Legal requirements for entrepreneurs

Legal tips

7 Legal Tips That Can Make or Break Your Business

Free Advice for Common Legal Mistakes Made by Entrepreneurs!

Legal requirements for entrepreneurs

Got a great business idea? You are sure that this is your Eureka moment? Ran it through friends, family, well-wishers – all approved? Time to take a plunge!

For the growth of your business, you will have to build an efficient team, create a kickass product, put a service delivery system in place, be great at marketing. And there is obviously social media to conquer and the sales! Sounds very cool and exciting.

But the sad reality is that you will have to deal with a large bunch of uncool, rather mundane things in the process. One of them is the legal obligations that you need to fulfil as a business. “Ah, that can’t be tough…I will just hire a lawyer”. Nah, not that simple. In your journey to fight with the market forces at multiple fronts, whether or not you like it, you will have to interact with the legal system in India at various stages.

The ground reality is that India is a very difficult country to do business in. The number one reason for that is India’s complex, slow, and inefficient legal system. Out of 191 economies in the world, India ranks 134 in the ease of doing business index. Why is it this difficult to carry out business in India? There are a lot of things to blame. But most of it comes down to this: the regulatory and legal system.

The very bureaucratic nature of the legal system tests your patience to the core. It even serves as a barrier at the entry level. Grim much? This is a huge upside as it filters out the competition at the entry-level itself! There is a silver lining to everything.

Huge businesses spend a large chunk of money on their legal expenses to gain a strategic advantage over their competitors.

We bring to you some legal tips which you must know as an entrepreneur. We have also managed to pack some very useful information for startups as well!

Read till the end for an often ignored yet extremely important bonus tip.

🚀Let's get started.🚀

#1 Pick an Appropriate Legal Structure

First things first, before starting out a business, it is essential to be clear about the nature and the type of your business to formalize a business structure.

You will have to incorporate your business as a specific business type, namely-

  • Individual/Sole Proprietorship
  • Private Limited Company
  • Partnership
  • Limited Liability Partnership (LLP)

It is extremely important to have clarity on the nature of your business because it will prove to be integral in the overall vision and goal of your enterprise.

Legal tips for entrepreneurs

🡺If you are starting out, I recommend you to go for a Sole Proprietorship first. Once you get the hang of how things will move in your business and you are ready to scale, change your legal status to a Private Limited Company.

🡺Suppose you have a very clear vision and have already sorted the bits and pieces of your business. In that case, you may want to incorporate as a company from the very beginning.

🡺Many partnership firms fall apart due to a change of business interest in one of the partners, ethical issues from one of the partners and so on… Better choose your partners very carefully! You wouldn’t want your partner to turn against you when things in business are on a roll.

Legal tips

#2 Draw the Founders Agreement

This tip is specifically for early-stage startups. It is advisable to draw up a Founders Agreement.

free legal advice for entrepreneurs

It is a document that has all basic details about the founding team of the business with a detailed mention of

  • Roles
  • Responsibility
  • Compensation
  • Operational Details
  • Exit Clause

Those mentioned above are, however, only the major areas that are covered. It is always upon the team’s discretion to decide the length and the details of the agreement.

Having a detailed co-founders agreement saves a lot of money and acts as a guide if a dispute arises.

It is a document that has all basic details about the founding team of the business with a detailed mention of
  • Roles
  • Responsibility
  • Compensation
  • Operational Details
  • Exit Clause
Those mentioned above are, however, only the major areas that are covered. It is always upon the team’s discretion to decide the length and the details of the agreement. Having a detailed co-founders agreement saves a lot of money and acts as a guide if a dispute arises.

#3 Acquire Business Licenses

Carrying almost any business out in India will require you to acquire licenses. The licenses that you require vary, depending upon the nature and size of your enterprise.

Business licenses are legal documents that allow the operation of a business. In contrast, business registration is the official process of listing a business with the official registrar.

Business licenses are legal documents that allow the operation of a business. In contrast, business registration is the official process of listing a business with the official registrar.

Some licenses are simple tax registrations for the sales of goods and services like GST registration. While others for specific activities. Say employing more than 10 people requires you to get various labour and employment-related registrations.

It is important to note that business licenses vary from industry to industry as well. For instance, an e-commerce company requires a Goods and Service Tax (GST) registration. A restaurant will require licenses like Food Safety License, Certificate of Environmental Clearance, Prevention of Food Adulteration Act etc. and so on.

legal basics for entrepreneurs

Another major reason licenses are of quintessential importance is that they form a part of legal due diligence when investing in a company. Not having the required license in place can hamper your chances of getting good investments and may also lead to lawsuits and unwanted legal battles.

Ever wondered how the life of an entrepreneur is? Is it just a luxurious entrepreneurial lifestyle or a life with deep stress due to no defined working hours and cut-throat competition?

Click here to have a Sneak Peek into the Life of an Entrepreneur.

Ever wondered how the life of an entrepreneur is? Is it just a luxurious entrepreneurial lifestyle or a life with deep stress due to no defined working hours and cut-throat competition?

Click here to have a Sneak Peek into the Life of an Entrepreneur.

#4 Ensure Proper Accounting and Taxation

Most businesses fail on this very important point which leads to founders getting fined, getting embroiled in litigation and possibly getting imprisoned! What is the reason, you ask? Negligence and lack of knowledge of the laws involved, and in most cases, it is a combination of both.

common legal mistakes made by entrepreneurs

As your business starts to grow, the talk around taxation and accounting will become an everyday business. There are a variety of taxes that apply to businesses. As the founder of an enterprise, you have to understand your enterprise’s accounting and tax procedures. Blindly outsourcing this job to CAs, however qualified they might be, is probably not the wisest thing to do.

❖ In some good news for startups, the Government of India has launched the ‘Startup India’ initiative to promote startups. Under this scheme, there are many tax exemptions and tax holidays for startups.

According to this initiative, a startup can avail of income tax exemption for 3 years and tax exemptions from capital gains and investments above Fair Market Value. The conditions that need to be qualified to avail these exemptions are:

  • The startup should not be more than 7 years old (or 10 years for biotech) from the date of incorporation.
  • Is incorporated as a Registered Partnership, Limited Liability Company or Private Limited Company.
  • Turnover in any year should not have exceeded 25 crores.
  • The startup should not have been formed by splitting or reconstructing an existing business.

Every business needs a competitive advantage to survive and excel in the market. These government schemes can give you that advantage, especially when you are small.

As your business starts to grow, the talk around taxation and accounting will become an everyday business. There are a variety of taxes that apply to businesses. As the founder of an enterprise, you have to understand your enterprise’s accounting and tax procedures. Blindly outsourcing this job to CAs, however qualified they might be, is probably not the wisest thing to do.

❖ In some good news for startups, the Government of India has launched the ‘Startup India’ initiative to promote startups. Under this scheme, there are many tax exemptions and tax holidays for startups.

According to this initiative, a startup can avail of income tax exemption for 3 years and tax exemptions from capital gains and investments above Fair Market Value. The conditions that need to be qualified to avail these exemptions are:

  • The startup should not be more than 7 years old (or 10 years for biotech) from the date of incorporation.
  • Is incorporated as a Registered Partnership, Limited Liability Company or Private Limited Company.
  • Turnover in any year should not have exceeded 25 crores.
  • The startup should not have been formed by splitting or reconstructing an existing business.

Every business needs a competitive advantage to survive and excel in the market. These government schemes can give you that advantage, especially when you are small.

#5 Adhere to Labor Laws

As a business, you will naturally employ people to work for your enterprise. Therefore, adhering to labour laws becomes integral for any organization. Irrespective of the size of your enterprise, you are subject to various labour laws.

The 9 major labour laws are:

Don’t Worry! You don’t need to go through these complex laws yourself. You just need to consult legal counsel to understand the basics of the laws that apply to you and build processes to ensure their compliance.

As a business, you will naturally employ people to work for your enterprise. Therefore, adhering to labour laws becomes integral for any organization. Irrespective of the size of your enterprise, you are subject to various labour laws. The 9 major labour laws are: Don’t Worry! You don’t need to go through these complex laws yourself. You just need to consult legal counsel to understand the basics of the laws that apply to you and build processes to ensure their compliance.

Startups registered under the ‘Start-Up India’ initiative have to complete a self-declaration (for the aforementioned 9 labour laws) to avail exemption.

Startups registered under the ‘Start-Up India’ initiative have to complete a self-declaration (for the aforementioned 9 labour laws) to avail exemption.

Beyond legal compliance, a well-designed employee policy is key to attracting and retaining talent in the company. Plus, it also serves as a major motivator for productivity.

#6 Ensure Effective Contract Management

Contracts form the heart and soul of any business and are its indispensable part. A contract ensures the smooth functioning of a business. It serves as an effective tool for ensuring recourse in case of non-fulfilment of any promise. Basic knowledge of various aspects of contract management can be very useful for entrepreneurs.

All contracts are governed by the Indian Contract Act, 1872.

All agreements are contracts if they are made by the free consent of parties competent to contract for a lawful consideration with a lawful object and are not expressly declared void.

legal checklist for entrepreneurs
One of the most crucial kinds of contracts is Employee contracts. Formalizing the contract with details about:
  • Salary
  • Scope of work
  • Nature of work
  • The permissible number of holidays
  • Working hours etc., ensures efficiency and ease of operations. Having clarity with your employee from the get-go helps in reducing conflicts at a later point.
Vendor agreements are used to hire contract staff for assistance on design and development, manufacturing contracts etc. Effective contract management would ensure a system of checks and balances and would ensure timely delivery of services. Since startups thrive in stiff competition, the information they disclose to employees, potential investors, or customers needs to be protected to prevent theft of ideas and appropriation of goodwill in the market. Non-Disclosure Agreements (NDAs) come in handy in such situations. As a Startup, you need to draw up a detailed NDA for all those who use critical business information.
One of the most crucial kinds of contracts is Employee contracts. Formalizing the contract with details about:
  • Salary
  • Scope of work
  • Nature of work
  • The permissible number of holidays
  • Working hours etc., ensures efficiency and ease of operations. Having clarity with your employee from the get-go helps in reducing conflicts at a later point.
Vendor agreements are used to hire contract staff for assistance on design and development, manufacturing contracts etc. Effective contract management would ensure a system of checks and balances and would ensure timely delivery of services. Since startups thrive in stiff competition, the information they disclose to employees, potential investors, or customers needs to be protected to prevent theft of ideas and appropriation of goodwill in the market. Non-Disclosure Agreements (NDAs) come in handy in such situations. As a Startup, you need to draw up a detailed NDA for all those who use critical business information.

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#7 Choose Best Investment Structure

One of the most time-consuming aspects of a business is raising funds for working capital requirements and development. In India, Investors (High Net Worth Individuals/Angels/Funds Managers) invest money into early and progress stage firms in several structures and varied terms.

Entrepreneurs need to seek legal advice for negotiating the terms of the deal, the rights of the investor, and the structure best suited for their business. The process usually involves drawing up a ‘TermSheet’ defining the intentions of the investor and the entrepreneur following due diligence of the business.

Legal formalities for entrepreneurs

Your business might be in the initial stages, and you must be burning cash. In such a situation, an equity sharing deal with an investor is better than a royalty deal.

In an equity deal, the investor will be in the same boat as you and will be paid off in the long run. While in a royalty deal, you will give some cash to the investor on every sale, which can be counterproductive, especially when you want cash the most.

Your business might be in the initial stages, and you must be burning cash. In such a situation, an equity sharing deal with an investor is better than a royalty deal.

In an equity deal, the investor will be in the same boat as you and will be paid off in the long run. While in a royalty deal, you will give some cash to the investor on every sale, which can be counterproductive, especially when you want cash the most.

#Bonus Tip: Protect Your Intellectual Property

Your intellectual property in your business is the most important currency of enterprise, and thus its protection becomes quintessential. This goes especially for tech-centric businesses. The codes, any discovery, a new invention, or any literary work all qualify as intellectual property. But sadly, despite much talk around it, most businesses fail to do very well-rounded protection of the intellectual property in their enterprise.

legal issues entrepreneurs need to know

You can own the intellectual property broadly in the following forms:

  • Copyright
  • Trademark
  • Patents
  • Trade Secrets

You can protect your intellectual property by:

    • Protecting Your Name: After you have decided on a name for your company, make it a point to get it registered as a trademark.

         To check trademark availability, Click Here.

    • Scrutinizing: If you outsource your work to domestic or global partners, find out if your partners are sensitive to your IP and its protection. You should ensure that remote employees are accessing your IP most confidentially. An NDA can also be drawn to avoid any slip-ups.

    • Hiring An Auditor: Your patents are not the only IP assets that you own. Place equal focus on absolutely any other kind of IP that you might own. Hire an auditor for distinguishing between the registered and non-registered ones and have them protected at the earliest.

    ❖ Startups can use the Scheme for Startups Intellectual Property Protection (SIPP) under the Startup India initiative. For the effective implementation of the scheme, facilitators have been empanelled by the Controller General of Patents, Trademarks and Design. The facilitators help startups by providing advisory services, assisting in patent filing and disposal of patent applications at a minimal charge.

You can own the intellectual property broadly in the following forms:

  • Copyright
  • Trademark
  • Patents
  • Trade Secrets

You can protect your intellectual property by:

  • Protecting Your Name: After you have decided on a name for your company, make it a point to get it registered as a trademark.

To check trademark availability, Click Here.

  • Scrutinizing: If you outsource your work to domestic or global partners, find out if your partners are sensitive to your IP and its protection. You should ensure that remote employees are accessing your IP most confidentially. An NDA can also be drawn to avoid any slip-ups.

  • Hiring An Auditor: Your patents are not the only IP assets that you own. Place equal focus on absolutely any other kind of IP that you might own. Hire an auditor for distinguishing between the registered and non-registered ones and have them protected at the earliest.

❖ Startups can use the Scheme for Startups Intellectual Property Protection (SIPP) under the Startup India initiative. For the effective implementation of the scheme, facilitators have been empanelled by the Controller General of Patents, Trademarks and Design. The facilitators help startups by providing advisory services, assisting in patent filing and disposal of patent applications at a minimal charge.

Disclaimer: This information is for informational purposes only and does not substitute for proper legal advice from an expert. We request you to consult your tax consultant before taking any decision.

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Tarashme

Tarashme

Tarashme is a blogging website for entrepreneurs. It provides practically useful content that helps them to accelerate their growth.

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