• Devansh Lakhani

Legal Aspects of a Startup

Starting out on your journey as an entrepreneur can be exciting. New ideas, new information, new networks can all get a little overwhelming as the days go by. Successful startup founders usually find it in themselves to push through all sorts of troubles to rise up in the market.

Usually, startup founders get so caught up in their quest for success, that their focus can be a little blinkered. They’ll focus on the logistics, the technical aspects, as well as the marketing of their products, but somewhere down the line they tend to neglect the legal aspects of a startup. So, here we have some tips for you to keep in mind while building your startup:

1.   Deciding a Business Structure-

Legally, there are 4 types of Business Structures recognized by the court- Proprietorship, Partnership, Limited Liability Company (LLP), and Private Limited Company. Do thorough research on all types to determine where your startup will feel most comfortable. Take into consideration your method of funding as well, whether you are bootstrapping, or trying to raise funds, it plays a major role in helping you decide what type of company your startup can be classified as. Find out how the ownership and registration of each type of company is placed. Consider the following aspects of the type of company:

  • Ownership

  •  Member liability

  •  Transferability

  • Registration

  •  Legal Status

  •  Number of members required

  •  Taxation

  •  Existence/Survivability

  • Annual Filings

  • Annual Statutory Meeting

  • Foreign Ownership 

2.   Founders’ Agreement-

Founders’ agreement is a document that talks in detail about the founding members of the company. It specifies the important details like roles, responsibilities, operational details, executive compensation and exit clauses. Having such a document ready helps to avoid surprises at later stages. It minimizes potential disagreements once the company is fully functional, and allows for a solid foundation to be laid down. The Indian startup ecosystem is a dynamic landscape, and strong, concise documentations help to navigate through uncertainties. 

3.   Understanding taxation and accounting laws

Taxes are an integral part of every business they are of two types such as state tax and central tax. Different business and operating sectors have different tax structures and therefore it is necessary to adhere to the laws. The government of India launched the startup India initiative a couple of years ago to encourage startup owners of the company. There were many exemptions and tax holidays introduced for startups and new businesses. Here’s the website to know more about this initiative:

As far as accounting is concerned maintenance of proper books of account and timely audits go a long way . Adhering to accounting and taxation rules helps to avoid accounting mishaps later on. Integrating these practices from the start of the business is crucial.

4.   Protection of intellectual property

Intellectual property is the one secret ingredient of most businesses today especially tech and service centric businesses. Algorithms, research findings, and proprietary codes amongst many others are some of the most common types of intellectual property owned by companies. Protection of intellectual property under the startup India initiative has a special place- ‘scheme for startups intellectual property protection.’ For effective implementation of this scheme facilitators have been appointed by the Controller General of Patents Designs and Trademarks.

5.   Effective contract management

As per Indian Contract Act 1872, all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration with a lawful object, and are not expressly declared to be void. In simple words a contract that is lawfully made ensures smooth functioning of a business and helps navigate uncertainties. Employee contracts are crucial while starting a venture, they bring clarity by outlining details about scope of work, salary, stock options, and operational responsibilities.

Sometimes in the initial stages of operations, startups tend to hire contract staff and vendors. Effective contract management systems allow for timely fulfillment of required work and adherence to labor laws if applicable.

One more important contract that startups must have in mind is a non-disclosure agreement (NDA). Startups, in order to scale up need to discuss their ideas with a host of people (potential investors, employees, customers). This makes their ideas vulnerable to theft, hence the need for an NDA.

6.   Planning the winding down of business- 

Often while planning for fair weather an entrepreneur might tends to forget planning for foul weather. Therefore, sometimes startups struggle when it is time to shut down and cannot make the right call, so from a legal standpoint it is crucial to create a plan for winding down the business that is best suited for all parties involved.

There are 3 ways to shut down a startup:

  • Fast track exit mode

  • Court or tribunal route

  • Voluntary closure

Additionally the Insolvency and Bankruptcy bill 2015 is a new tool that entrepreneurs can use. If you neither wish to operate your startup nor wish to shut it down you can apply for it to be a dormant company- that allows a company to stay afloat with minimal compliance.

It is always in the best interest of your startup to adhere to legal requirements for smooth business operations. Look into hiring a professional legal counsel for this purpose.

We at Lakhani Financial Services always try to adhere to the latest laws and legal technicalities of running a business. We are sharing this information to further our cause of helping startups achieve their maximum potential.

About Devansh Lakhani

Director of Lakhani Financial Services, and a Chartered Accountant, he helps start-ups raise funds from his network of investors. He guides and advises start-ups to scale up by providing efficient sales, marketing, team building, and business management strategies. He has executed fundraising by block deals on the stock exchange and conducted IPOs and right issues on the SME platform to the tune of over Rs. 50 Crore. He is currently working with start-ups from various sectors to help them channelize their business models and investments.

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