5 Mandatory Compliances Required to Start a Trading Business

Starting a trading business requires a lot of initial research related to the product to be traded. What should be traded, what’s the market availability, what’s the competition level, what’s the expected durability of the product in the market, what will be the cost, what will be the profit margin, what will be the customer satisfaction, etc. Apart from all this, the effects of various laws and regulations applicable to the trading business should be evaluated. To start a trading business in India, you are required to comply with some legal formalities which are discussed below:  

1. Incorporation

A trading business can be carried out by any form of entity, i.e., by sole proprietorship, partnership, limited liability partnership (LLP), company, etc. Depending upon the type of entity, incorporation is to be done. A sole proprietorship concern does not require any specific legal incorporation under any law. However, it may require to obtain a few licences under different laws which we will discuss in point no.5.

Specific incorporation is required for partnership registration, LLP registration, company registration, etc. The incorporation of partnership concern is governed by the Indian Partnership Act, 1932; LLPs by the LLP Act, 2008, companies by the Companies Act, 2013 and so on.

So, what are the basic requirements for incorporation as a legal entity? 

• Digital signature certificate (DSC) 
• Designated Partner Identification Number (DPIN), Director Identification Number (DIN), etc. 
• Unique trade name (different from the existing ones) 
• Identity proof of the owner (like Voter id, Passport, Driving Licence) 
• Residential address proof of the owner (like Bank statement, Electricity bill, Telephone bill, not older than 2 months) 
• Official address proof of  the legal entity in the name of the owner  (like Electricity bill, Telephone bill, Gas bill, not older than 2 months) 
• No Objection Certificate (NOC) from the owner of premises to be used as the official address
• PAN (Permanent Account no.) and Aadhar card 
• Written consent of the designated partners or directors to act as such under the legal entity 

Once the above-mentioned requirements are made available, fill up the latest incorporation form available and submit for approval along with the prescribed fee. After approval, file the LLP agreement or Memorandum of Association (MOA) and Articles of Association (AOA), as per the type of legal entity formed.

2. Trademark/ brand name or patent registration

Trademark is basically a sign, phrase, word, symbol that denotes a specific product or service (known as service mark) and legally differentiates it from the products or services of it’s kind. It belongs to a specific legal entity. It is legally recognized as intellectual property. It identifies the brand owner. So, the owner of the business may apply for trademark registration to protect the product or service from being used without permission. The owner can sue a person who infringes a trademark.

Similarly, there’s a patent which is also a form of intellectual property and gives the owner legal and exclusive right for an invention. So, owner of the business may apply for patent registration to prevent others from commercially exploiting the patented invention’s use, sale, import, distribution, etc. without permission. The owner can sue a person who infringes on a patent.

Both trademark and patent registrations can be obtained by submitting respective registration applications along with the prescribed fee. Once, the application is approved, the business can be carried out under such name. 

3. Registrations under tax laws

Every trading business in India attracts taxes, both direct tax and indirect. The direct tax covers income tax while Indirect tax covers GST (Goods and Service Tax). 

Under the Income Tax law, a business entity is required to pay the tax liability in the form of advance tax, TDS (Tax deducted at source), TCS (Tax collected at source), self-assessment tax, etc. The tax is paid by sole proprietorship concern as per slab rates while tax is paid by partnership concerns, companies, etc. as per fixed rates as provided under the Income-tax Act, 1961. For the purpose of TDS and TCS, the entity deducting or collecting tax is required to obtain TAN (Tax Deduction and Collection Account Number).

Under the GST law, a business entity is required to first obtain GSTIN (Goods and Service Tax Identification Number) based on its turnover limit. The turnover threshold limit for GST registration in case of a supplier of goods is ₹40 lakhs, except some specified states and ₹20 lakhs for specified states, and in case of a supplier of services, it is ₹20 lakhs, except some specified states and ₹10 lakhs for specified states. 

Please note that, obtain PAN of the entity before proceeding further to GST registration, because GST registration is based on PAN. Also, registration is to be obtained for every state where the business extends.

GST registration can be obtained voluntarily also, in case the business entity wants to avail the benefit of ITC (Input tax credit).

4. Business Contracts

A trading business also gives rise to contracts between the parties involved in trading. A written contract is important to avoid any kind of disputes in the future since the legal terms and conditions in the contract are binding on both the parties. Business contracts can be in the form of MOU (Memorandum of Understanding), Vendor Agreement, Lease Agreement, Insurance Agreement, Financial Agreement, etc.

5. Other miscellaneous requirements

Apart from the above mandatory compliances, following are some of the other requirements that need to be considered:

• Open a current account in a bank.
• Register under the MSME Act (Micro, Small & Medium Enterprises Act) or the Shops and Establishment Act, etc. 
• Obtain licenses for specified categories of trading businesses like IEC (Import- Export Code), FSSAI (Food Safety and Standards Authority of India), etc. 
• Obtain clearance under the Environmental laws for dealing with goods that may affect the environment, like hazardous goods, chemicals, etc.

Conclusion

The above-mentioned compliances help a person to establish a business entity for trading in India. Once, the trading activity starts, other legal formalities emerge which need to be complied with by the entities. These legal compliances depend on the laws applicable to a particular type of entity and also on the concerned trading activity.