Startup Legal Checklist – Mark what has been done!

‘The scariest moment is always just before you start’
Stephen King

Isn’t making the beginning, the initial push, the inertia needed to gather momentum always the toughest? The struggle gets harder when there is a lot of money, hope and aspirations on stake. If you’re an ardent follower of Shark Tank or a creative inventor looking forward to entering the start-up ecosystem, this checklist may help you put some of your troubles to rest. This article is divided into two parts; Part 1 focuses on things you need to deal with before you start your own venture. Part 2 is focussed on more continued aspects that you need to be mindful of, once the business is all set.

Startup Legal Checklist – Part 1

Checking name availability

Choosing the right name reflecting the use or qualities of your product, service or idea is probably just as important as the idea itself. While you may still be able to change your businesses name later, it’s ideal to put thought into the name you choose. The Registrar of Companies is the deciding authority of availability of name. Even if your business name resembles another enterprises name too closely, it may be rejected.

Registering your domain-name

Even though you may choose to sell your products only off-line through distributors, there is no way an entity can survive in today’s world without an online presence. It’s not an entirely untrue modern adage that ‘If it doesn’t exist online, it didn’t happen’. Before you think of marking your online arrival, it’s important to establish a domain name. Some websites may be willing to do it for free (in exchange of hosting often annoying pop-ups with click baits) or you may choose to buy a domain name. Facebook is known to have paid $8.5 million to acquire the domain fb.com in 2011 from the Farmer’s Bureau Federation in America.

Deciding your business structure

There are distinct advantages and corresponding obligations associated with each business and hence, it is very important to weigh your future business plan against the merits of the structure you decide. While a sole proprietorship concern is more suited to a professional or artist, a Limited Liability Partnership is ideal for those businesses that cannot function without expertise in multiple areas. Even though setting up of a company has higher legal and associated compliance costs, this form of business is ideally suited for complex businesses that have plans for extensive expansion as it insulates owners from risks of non-payment due to clear ring-fencing between assets and liabilities of company and those of its owners. Another advantage of a partnership concern is its conversion into a private company is easier. While it is tempting to choose an LLP structure, given the tax advantage (on Dividend distribution tax), it is pertinent to note that for an FDI in LLPs is restricted in sectors such as financial advisory services.

For a start-up considering foreign investment, the company type is often prescribed as the Indian laws sometimes prohibit investment in any other mode of business structure.

Location advantages to consider

In order to promote business expansion in certain areas, the Government often comes up with glitzy packages of services provided for free or concessional rates in some states or specific townships developed for industrial purposes. This may also mean better supply of electricity, integrated access to markets, packaging and distribution facilities and easier access for workers. Setting up an industry in specified areas may also trigger tax advantages such as

Being mindful of your pre-incorporation contracts

By incorporation, we mean not just a company form of business but all those contracts which you may enter into before your business entity has come into being or starts making money. For example, if you enter into onerous debt obligation for your asset acquisition reckoned right from the time you take the loan, the interest burden may keep accumulating before you even acquire or put your asset to use. In order to avoid such a scenario, it is advisable to go for more flexible payment systems structured to suit your business and financial needs.

Choosing the right people to work with

While this isn’t a legal checklist to cross off your list and it’s hardly possible to quantify who’d be the ‘right’ one for you, it can definitely have major legal repercussions if things between you and your partners go awry. From Cyrus Mistry with Tatas to Vikram Bakshi of McDonald’s, we’ve all heard of qualified people ideally suited for the job having a fall out with the management. Although the risk of a partner disclosing your secrets may be mitigated by including the right caveats in your contracts with extreme penalties for breach, it would save you and your business a lot of heartache (physically and financially, respectively) to assess people before making long term commitments.

It is also ideal to include a clause in the agreements with co-workers to the effect that the intellectual property developed in the course of business would vest in the start-up rather than the person developing it, so save the business from a possible IP dispute.

License,Permits and Other Approvals

As a start -up working in any sphere, where food industry or fibre-optics, all the sectors would require some level of getting approvals. It may be stringent for some such as health-related sectors or fairly simple such as the fashion industry. Getting all your regulatory papers in place is likely to give out the impression to a prospective client, supplier or investor that you have done your basic groundwork right. It may also help you navigate through contingency clauses which are often inserted by smart lawyers to avoid their clients from potential losses due to rejection of licenses.

Startup Legal Checklist – Part 2

Securing intellectual property

While it is ideal for early stage business to secure ownership over intellectual property, such as brand-name, trademarks and patents. This is so because in case of a possible infringement, such as someone else using the same name, logo or goodwill, it is easier to establish your rights over IP. Most investors while taking a call on your start-up businesses worth, also factor in the IP value that you may gain in future. For those into inventions of a scientific nature, it is absolutely imperative to seek a patent registration at the earliest as the average time taken from filing to the actual grant is about five years in India.

Understanding tax implications and managing them (legally, we mean)

Startups incorporated after April 1, 2016 are eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years provided that annual turnover does not exceed Rs 25 crores in any financial year. However, contrary to popular belief, this does not mean an absolute exemption from all taxes. Firstly, this provision refers only to income tax, so may still be liable for GST, import tax, custom duties and other applicable levies. Secondly, if in any year the turnover crosses 25 crore rupees, the regular tax payment rules would apply. Also, this exemption is only available for three out of seven years and hence, you’d still have to pay taxes for the remaining four years. It is also important to note that only a start-up set up as a private limited company or limited liability partnership incorporated after April 1, 2016, would be eligible for tax concessions.

The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Moreover, this amount needs to remain invested in the specified fund for a period of 3 years. So in any case, if it is withdrawn before 3 years, then exemption will be revoked in the year in which money is withdrawn and the gain so made will be taxable.

Further, in April this year, the government has issued a clarification stating that only those start-ups that have funding of a maximum of 10 crores (including the amount contributed by angel investors) would be eligible for tax concessions.

Maintaining proper records and ensuring their safety

Much to the chagrin of our mothers, haven’t we all struggled with keeping our rooms clean and looking out to our moms for that one shirt hidden beneath the pile? It is moments like these which help us appreciate the value of time and order of things. Similarly, for impending audits, filling compliance documents, ease of establishing evidence in a court or supplying documents requested by your investor, it is of utmost importance that your records are proper, updated and kept in a legally mandated format. It is also important to invest in a good security system for safety of your records.