The paperwork a small business needs to operate legally

The question is almost always asked as though a definitive list exists for a business of a certain size. It does not, and the reason is structural rather than a gap in anyone's summary.

Every obligation described below is switched on by a specific fact, not by size in the abstract. The facts that do the switching are: what legal form the business takes, what it actually does, where its premises are, how much it turns over, how many people it employs, and which state it operates in. Two businesses with identical revenue can carry entirely different obligations because one manufactures and the other consults, or because one is in Maharashtra and the other in Karnataka.

The state point deserves emphasis because it is the most common cause of confidently wrong information. India distributes legislative power between the Union and the States, and a substantial part of this subject — shops and establishments, trade licensing, professional tax, much of labour regulation — sits with the States or is concurrently regulated. A rule someone describes from experience in one state may be genuinely inapplicable in another.

What follows sets out which fact triggers which obligation, as at the date of writing. It states what the law requires. It does not advise on what any particular business should do, which depends on facts and belongs with a professional who can see them.

The first group establishes that the business exists and can be identified by the tax system.

Entity formation depends entirely on the structure chosen. A sole proprietorship is not registered anywhere and has no incorporating document, because in law the business and the proprietor are the same person. A partnership is created by agreement between partners, with registration with the Registrar of Firms being optional — though the Indian Partnership Act, 1932 attaches consequences to non-registration, notably restrictions on an unregistered firm's ability to sue to enforce a contract. A limited liability partnership under the LLP Act, 2008 and a company under the Companies Act, 2013 are both created by registration with the Registrar and cannot exist without it.

A Permanent Account Number is required for the entity where the entity is a separate person in law. A proprietorship uses the proprietor's own PAN, since there is no separate person to issue one to — the first place people go looking for a document that does not exist.

A Tax Deduction and Collection Account Number becomes necessary where the business is required to deduct tax at source, which is triggered by the nature and size of specified payments rather than by the business's overall size, so it can arise early.

Registration under the goods and services tax is the obligation most often described with a single number, and it has never been a single number.

The threshold for registration on the basis of aggregate turnover differs between suppliers of goods and suppliers of services, and differs again for the states designated as special category states, which have lower thresholds. The commonly cited figures are forty lakh rupees for goods and twenty lakh rupees for services, with twenty lakh and ten lakh respectively for special category states. Those figures come with a genuine complication: the higher goods threshold was introduced by notification with an option for states, and states did not all exercise it identically, so the applicable threshold is a function of the state as well as of what is supplied.

More importantly, turnover is not the only trigger. Registration is compulsory regardless of turnover in a set of specified cases, which include making inter-state taxable supplies of goods, being liable to pay under the reverse charge mechanism, supplying through an electronic commerce operator, operating as a casual or non-resident taxable person, and acting as an agent.

Because thresholds, exemptions and the compulsory-registration list are all set and amended by notification, the current notifications and the GST portal are the authority. A figure quoted in an article is a figure as at a date.

This group is triggered by having a place of business and by what happens in it, and it is overwhelmingly state and local law.

Shop and establishment registration is required by the state legislation applying to commercial establishments. There is no central Act — each state has its own, which means the threshold, the timeline from commencement, the fee, the renewal period and even whether a business with no employees is covered all vary by state. Several states have simplified or exempted small establishments, and several have digitised the process entirely.

A trade licence from the municipal corporation or local body is a separate requirement, distinct from shop and establishment registration despite being frequently confused with it. It is a permission to carry on a specified trade at specified premises, and which trades require one is set by the local body's own rules.

Beyond these, obligations attach to particular activities rather than to businesses generally: a licence under the Food Safety and Standards Act for anyone handling food, consent to establish and operate from the state pollution control board for specified categories, a factory licence under the Factories Act where the premises meet the statutory definition, fire safety clearance depending on the building and use, and a range of sector-specific approvals. Which of these applies is a question about the activity, and the local authority is the source.

Employment-linked obligations switch on at numbers of employees, and the numbers differ from statute to statute, which is why they are so often mixed up.

Provident fund coverage under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 attaches to establishments in scheduled industries employing twenty or more persons. Coverage under the Employees' State Insurance Act, 1948 attaches at ten or more employees in most states, though some states apply twenty for certain categories, and the Act applies to notified areas. Gratuity under the Payment of Gratuity Act, 1972 applies to establishments with ten or more employees. The obligation to constitute an internal committee under the sexual harassment at workplace legislation applies to a workplace with ten or more employees.

Professional tax on employment is a state levy, so whether it applies at all, and at what rates and thresholds, depends on the state.

One significant caveat applies to this whole group. Four labour codes enacted in 2020 consolidate a large number of the earlier central labour statutes, and their bringing into force has been staged rather than simultaneous. Which statute governs a given obligation therefore depends on the date in question and on what has been notified. That makes the Ministry's own notifications, rather than any secondary summary, the reliable source here.

Three habits make the difference between using information like this well and being misled by it.

The first is to ask what fact triggers the obligation, rather than asking whether it applies to a business of your size. Once the trigger is identified, the question becomes checkable: does the business supply inter-state, does it employ ten people, does it handle food, is the premises within a notified area. A list organised by trigger can be worked through. A list organised by business size cannot.

The second is to establish the jurisdiction before relying on any statement. For anything in the premises or employment groups, the answer is state-specific and sometimes city-specific, and a rule accurately reported from another state is still the wrong rule.

The third is to treat every figure as being as at a date. Thresholds, exemptions and coverage are set by notification and revised by notification, and the labour codes make the entire employment group date-dependent in a more fundamental way. An article cannot update itself.

And a limit worth stating plainly: this explains what the law requires. Whether a particular business is covered by a particular provision is a question about that business's facts, and a general explanation cannot answer it however precisely the provision is quoted.