Many startup businesses find it near impossible to predict future lawsuits especially when the future of their company is just as undetermined. However, as a business owner it is your responsibility to do everything within your power to prevent the risks you have access to avert. To build a successful business a business owner must not only turn a profit but take the initiative, from the start, to protect their business from claims and lawsuits that could result in devastating losses of both business and personal assets for the long haul. Consider these three tips to ensure your company is prepared to wind the legal storms the forces of nature throw your way.
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Company registrationsMany new business owners operate their businesses as sole proprietorships; the only problem with this is that if the company is sued, the owner’s individual assets can be used to pay off the losses of the business. Business owners with unlimited liability are not protected against the risks that their business may face, and are exposed to and responsible for all forms of loss their legal battles might bring.
A start up company owner must ensure limited liability early on by registering their businesses as either a Private Limited Company or an LLP. A Private Limited Company, the most popular legal structure for businesses, should be chosen by anyone looking to build a scalable business. Businesses choose to register as such in India, as it allows outside funding to be raised easily, limits the liabilities of its shareholders and enables them to offer employee stock options to attract top talent.
Limited Liability Partnership (LLP), introduced only in 2008, limits the liabilities of its partners to their contributions to the business and also offers each partner protection from the negligence, misdeeds or incompetence of the other partners. The LLP is also cheaper to incorporate than a private limited company as it requires less compliance and can be a smart choice from a tax perspective. However, if you're looking to raise venture capital or attract talent with employee stock options, registering as a private limited company is the way to go, as LLPs cannot easily accommodate it.
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Trademarks With multiple startups cropping up daily in India, new industries are facing tough competition at a faster rate than ever before. Everyday there is someone out there trying to find an idea that works, replicate it, and call it their own creation. To protect your new brand from this, it is essential to act as fast as possible to protect your intellectual property before another business swoops in to capitalize on it.
If a larger company chooses to sue a small business it can result in consequences that can entirely alter the business and the client base you have built. One example of this was when Ebay began the proceedings for trademark infringement against Foodiebay the start up, which was later forced to rebrand as Zomato.
A trademark registration enables business owners to easily establish their right to the trademark in court and earn royalties. It also deters piracy and prevents similar company names from being registered by other businesses. You can conduct a trademark search, to check if your brand name clashes with existing trademarks. A company’s brand, content and inventions are often even more valuable than just its business idea as they maybe assets that are integral for the core services of the company and its long-term sustainability.
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AgreementsEver heard of the phrase, “better a lean agreement than a fat lawsuit?” Companies who have faced legal crises due to undefined relationships with those they work with can attest to that fact. Agreements made at the beginning of relationships between vendors, employees and clients can save any business time and money that would have been wasted in the resolution of a dispute.
A Vendor Agreement is an agreement stipulating the conditions under which the work is to be performed by the vendor. A well-drafted Vendor Agreement will minimize risk of future litigation, as the rights and duties of both parties are clearly laid down in the agreement.
An employment contract is necessary when hiring any employee or consultant, whether part-time of permanent. This agreement is a comprehensive document that addresses all terms and conditions governing employment, as well as the rights, duties and responsibilities of each party with respect to the other. A specific, well-drafted clause in an employment contract can go a long way in avoiding ambiguity and minimizing legal risks.
Employees and business partners have access to the highest levels of information that can be harmful to a business, if they get in the wrong hands, so drafting a Non-Disclosure Agreement (NDA) is essential. This agreement is a legal contract stating that certain information such as trade secrets, business plans, business methods and strategies and its disclosure is restricted to third parties.
As with all risk preventing strategies, being prepared to implement these legal structures in your business can prove to be more effective if considered before the cause for legal action arises. Just because your business isn’t presently at high risk of a lawsuit doesn’t mean you are at no risk at all. With these three tips under your belt, your business should be on the right track towards ensuring a legal and dispute free future.
Guest Author
Hrishikesh is the founder and Chief Executing Officer at Vakilsearch where he leads business development and works closely to contribute to the strategic vision of the company.With tremendous support from the team, Hrishikesh has taken on the challenge of building a billion dollar company in India which will change forever the way Indians access professional service.
