Act smart, Act Legal

There are several phases in launching a start-up. Right from the moment the idea blossomed in your grey cells, to where you celebrated the first funding you received, to where you spend your days unveiling the market to when you get interviewed by some popular magazine on account of your hard-earned success, you need to be in close interaction with the invisible hand which might just make or break your business. No doubt, India is one of the most difficult nations to do business. The extremely comprehensive legal system definitely obstructs and complicates the foreign investment process. Out of 191 economies in the world, India ranks 134. It is easier to do business in countries like Pakistan, Nepal and Bangladesh! Why is it so difficult do business in India?

In this post, I have tried to sum up various legal fronts you need to keep an eye on if you are planning to or have already launched your business.

Intellectual Property:The biggest wealth of a start-up is the idea on which it is based. Suppose you get an idea for a pr

oduct X, and you discuss it with your friend who works in a firm that delivers a similar product. You thought taking an experienced person’s advice will benefit your development. In the meanwhile, you pitch your idea and start getting several proposals from VCs and you think you are all set. And then you know your friend has quit his job and asked you for hiring him. Of course you are more than happy to hire him as he has an exposure to that background. And he says he is ready to work from that day itself without any pay as he owns 50% of the IP in your company. Stunned, aren’t you? He reasons you guys sat together and he did give insights from time to time and thus became a partner! It is thus important to monitor whom you share your ideas with and have proper agreements as the case may be.

Breakdown for the Organization: Many of the start-ups have eventually collapsed due to co-founder conflicts. It is strictly advised to have all the co-founder agreements documented and in place. Terms should include how the company is to be broken down, distribution of shares, price at which shares should be sold in the event of a founder leaving due to any natural/unnatural cause. It should also account for the division of daily operations and salaries of the founders and the rate at which they change. Some new business owners think they will pick these things up as they go, but once the business launches, everything will only get more hectic.

Tax Liability and Saving on Taxes: One needs to know various taxes one needs to pay on the income, import and establishments in the business. Being a start-up, it is mandatory to keep a note of taxes to avoid spending on fines and complicated tax planning at the time of fiscal. Leaving it totally to a CA might not be benefitting as the stakes involved here are high. And not knowing what taxes to pay is definitely not an excuse in law, take for example, the case of Su-Kam whose founder almost went to jail for non-payment of excise duty. A clever move by many Indian start-ups to save on taxes is by taking investment through foreign parent companies. This is one reason why investment bankers and management consultants who bring in such strategic skillsets are in high demand as co-founders. Income and employment taxes are most common to many business firms. Income tax depends on the structure of the business. Employment taxes like worker’s compensation and unemployment are required for all business owners. Some states may even require temporary disability insurance.

Contracts: As a businessman, one should learn to read and negotiate contracts and extract the most out of it. He/She has to deal with several such like marketing contracts, content supply agreement, distributorship agreements, advertisement agreements, franchisee agreements and so on — depending on the business. Even Steve Jobs was of the opinion that every intelligent person should know how to read and negotiate a contract, just like everyone should start learning how to code!

Written by:

Priya Kumari