Starting a new business can be demanding, it leaves you in a bit edgy situation and with other legal entanglements. There are a lot of issues that an entrepreneur goes through during starting up.
A dilemma begins with what sort of business structure they should adopt when choosing to register private limited company. Other difficult questions come out in the finance and fundraising domain regarding whether to borrow the loan from a bank or to approach an angel investor.
Here, let us take a look into some of the legal scenarios that your start-up needs to take care of:
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1. Selecting the right business structure
One needs to ponder diligently when it comes to selecting the right business structure. There is a plethora of options out there to choose from in India, approximately more than ten. It becomes tedious to select one from all of them. In India, a new company can register itself as an LLP or private limited company. It is the ball game in which you have to examine corporate flexibility, business nature, compliance requirements, tax efficiency and cost of formation thoroughly, etc. Most entrepreneurs in India select a private limited company because of its capability to attract funds from investors.
2. Holding legal documents and policies in place
Start-ups must adhere to standardized policies and procedures from the commercial itself. Due to the functional needs, it is easy for the companies to enter into agreements. Hence, policy for such purpose must be set up. Agreements such as co-founder or shareholder’s argument, T&C for website usages, non-disclosure agreement, etc. depict business concerns.
Co-founder and shareholder’s agreement
A founder or co-founder’s agreement represents the company’s founding members’ roles, duties, and responsibilities. This is a broad and more comprehensive agreement, including large aspects.
A shareholder’s agreement represents shareholders’ rights by elucidating the situation under which they can perform their rights with the inclusion of a shareholder’s rights to transfer shares, redemption upon death or disability, right of first refusal, and their authority to run a start-up and control it.
Website disclaimer policy, privacy policy, and T&C
Any organization converse with the third party via a web portal, disclosure and privacy policy is requisite after LLP registration. T&C as well as privacy policy modified as per the specified business.
No disclosure agreement
It works to safeguard start-up as it protects the founder and employee’s ideas and IP (intellectual property). NDA must specify the following things.
- Specifying confidential information.
- Handling of confidential information.
- The proprietor of information.
HR policy
Earlier employees of any start-ups are invaluable assets. Hence, it is crucial to retain them for the long-term for such a thing to happen, a start-up should need HR policies such as flexible work hours, providing WFH when needed, ESOP assignment, etc.
Vendor agreement
Hypothesize a situation wherein vendor contracts; some hidden clauses can lead to unpredicted price escalation or give dissolution power to other parties without prior notice requirement. That is why it is advisable to secure your transaction with a symbiotic contract with a third party.
3. Understanding licensing regulation
No one can operate a start-up in ambiguity. If your start-up falls into a business that needs a license, then you should go for it. Playing it safe is the better option; otherwise, one has to deal with legal suits, losing faith from investors, slow investments, and to a larger extent shutting down the business in a worst-case scenario. Licensing awareness is a need and a must for any start-up.
Take a glance at the following domain if your business falls under them.
- Obtaining the shop and establishment registration done concerning locality in which business operates.
- Activity-based licensing needs may arise depending on the business’ nature. For instance, an FSSAI license is required for operating a business around any consumable food item, etc.
- Registration of GST is advisable if not compulsory. It is required for business or professional entities crossing the limits of INR 20 lakhs turnover a year (10 lakhs for NE states). You are destined to scale your start-up. Hence, it is good to have registration.
- Business activities containing products’ import and export need the proprietor to get import-export code. One should also make an online IEC registration (import and export code) by visiting a government-specified website or contacting a business professional service provider.
- To be a beneficiary of government schemes and subsidies, it is suggested to register with the MSME department. The same goes for the scheme introduced by the government for particular mentioned activities.
4. Complying to taxation policies
Understand the taxation structure in which you are falling. It can majorly impact your business outcomes, and that is why you should plan accordingly. One has to accommodate taxation and accounting awareness as necessary to submit annual legal compliance with specified authority. Getting acquainted with GST is also necessary as it involves indirect tax. Complying to GST regulation is a must, from monthly to quarterly and annually. There are multiple schemes to get tax incentives at the state and central level such as the ‘Start-up India’ initiative at the national level.
5. Handling your cash flow and account
Any start-up has to raise funds and finance to meet the daily requirement of the business. One has to think about where they can bring in the working capital as there are many market options. Hence, it is important to track the financial record with legality. Another area is to maintain your books of account and audit from time to time, ensuring that you are adhering to all the required compliances. Negligence of which can lead to difficulty.
Conclusion
To start a business initially, you need finances from various sources such as internal or external. Other than that, you have to follow the steps such as incorporating, registering, managing, and functioning the start-up for good management diligently. While working on all of these, it is crucial not to overlook the importance of your business’s legal compliances.
