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 favorable latitudes and an easy-business ecosystem, which many countries are vigorously accommodating in their economic and social spheres. India in particular has become a magnet for start-up hubs, attracting massive investments, evolving technology, and a 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 the following legal considerations in mind to avoid any blunders:-

Error in choosing the right corporate entity for your start-up

Some of the most basic questions a start-up faces are “Should I be an entity?” and of what type? Perhaps a corporation, LLC, 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 agreement

How 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 organization’s operating terms.

Jeopardizing your intellectual property rights

Intellectual 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 too expensive a 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 an adequate employment agreement

It 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 well-drafted workplace policies that govern how these systems can be used or restrict employees from sharing confidential information.

Not adhering to securities law

Once 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 that do not comply with specific disclosures or filing requirements leads to serious legal repercussions.

Mixing your expenses with business expenses

When 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 are 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 documentation

Every 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 a serious influence on due diligence procedures which can make or break an investment deals.

Not insuring important tax considerations

Adhering to sound tax planning is very crucial for your business, as it can save a 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 installments. 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.

In recent years, we have witnessed a tremendous upsurge in start-ups business. This resurgence in entrepreneurial spirit could be attributed to various favorable latitudes and an easy-business ecosystem, which many countries are vigorously accommodating in their economic and social spheres. India in particular has become a magnet for start-up hubs, attracting massive investments, evolving technology, and a 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 the following legal considerations in mind to avoid any blunders:-

Error in choosing the right corporate entity for your start-up

Some of the most basic questions a start-up faces are “Should I be an entity?” and of what type? Perhaps a corporation, LLC, 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 agreement

How 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 organization’s operating terms.

Jeopardizing your intellectual property rights

Intellectual 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 too expensive a 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 an adequate employment agreement

It 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 well-drafted workplace policies that govern how these systems can be used or restrict employees from sharing confidential information.

Not adhering to securities law

Once 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 that do not comply with specific disclosures or filing requirements leads to serious legal repercussions.

Mixing your expenses with business expenses

When 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 are 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 documentation

Every 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 a serious influence on due diligence procedures which can make or break an investment deals.

Not insuring important tax considerations

Adhering to sound tax planning is very crucial for your business, as it can save a 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 installments. 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.

Advocate Chikirsha Mohanty

4.0 | 2+ user ratings

Greater Kailash - 1, Delhi

5 years

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