Startups are small business units operating with limited resources and experience. Time and again, these small business units face several legal challenges affecting their growth and expansion. Often, they land in serious trouble due to non-compliance with the law. The problems faced by startups in India are common for all the startups resulting in the imposition of fines and penalties at a later date. This creates a deep impact on the limited capital and other resources of the startups.
You can know about startup legal issues as under-
Structuring the legal entity to avoid startup legal issues
A business structure denotes the legal structure that your business shall follow in its day-to-day operations. The business owners must have a thorough understanding of the features of each business structure and then finally take up their business idea by choosing among the most suitable business structure namely- sole proprietorship, partnership, limited liability company, and corporation.
Sole Proprietorship firm
A sole proprietor requires minimum fees and documentation to start operating its business. It is the simplest business structure where an individual is responsible for its daily operations. The problems faced by startups in India create problems for them to expand and grow. The business transactions form a part of the tax return of the owner. No separate ITR is filed as the owner and the business remain one single entity. The business owner files Form 1040 with Schedule C and Schedule SE for self-employment tax to save himself from startup legal issues.
Limited Liability Company
A limited liability Company registration is best suited for unstable and risky businesses. It has restricted liability. It contains the features of both – partnership and corporation. It does not put any limit on the number of shareholders in the company. It needs to file its Article of Association in the state where it intends to do business. It involves less paperwork& limited liability i.e. no assets are sold to pay the liabilities.
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It operates under the Partnership Act and the Indian Contract Act where two or more persons participate in the business proceedings. Its tax returns are filed through Form 1065 in the personal ITR of the partners. Proper compliance can decrease the problems faced by startups in India. Startup legal issues arise due to less paperwork and the partners are personally liable for the business debts with the provision of sale of their assets as well.
It gives a separate identity to the business. It involves too many formalities and is an expensive setup. It is necessary to register your business under a Corporation if you wish to go public i.e. issue common stock to the public. A corporation is liable to pay both Central and state taxes.
Its biggest advantage is that there is no limit to raising capital. It provides limited personal liability and the owners get protection against business debts and other obligations.
Not having a proper Co-founder agreement
A founder agreement defines the conditions of the compliance and position of the founder. It understates the roles and responsibilities of each founder separately which helps in the reduction of the problems faced by startups in India.
It states your future with the co-founders and the undertakings of all the persons involved in the ownership of the company. This agreement plays an important role in the management of the founders of the company and saves them from startup legal issues.
Not having proper employee documentation
The startup owners undermine the importance of employee documentation which leads to several problems in the long run. Business owners face unforeseen problems due to a lack of proper employee documentation. Proper employee documentation at the initial stage of your business helps you overcome several unanticipated issues and binds both parties under the company law. The process of employee documentation includes-
- Employee Stock Option Plan Documents
- Job Offer Letter
- Employment Contract
- Confidentiality Agreements
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Problems faced by startups in India in compliance with the tax structure
Startups are small units of business due to which the business owners often ignore the importance of TDS, GST, and other income tax compliances. This lands them in deep trouble in the long run. At a certain time, these non-compliances hinder their growth prospects and increase the problems faced by startups in India while raising funds for business expansion.
Proper trademark for your brand
There are serious implications in case of inadequate or absence of legal protection of the intellectual property resulting in startup legal issues. The trademarks of the idea, product, or company logo must be obtained promptly to prevent its misuse by other competitors. Copyright of the original must be obtained to save your future hindrances of any kind.
Lack of non-disclosure
There is a provision of a non-disclosure agreement to maintain the confidentiality of the business operations. It comes into play during any agreement with any other business entity or with any other company or its staff for any project or during any particular period. This agreement maintains the confidentiality of both parties and saves a lot of problems in the long run.
Lack of Secretarial documentation
The startup owners overlook the importance of having an efficient secretarial firm due to which they get maximum red flags in their due diligence compliances. An efficient Secretarial firm saves you from the problems faced by startups in India, avoids unnecessary red flags, and completes your documentation that includes Notices, Minutes, resolutions & other relevant registers.
Lack of proper due diligence
Lack of proper due diligence hinders your prospects of business expansion and causes irrelevant startup legal issues. It is an important process followed before entering into any contract with another party. It plays an important role in your growth aspects and should be done through professionals only
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Startups operate on limited resources due to which they ignore the legal and other compliances to direct their resources towards their daily operations. The importance of due diligence cannot be ignored whether you are in the beginning stage or your expansion phase as it saves you from the problems faced by startups in India.
Proper due diligence and other legal compliances save you from a lot of troubles in the future. It is better to analyze the future scenarios and be ready with all the required compliances to prevent any future startup legal issues.