential to gain wider access to knowledge and expertise from partners.
– The infusion of capital is easier than it is in other business structures.
– This business type offers the ability to share the burden of startup costs and capital
expenditure.
– The division of labor among partners creates a better work-life balance.
• Disadvantages
– Partners carry the burden of liabilities, regardless of the partner who is responsible for the
debt.
– There's a potential loss of autonomy as all partners deliberate on key decisions.
– There can be more potential for conflict between partners.
– Selling complications can arise if one partner disagrees with the plan to sell the business.
 3. Limited liability company
In a limited liability company, the owner's assets, like their car, house and
personal accounts, have protection if their business goes bankrupt. This
ownership option is a good choice for small business owners looking to
start a new business.
Advantages
– Flexibility to adopt different tax structures
– Potential to earn tax deductions for business losses
– Responsibility for business liabilities doesn't belong to shareholders
– Ability to restructure without seeking regulator approval
• Disadvantages
– It can be challenging to raise capital for this type of business.
– This can be more expensive to form than other structures.
– The salary and profits are often subject to self-employment taxes.
 4. Private corporation
A private corporation involves individuals forming a group to
manage a business. This kind of ownership separates
assets and liabilities from the owners. In case of loss, the
owners only lose the amount they invested. Those starting
a corporation submit a document called the articles of
incorporation in the state where their business is located.
Private corporations allow individuals to buy stock from the
corporation, giving the business more capital to grow the
business or invest in better technology or tools. Individuals
who buy stock become part-owners of the corporation.
 5. Cooperative
A cooperative is an enterprise that is privately owned by the same people who
benefit from it. The owners of a cooperative, who are also the shareholders,
are involved in the decision-making process. There is no limit to the number
of shareholders in a cooperative, which means there is no limit to the
number of owners.
• Advantages
– Grants equal rights to members during the decision-making process
– Brings members together for a common cause
– Provides access to diverse and unique funding opportunities
• Disadvantages
– Fewer incentives for angel investors and venture capitalists
– Slower decision-making among owners
 6. Nonprofit corporation
A nonprofit corporation operates to benefit a
community or providing a social service. For
someone to operate this form of ownership,
they're required to prove to a government entity
(file a certificate of formation with their Secretary
of State's Office) that their services benefit
society. These corporations are typically charitable
organizations in the fields of science, criminal
justice, education and humanitarian affairs.
• Advantages
– There is limited liability protection for owners' assets.
– You are eligible for tax exemption.
– You are eligible to receive grants.
– You have diverse fundraising opportunities.
– Donations are tax-exempt.
• Disadvantages
– There are high startup costs.
– The approval of tax exemption status may take a long time.
– You are not always eligible for tax exemption.
– There might be excessive public scrutiny of how you use funds
and donations.
 Sales Tax
• Sales Tax is a form of tax paid to a governing body for the
sale of goods and services. Sales tax is an indirect tax and is
generally charged at the point of buy or exchange of certain
taxable goods, charged as a percentage of the value of the
product.
• The sales tax depends on the government in power and the
individual policies enforced by it, generally being simple to
calculate and collect. In simple terms, the sales tax is an
extra amount of money paid while purchasing goods or
services.
Types of Sales Tax
The concept of sales tax depends on the governing principles followed by
governments, but there are some universal sales taxes applicable in most
countries. The different types of sales taxes are mentioned below.
• Retail Sales Tax: This is a tax charged on sale of retail goods and is directly
paid by the final consumer.
• Manufacturers’ Sales Tax: This tax is levied on the manufacturers of certain
goods.
• Wholesale Sales Tax: This tax is levied on individuals who deal with
wholesale distribution/sale of manufactured goods.
• Use Tax: This is a tax levied on the consumer for goods which are
purchased without sales tax (generally from vendors who are not under
the tax jurisdiction).
• Value Added Tax (VAT): is an additional tax levied on all sales by certain
governments.
Sales Tax in India
A major reason for the growth and development
of the country can be attributed to
the taxes collected by the Government of India.
India follows the system of a central union
government at the Centre and state
governments in each state. Each government
chooses a taxation policy suited to its
requirements.
Central Sales Tax Act, 1956
• The Central Sales Tax Act governs the taxation laws in the country,
extending to the entire country and contains the rules and regulations
related to sales tax. This Act allows the Central Government to collect
sales tax on various products. The Central Sales Tax is payable in the
state where the particular goods are sold.
• Objectives of Central Sales Tax Act
– Provide provision for levying, collection and distribution of taxes
collected from sale of goods through interstate trade.
– Frame principles to determine when sale and purchase of goods
occurs.
– Classify certain goods as being of special importance for trade
and commerce.
– Be the competent authority to settle interstate trade disputes.
Central Sales Tax (CST) Transaction Forms
Forms Purposes
This form allows the purchasing dealer to get goods at
Form C
concessional rates from the seller.
This is issued by the government department which purchases the
Form D
goods.
This is issued by the dealer who initiates the inter-state movement
Form E1
of goods
This is issued by the subsequent seller when the goods move from
Form E2
one state to the other.
Form F This is issued when the goods are sent to a different state.
Form H This is issued by an exporter for the purchase of goods.
Form I This is issued by dealers in Special Economic Zones.
State Government Taxes
• Individual State Governments have the power to levy sales tax to meet their
financial requirements. The sales tax in different states vary for different
products, with Value Added Taxes forming a big chunk of state income. It is
for this reason that certain goods are cheaper in a particular state compared
to another state. States categorize individuals associated with sale of goods
into manufacturers, sellers and dealers, with each one needing certificates to
work under the ambit of the law.
Sales Tax Exemptions
– States offer tax ememptions in certain cases, which can be humanitarian or to avoid
double taxation.
– Sellers with genuine state resale certificates are exempted from tax when they
resale products.
– Products sold to charities or schools are provided tax exemptions.
– There are a list of essential and local commodities which are exempted from sales
tax.
Calculation of Sales Tax
• Sales Tax might seem like a complicated term to a lot
of people and a lot of us think that calculating it is
extremely hard, if not impossible. It is however far
from the truth, as calculating sales tax is no
Herculean task if one gets the basics right.
• Total Sales Tax = Cost of item x Sales tax rate
For Example: If Mr. Kumar purchases a box of chocolates which
cost Rs. 100 which have a sales tax component of 10%, then
the total sales tax paid by him becomes (100 x 0.10) = 10
 Income Tax in India
• Income tax is a direct tax imposed by the
central government on the income earned by
individuals and businesses during a financial
year. It serves as a crucial source of revenue
for the government, supporting infrastructure
development, healthcare, education, and
various welfare schemes.
 Who has pay Income Tax
The entities listed below must pay taxes and file their income
tax returns.
• Artificial Judicial Persons
• Corporate firms
• Association of Persons (AOPs)
• Hindu Undivided Families (HUFs)
• Companies
• Local Authorities
• Body of Individuals (BOIs)
What are the Different Types of Income?
• Property Income - This category includes income generated from renting a
residential property. Individuals earning rental income are subject to taxation
under this head.
• Salary Income - Income derived from employment, including salaries and
pensions, is classified under this head. Tax liabilities arise from earnings related to
one's employment.
• Business or Professional Income - Self-employed individuals, freelancers,
businesses, contractors, and professionals like life insurance agents, chartered
accountants, doctors, lawyers, and tuition teachers with independent practices fall
under this head. Profits generated from these endeavors are taxable.
• Capital Gain Income - Surplus income generated from the sale of capital assets like
stocks, mutual funds, or real estate is taxable under this type of income.
• Income from Other Sources - Income earned as interest from savings bank
account, fixed deposits, and lottery winning.
 The Employees Compensation Act, 1923
• Chapter II
– Section 3
Employer's liability for compensation: employer shall be
liable to pay compensation for:
1. Injury due to occupational hazard
2. Partial/Total/Temporary/Permanent disability due to
injury due to occupational hazard
3. Disease due to (1)
4. Injury due to disease from occupational hazard
• Chapter II
– Section 4
Amount of compensation
(a) where death results from the injury an amount equal
to 50% of the monthly wages of the deceased 1[employee]
multiplied by the relevant factor; or an amount of [one
lakh and twenty thousand rupees], whichever is more;
(b) where permanent total disablement results from the
injury an amount equal to 60 %of the monthly wages of
the injured [employee] multiplied by the relevant factor;
or an amount of [one lakh and forty thousand
rupees],whichever is more
Role of various national and state agencies which render
assistance to small scale industries
– Government has recognized the important role of
entrepreneurs in the industrial development of the country,
especially through the Small Scale Industries (SSIs).
– SSIs are essential for Indian economy in terms of
employment generation, foreign exchange earnings, and its
share in industrial output, and contribution to national
income.
– The government of India and state governments provides a
number of special facilities and incentives.
• The incentives not only motivate entrepreneurs to set up
industries in the small scale sector, but also strengthen the
entrepreneurial base in the economy.
• The new entrepreneurs face a number of problems on
account of inadequate infrastructure facilities and other
support services.
• he government offers a package of services through its
specialized institutions and motivates entrepreneurs to take
advantage of the various facilities and establish enterprises
and flourish.
• These packages include assistance in obtaining
finance, help in marketing, technical guidance,
training, and technology up gradation etc. It is
hoped that institutional incentives would play
a key role in the promotion of small
enterprises and ensure their self-sustained
growth.
Central Level Institutions
– Small Scale Industries Board
– Small Industry Development Organization(SIDO)
– National Small Industries Corporation (NSIC)
– Khadi and Village Industries Commission (KVIC)
– National Institute of Small Industry Extension
Training (NISIET)
– National Institute for Entrepreneurship and Small
Business Development (NIESBUD)
State Level Institutions
– State Industrial Development Corporations (SIDCs)
– State Directorate of Industries (SDIs)
– District Industries Centres (DICs)
– Small Industries Development Bank of India
(SIDBI)
Other Agencies
– National Bank for Agriculture and Rural
Development (NABARD)
– Housing and Urban Development Corporation Ltd.
(HUDCO)
– Technical Consultancy Organizations (TCOs)
– Small Industries Service Institutes(SISI)
– State Financial Corporation (SFC)