How to Avoid Legal Issues While Starting a New Business

Business Legal Requirements

With plenty of new businesses sprouting in India, keeping them compliant is crucial. While most of the start-ups are gung-ho about reinventing the wheel, doing so may have adverse consequences. That’s why when it comes to legalities in business, opting for best business professional services is the best bet. With that in place you will avoid a major chunk of work that requires expertise.  

While this is on, you still have a few other tasks requiring your involvement. Here are some proactive measures you should undertake to avoid legal issues while starting up. 

Clarity Regarding Business Structure

While it seems easy at first glance, this decision should be taken carefully.  There are more than 10 types of business structures in India that one can choose from. Choosing the right one for your start-up is vital.  

Check out the table below to get clarity on different types of popular business structures that startups can go with. 

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Generally, a start-up business in India can either be registered as a Limited Liability Partnership or as a Private Limited Company. The core issue is identifying the business nature, corporate flexibility, tax efficiency, compliance requirements, and cost of formation, etc. A typical Indian scenario sees start-ups incorporating as a Private Limited Company; purely because it gets easier to raise funds from investors. 

Legal Documentation 

Start-ups should stick to standardized policies and procedures from the beginning.  It is usual for companies to enter into agreements due to operational needs. The policies for this should be set up.  

The agreements like shareholders’ or co-founders’ agreement, non-disclosure agreement, terms and conditions for website usage, etc., represents business’ concerns.  

  • Co-founders Agreement 

A founder’s or a co-founders’ agreement spells out roles, duties, and responsibilities of the company’s founding members. This is a broad agreement covering multiple aspects that founders may undertake during their tenure. 

A shareholders’ agreement outlines the shareholders’ rights by defining the situations under which they can exercise their rights. This includes shareholders’ right for share transfers, right of first refusal, redemption upon death or disability and also their authority to control and run the start-up. 

  • No disclosure Agreement 

NDAs work to protect the start-up as it safeguards the founder and employees’ ideas along with the intellectual property. The following are the key legal documents required to start a business.  

  1. Defining confidential information
  2. Handling of confidential information 
  3. Owners of information 
  • Vendor Agreement

Imagine entering into a vendor contract that has some hidden clause(s) that possibly could trigger unpredicted price escalation or give termination power to the other party without notice requirements. This can create chaos within your startup. Therefore, though not mandatory, it is important to secure your business transactions with symbiotic contracts with third parties. 

  • Mandatory Documents 

Articles of Association and Memorandum of Association are the two fundamental documents for any limited company. For LLP registration, the signature of all partners is a must. Also, having a partnership deed is important for smooth functioning of a Partnership Firm.  

Understanding Applied Taxation Laws

Know about the taxation structure that applies to you. Taxability will majorly affect your business outcomes and therefore, you should plan accordingly. You will need to get accustomed to taxation and accounting as it is pre-requisite for any filings and annual legal compliance with respective authorities. Get familiar with GST since all indirect taxes are now abolished.  GST for different goods and services are classified under multiple tax slabs. 

Ranging from monthly GST filing, to quarterly, and annual filing, following the GST regulations is very important for any business to avoid the future hassles. Taxation for start-ups also involves declaring tax liabilities at the time of incorporation. 

There are a number of schemes for tax and incentives at state and national level. Keep checking for initiatives by Indian Government. There are certain initiatives where a start-up can claim tax exemption for 3 years even from capital gains and investments above fair market value. But, ensure these conditions are fulfilled to leverage this initiative. Staying updated is the key! 

Requirement for Licensing 

Start-ups don’t operate in ambiguity. If your start-up is into something that requires licensing, do it. Play by the rules or else be prepared for expensive, multiple legal suits, slow investments, loss of investor faith and even shutting down of business. Hence licensing awareness is a necessary hygiene that start-ups should strictly follow.  

Check, if your startup needs to comply with any of the below conditions: 

  • Get the Shops and Establishments Registration done with respect to the Premises from where business is run.  
  • Activity-based licensing requirements may arise depending on nature of business. For example; FSSAI License or Food License is required in case of starting up a food truck, restaurants, food joints, food item or consumable item packaging, food item or consumable item delivery, etc 
  • GST Registration is advisable if not mandatory. Though, it is mandatory for all Business or Professional entities exceeding INR 20 Lakh turnover a year (10 Lakh for north-eastern States). You are bound to scale your start-up with time. Therefore, it is best to have a voluntary registration. 
  • Business activities involving products’ import and export require the proprietor to obtain Importer – Exporter Code.  
  • To reap benefits of government schemes and subsidies, it is recommended to have a registration with MSME Department. Do the same to avail benefits under schemes introduced by the Government for prescribed activities.  

Cash Flow Management 

A start-up needs to introduce capital and funds in the business to match with the day-to-day business requirements. Ensure this by bringing in the working capital for your start-up. But then, there are multiple ways to raise capital.  It is essential to keep a track of your finances on paper to acknowledge its legal stand.  

Books of accounting are also another vital aspect. Good start-up hygiene involves maintaining accurate books of accounts and auditing them regularly.  This is to ensure all the necessary accounting and taxation rules are adhered to. Negligence in doing so can lead to serious accounting discrepancies and problems in annual compliances. 

During the business incorporation marginal capital is introduced. But then, that is not enough to run a healthy start-up so it will require finances from multiple sources viz.; internal and external. 

What you need to understand for getting capital from external sources? 

Most of the Indian start-ups rely heavily on equity holders for investment. The return to the equity holders is considered not as an expense for the Company but a profit distribution in the form of a dividend.  

Start-ups should make a note that funds raised from the external sources are charged against profit. It is because the pre-defined interest rate is paid irrespective of the profit earned by the Company. Though start-ups benefit from raising funds from external sources, it may or may not dilute the ownership of members. Moreover, such a route will help start-ups to get the best resources for the company’s growth initiatives.  

Funds provided by the venture capitalists and term loan providers are in lookout for timely return from the Company. This is because they lend in money for longer term. Therefore, start-ups should consider presenting the financial planning well in advance and in a concise manner. This goes to build investors’ trust right from the initial funding stage. 

Conclusion

The steps of incorporating, registering, managing, and operating start-up needs more detailed attention. This should be focused on the provisions defined for governing the respective dealings, procedures, and business actions. This is a little frustrating for entrepreneurs who are dedicatedly immersed in the primary business activities. But the importance of legal requirements and procedures should not be overlooked, it fundamentally protects the business. 

With all your marketing efforts for your business in place, it’s a good idea to have an all-in-one payment solution in place as well. Sign up with PayUmoney to enjoy the best payment gateway experience and grow your business effortlessly! 

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Author: Shrijay Sheth

Shrijay is an entrepreneur with more than ten years of experience in working with hyper-growing digital commerce companies across the globe. He is a data-savvy leader and a true believer of people first philosophy. Currently, he leads LegalWiz.in, a LegalTech venture in India – helping startups in company registration, trademark and other IP protection, and legal compliance.

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