If you’re an entrepreneur with a brilliant idea planning to bring your startup into today’s very crowded market place, you’ve probably wondered how to avoid legal ruin. Most entrepreneurs look at setting up legal operations as a painful process, but it doesn’t have to be. Here are four legal stages you should take your business through to build a solid legal foundation and start off on the right track.
STAGE ONE
Incorporating the business: There are several ways to register your business but choosing the right one for your brand can be a key factor in determining whether you become a market leader or are quickly sold. So whether you are a new garage business or are trying to refresh an idea you thought of years ago, here are some of the options you should consider:
▪ Private limited Company: Start-ups that want to raise funding can register as a private limited company so as to offer investors shares and seats on the board of directors. However, private limited companies require greater compliances, have few tax advantages and have high compliance costs.
▪ Limited Liability Partnership (LLP): Professional and advisory firms that do not require equity funding can choose to register as an LLP. This structure combines the advantages of partnership firms and private limited companies. An LLP structure helps to limit the liability of partners in the firm, has fewer compliances as compared to a private limited company and has tax advantages in case of profits over Rs. 1 crore. Further, an LLP can have unlimited partners and has low compliance costs.
▪ One Person Company (OPC): An OPC has only one director who is the sole shareholder. An OPC structure has high compliance requirements and cost and limited tax advantages.
▪ Partnership Firm: A good option for small businesses, but all others should avoid it on account of unlimited liability, which means that any business debts can be recovered from the personal property of the partners
▪ Sole Proprietorship: Small manufacturers and traders, who typically have just a service tax or VAT registration, are known as sole proprietors. It is usually advised to avoid this type of registration on account of unlimited liability, which means that any business debts can be recovered from your personal property
STAGE TWO
Come to a Consensus: Once the business is incorporated, founders of a company should discuss their vision for the company and how they will build it in depth. A founders' agreement outlines the various roles and responsibilities of the founding members of a company, the equity vested in them, the ownership of intellectual property created by them and their roles and responsibilities. It is a broad agreement covering various aspects of the endeavor that the founders are about to undertake, including the consequences of their departure or death.
Drafting an agreement can clear the air, as often many matters tend to not be discussed between co-founders. To protect the business, founders may include confidentiality, non-solicit and non-compete clauses in the agreement so as to ensure that founders do not branch off and compete with the business, solicit the clients and customers of the business, leak confidential details and information about the business.
STAGE THREE
Government registrations: once you incorporate your business you must apply for certain government registrations. The two registrations always required are Permanent Account Number (PAN) and Tax deduction Account Number (TAN), the former is mandatory for opening of bank accounts and filing income tax returns and TDS returns, while the latter is required by all companies engaged in deducting or collecting tax. Apart from PAN and TAN registrations, other registrations may be required such as Import Export Codes (IEC), VAT, or Service Tax depending on the type of business you are running and its turnover.
STAGE FOUR
Protecting your Brand: Once your business is registered and has started to grow, you’ll need to take certain steps to protect your brand. This involves protection and management of your intellectual property (IP). While intellectual property is always the property of the business owner, it is generally assumed that the first person to file for registration is the owner.
This applies to trademark, copyright and patents. As a startup you should identify if your product or service is entitled for a patent as it gives you the right to prevent others from making, using, importing or selling your invention without approval. Trademarks protect your brand, slogan or logo, while copyright registration confers upon its owner sole rights to copy or reproduce the work or grant permission to another to do so.
As a new entrepreneur you not only have the task of convincing the world that your idea will work, but you also have to ensure your startup observes all legal obligations to ensure its long-term success. Going through these four stages will enable your startup to be legally ready to take the plunge and see your business take shape.
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.
