India is a land of budding entrepreneurs. We have innovative startups all around. There are successful businesses being built at every moment of time. New ideas are being conceived as you read this article. But sadly an astounding 70% startups fail (or more than that!).
There are many mistakes that a startup commits behind this high percentage of failure. In this article we will discuss legal mistakes that a startup should avoid to become successful.
- Unclear terms between Co-founder
Always have an agreement with the co-founder. Initially it may seem that the co-founders have a strong bonding but you never know when things can go wrong. I have seen number of cases where the startups with brilliant ideas just failed because one of the co-founders decided to quit. The reasons for co-founders quitting could be financial (top reason), timing and commitment to the startup, personal grudges. This demoralizes the other co-founders too.
So have a pre-agreement between the co-founders about the finances they will introduce, profit percentage, responsibility and authority for specified function like technology, finance, marketing of the startup.
- Legal Structure
If your product falls in the category of B2B (business to business) then you will have to register your business as a Private Limited Company. Many corporates have a pre-condition of only Private Limited Companies as their vendors. Even in the case of products falling under B2C category one should register a Private Limited Company if over time you seek external funding or investment into your business. Further, in either case, the legal standing of a Private Limited Company is always better. I can provide you with a small tip here which will be helpful in selecting your business’s legal structure in normal cases.
A Private Limited Company is preferable for startups, Limited Liability Partnership is preferable for Professionals like Chartered Accountants, Architects, One Person Company is preferable for Single Promoters, Sole Proprietorship is preferable for Small Traders and a General Partnership is preferable normally for family businesses.
- Contracts & Agreements
Requirement of Contracts
When you do business, it is must to have a legally binding agreement with your vendor and buyer. You may even need Non-Disclosure Agreement if you are sub-contracting your work, rent agreement for office when you are taking premises on rent with specific clauses for refund of security and duration of use.
Standardization of Contracts
When you are starting your business you need to have flexibility with regard to price, terms of payment, duration of contract because you need to create your market. But as your brand becomes more known in the market, you need to have standard terms and conditions.
- Documentation for Employment
A business needs to have a good team to provide work to clients with efficiency. There are two things to consider when hiring your employees
- Background check: you should perform a background check of all the employees you hire. Apart from the background check the company should also maintain records having their Identification cards, Residential Proofs, Photograph.
- Employee hiring terms: The employee agreement terms should clearly mention roles assigned to employees, responsibilities of employees, allowable leaves, salary details, duration of employment, termination of employment, reporting to superiors and reporting from sub-ordinates, notice period.
5. Trademark, Copyright, Patent and Design Protection
I will ask you a simple question, what are you working today for? The success of your business! Right? Yes, you work for success of your business and this business is known by its brand name. All the effort, the sleepless nights, the commitment you put into business is basically to generate the goodwill of the Brand name so you can create brand loyalty overtime. When you are actually working for this brand name, you need to protect it.
In India, the brand names are also called as Trademarks. So protect your trademark by getting it registered before someone else does. Same is valid for Copyrights, Patents and Designs. Together, we call them as Intellectual Property Rights.
- Tax Issues
When it comes to India, the Indian taxation and compliances are still complicated in spite of all Governments efforts. There are hefty penalties when compliance are not undertaken. No one, I repeat no one would like to get a notice from the Income Tax Department for not filing taxes. You need to find a good partner who can take care of your compliances because a initially a startup can afford a full time in-house Finance Manager or Chartered Accountant.
Hire the right consultant
A legal consultant will always guide you through the possible violations you may make. They will even help you with your tax structuring so that the tax exposure is minimum.
- Infringing Trademarks of others
Relating this to the Intellectual property protection discussed above, it is scary when one day you come to know that all the efforts you had put in the generation of goodwill for your brand has become unfruitful because the brand already existed and was used by someone else. So, sort this out in the beginning itself, if you were creative enough to find one unique brand name for your startup you can do it again! Try and avoid hassles of trademark infringement, domain names duplicity etc.
- Licenses & Government Registrations
Depending upon the nature of your business you may need certain licenses to do business in India like Import Export Code, Food License, FSSAI, ISO, Service Tax Registration, VAT registration etc.
[About The Author: Ricky is the founder of online portal www.registrationsindia.com that helps companies and startups in their Business Registrations, Taxation & Compliance needs.]