Common legal bloopers a start-up should avoid
In recent years, we have witnessed a tremendous upsurge in start-ups business.This resurgence in entrepreneurial spirit could be attributed to various favourable latitudes and easy-business ecosystem, which many countries are vigorously accommodating in their economic and social spheres. India in particular has really become a magnet for start-up hubs, attracting massive investments, evolving technology and burgeoning market. However, in the excitement of launching a business, the necessary evils of legal considerations and compliances are often kept at bay. This could add up to a huge mistake that any entrepreneur can make.
Therefore it is very crucial for any entrepreneur or a would-be entrepreneur to keep following legal considerations in mind to avoid any blunders:-
Error in choosing the right corporate entity for your start-upSome of the most basic questions a start-up faces are “Should i be an entity?” and of what type? Perhaps a corporation, LLC or proprietorship etc. What is best suited for my business? These common questions have serious consequences and an error in deciding on your business entity can lead to disaster for your start-up. A corporate structure ensures your “separateness”, which protects you from unlimited personal liability. Different structures offer different opportunities and restrictions. For example if you do not want losses for your start-up, go for a limited company.
Therefore it is imperative to consult a good corporate lawyer early on to make things easier in long run, especially if you wish to attract investors since this will ensure your start-up has all correct legal paperwork in order.
Not having a corporation or LLC members agreementHow do you decide who should act as a CEO, what should be the contribution of each member or how to split equity? There are so many questions that founders do not think about. Your long term business plans would seldom be consistent, if there is no instrument to determine your organisation’s operating terms.
Jeopardizing your intellectual property rightsIntellectual property is a start-up’s most valuable asset. Whether it is a trademark, patent or copyright, they all require legal protection. In the midst of various things that go into building a business, intellectual properties are often not in priority or are considered as too expensive proposition for a start-up to act on. If you don’t protect your intellectual property, you are exposing your business to others. Therefore, it is essential to register your intellectual property as soon as possible.
Not having adequate employment agreementIt is important to have a contract with everyone who is working in your start-up and their classification. Whether they are an employee or independent contractors, it is common for employers to provide computers, email and interest access. There should be a well-drafted work-place policies that govern how these systems can be used or restrict employees from sharing confidential information.
Not adhering to securities lawOnce a start-up is incorporated, they normally issue stocks or equity to investors, friends or families etc. These are governed by securities law. Which are very complicated. Issuing stocks which do not comply with specific disclosures or filing requirements lead to serious legal repercussions.
Mixing your personal expenses with business expensesWhen setting-up a start-up, there are chances where your personal and business expenses become indistinguishable. This can lead to confusion when taxes are being filed or deductions being disallowed by revenue authorities. The company therefore, should ensure there is a financial account early on itself and there should be a separate record of expenses.
Lack of proper documentationEvery activity or transaction in your start-up must be properly recorded. Documentation of employees and interactions involving your company is very important. These considerations have serious influence on due diligence procedures which can make or break an investment deals.
Not insuring important tax considerationsAdhering to a sound tax-planning is very crucial for your business, as it can save lot of money and protect you from incurring liabilities. It is important to take stock of your profit and loss statement regularly and pay taxes on time and in prescribed instalments. Your start-up must have a tax consultant to insure all regulations are being followed. This would give you more time to focus on your company.
These guides are not legal advice, nor a substitute for a lawyer
These articles are provided freely as general guides. While we do our best to make sure these guides are helpful, we do not give any guarantee that they are accurate or appropriate to your situation, or take any responsibility for any loss their use might cause you. Do not rely on information provided here without seeking experienced legal advice first. If in doubt, please always consult a lawyer.
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