In India, the rapid progress and advancement in various sectors have led to an increase in the number of startups. They are the future of India. It has the scope to incorporate in multiple forms such as company including a partnership firm, limited liability partnership, etc. The laws relating to the tax laws, incorporation, environmental laws, securities laws, intellectual property laws, contract law, and various other regulations are required to adhere the compliance of Startups. The private limited company, partnership firm, a limited liability partnership firm are considered as ‘Startup’ till seven years from its incorporation date for getting the benefits under the Schemes of India.
It needs a lot of attention and efforts, including a developed proof of concept, finding the market fit product, and hiring the first set of employees. One of the most common areas where most startups make the wrong choice is establishing a solid legal foundation. Some of the legal mistakes made by them are as follows:
In startups, the legal entity you choose is very significant; mainly, it should be a registered company. It is preferred to go for Limited Company or LLP if you don't want to be personally liable for the liabilities of the startup and to avoid any legal hassles.
Absence of Founder's Agreement:
It is necessary to have a founder's agreement to decide the percentage of ownership, vesting rights, responsibilities of partners, salaries, terms and conditions, assets or cash flow in the business, etc. Absence of Founder's Agreement leads to enormous problems.
Lack of Documentation:
It is essential to maintain the documents to avoid the legal mistakes as the due diligence can make or break the deal.
Bifurcation of the Expenses:
It is very difficult to distinguish between personal and business expenses. The company should have a financial account at the onset and separate records as well. The proper distinction between the revenue and expenses shall be defined in the founder's agreement to avoid the conflicts.
Not tracking expenses:
Mostly, the mistakes made by the startups are not keeping track of their expenses. The expense which is not documented is not deducted, and therefore, the tracing of the expenses becomes very difficult.
Non- Compliance with Security Laws:
Most security laws require the sale of shares that comply with a specific form, filing procedure and disclosure unless such sales are exempt. If they fail to comply with such conditions, it can lead to the penalties for the founders and the start-up company, including the repurchase of all the shares at the issue price. Consequently, to avoid such penalties, founders, must hire the lawyers to prepare the document relating to sales of shares in compliance with the respective laws.
Lack of Employment Document:
Start-ups often encounter problems as they fail to maintain satisfactory employment documentation. They have prepared a core group of employment documents to be signed by most, if not all, employees. Employment documents for a company would include the benefits available to the employee, their roles and responsibilities, confidentiality clause, service marks, etc.
Intellectual Property Rights:
In case you develop a unique product or service, one should take the appropriate steps to protect the intellectual property of the company. While registering the name of the business, it is essential to research for picking the name of the Company to avoid the trademark and copyright. You should make sure that the name is distinctive and memorable. The name selected should not be in a limited sense as you might need to change the nature of business later.
Good Terms and Conditions of the Agreement:
It is a misguided effort to hire an inexperienced legal counsel to save the expenses, in case of start-up businesses. Instead of spending the money to hire competent legal counsel, founders often hire lawyers on steep fee discounts. It is advisable to take the consultation from the lawyer who has a vast experience in Commercial, Corporation, Contract, Employment, Intellectual Property laws, etc.