Legal Mistakes By Startups
In a country like India one has to be very vigilant with legal issues pertaining to their Start-up or already set -up Business
Legal issues are often at the back of an entrepreneur’s mind in the excitement of launching a startup. But just because you are small doesn’t mean that people are going to let things slide when you infringe upon their trademark or don’t tell the full truth to investors.
1. Not starting the business as a registered Entity
One of the very first decisions that founders must make is in what legal form to operate the business in, but founders often start a business without consulting a professional and, as a result, often incur higher taxes and become subject to significant liabilities that could have been avoided.
The types of business forms that are available to a startup business are as follows:
- Sole Proprietorship Concern
- Partnership Firm
- Limited Liability Partnership Firm (LLP)
- One Person Company (OPC)
- Private Limited Company
2. Not carefully considering intellectual property protection
If you have developed a unique product, technology, or service, you need to consider the appropriate steps to protect the intellectual property you have developed. Both the company’s founders and its investors have a stake in ensuring that the company protects its intellectual property and avoids infringing the intellectual property rights of third parties.
3. Coming up with a name for the company that has trademark issues, domain name problems, or other issues
When picking a company name, it’s important to do some research to help you avoid trademark infringement or domain name problems. You may be infringing someone’s trademark if you are using a trademark which is likely to cause confusion among customers as to the source of the goods or services. Here are some of the steps to that can avoid naming issues:
- Check on mca.gov.in that whether the name you want are already registered as ac company or LLP with the Ministry of Corporate Affairs or not, at this point of time you would not want to incur more expenses on the incorporation of the Start-up, but eventually when you are a big hit in the market you may go and change the firm into a Private Limited Company or LLP, at that time you may not get the name you want because it is already registered.
- Do a search on GoDaddy.com or other name registrars to see if the domain name you want is available. If the “.com” domain name is taken, this is very problematic and a red flag.
- Avoid unusual spellings of the name. This is likely to cause problems or confusion down the road (though some companies like Google or Yahoo have been successful with unusual names, such success is often the exception rather than the rule).
4. Failing to Keep Proper Records
- The phrase piercing the corporate veil is a term that states a founder of a company could become personally liable for a business’s debts if they failed to keep their corporation separate from their personal affairs. The only way to actually prove that you’ve done this is to keep accurate records.
- Every transaction should have a record, and those records should be backed up multiple times.
5. Failing to Take into Account Employees
- It may be some time before you actually decide to take on employees. This is fine, but when it does happen you must have the right protections in place. For a start, you should have agreements with your employees regarding whether they can start side projects and whether they can reveal your ideas and trade secrets.
- You also have to have firm agreements regarding hours and pay. Even the nicest employee could turn around and sue you later.
- Whenever you sign one of these contracts, don’t just place your name on it. The contract should also have your position and role within the company.
6. Do not refer to Different Compliances and Tax Rules
- If you are registered with Ministry of Corporate Affairs as A Limited Company or a LLP, one needs to keep in mind with different compliancies as per The Companies Act, 2013 and Limited Liability Partnership Act, 2008.
- Also with this one needs to comply with different tax rules according to the Income Tax Act, 1961, The Central Sales tax Act, 1961, The Service Tax Act and Rules as Amended by Finance Act 2016, The central Excise Act, 1994 etc
- This not the end, one also needs to comply with the State Tax Acts, fr E.g. Maharashtra Value added Tax Act, 2002, Local Body Tax by Maharashtra Provincial Municipal Corporations Act, 1949 etc
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