The startup scenario in India is getting exciting and challenging day by day. The young generation of entrepreneurs is coming up with ingenious and innovative ideas and they are not afraid to take a few risks in order to translate their startup dreams into reality.
Usually, ever since the conception of a startup idea, up until practical implementation of the same, entrepreneurs have their hands full with juggling a lot of things at once. They take care of everything from operations and finance to marketing and tech support.
However, the biggest mistake that many startups make is ignoring the legal issues involved with operating a startup. This spells legal trouble at some point or the other.
Here we will get to know the legal issues that might arise for a startup business and also the ways in which they can be handled or avoided altogether.
Some Common Legal Mistakes made by Startup Founders:
Not having a common understanding with co-founders
Disagreements and constructive criticism contribute to the success of your business. However, it is essential that you and your co-founders are in complete agreement about the objectives of your business, expansion strategies, source of funding and application of funds raised.
Not selecting the right organizational structure
You can start your business as a proprietorship, partnership, LLP or a company. It is of utmost importance to select the right structure for your business as it is going to affect your tax rates, the tax provisions applicable to you and your personal liability.
Not having proper documentation in place
In most cases, startups are founded by friends who feel no need to enter into a contract with each other. The reason is that preparing formal contracts can be seen as lack of trust in each other, thereby causing a rift even before the business has even started.
Not paying taxes
Failing to pay taxes can spell serious trouble with the Income Tax Department. Not only will you be deemed ‘assesse in default’, proceedings for recovery of tax and/or penalty will be started against you by the Income Tax Department as well.
Not filing returns
Many startup founders make the mistake of believing that since they do not have enough income,they do not need to file their individual income tax return or their company’s. This is a mistake.
Not maintaining record of expenditure
Almost every startup is guilty of making this fundamental mistake. They do not document the expenditure made by them. Examples include not preserving the receipts for conveyance expenses and losing postal receipts and stationery bills. This leads to frantic searches for these bills and receipts when they are needed to prepare a record of expenses.
Not maintaining proper books of accounts
Running a business smoothly is not possible without maintaining proper books of accounts. Many startups make this mistake and end up facing accounting and taxation troubles later.
Not protecting your Intellectual Property
There have been real life cases where startup founders were not proactive in getting their intellectual property registered. As a result, they have had to engage in long legal battles with people who infringed upon their intellectual property.
For example, you start a website called ‘startuphub.com’, but do not apply for trademark registration of the name ‘startuphub’. Someone comes across your website, likes your business name and files an application for trademark registration of the same. It is going to be very tough for you to get your business name trademarked now.
Now that you are aware of the common legal traps that you may fall into, let’s see how to avoid these traps.
A thorough Discussion with the co-founders
To avoid discord in the future, it is important that you maintain clear communication with your co-founders. Some important issues that need to be discussed and answered are:
Well Drafted Contracts and other Documentation
Make sure that all legal documents related to your business are well-drafted and watertight so that no space is left for disputes to arise in the future. The terms & conditions of the document and the rights & obligations of all parties should be stated in crystal clear terms. Examples of such documents are Partnership Deed, Memorandum of Association, Equity Agreements,Employment Contracts etc.
It is advisable to take help of experienced and qualified legal professionals to draft contracts and agreements that cater to your every need.
Paying Attention to your Organizational Structure
Selecting the right organizational structure can help you in managing your personal liability as well as your tax liability. Let’s have a look at different organizational structures and their pros and cons. There are several modes of operating a business like proprietorship, partnership, LLP, company and One Person Company (OPC). Do a thorough research on pros and cons of every model and then decide whether it suits your business needs.
Get a Professional to do your Taxes
Paying your taxes is important and paying them correctly is even more important. Short payment will attract penalties to be imposed on you by the Income Tax Department. If you are unsure about your tax liability, consult a tax professional to calculate your taxes and assist you in paying them.
Always file your returns
It is compulsory for a firm and company to file their returns irrespective of their profit. They are required to file an income tax return even if they suffer a loss. So there is no option to avoid filing returns in case of a company or firm.
However, even if you are an individual and your annual income is less than the exemption limit, it is recommended that you file your return. Filing proper returns every year only adds to your credibility.
Make it a habit to document your expenses
No matter how small an expense might seem, make it a point to always preserve the bill/receipt that you received when you made the expenditure. Not only will it create a well-documented record of all expenses that you have made, it will also save you a great deal of time when making journal and payment entries.
Using an Accounting Software
To solve all your accounting problems in a jiffy, consider installing and learning to use a dedicated accounting software like Tally. It is used by businesses all over India and provides support for all functions like journal entries, ledgers, profit & loss account, balance sheet, invoices and tax filing.
Online tutorials are available and you can learn to use it yourself.
However, if you feel that you will not be able to devote enough time to learn it, you can consider taking professional help also.
Make IPR protection your priority
As soon as you zero in on your business name and logo, make sure you apply for copyright and trademark registration. Your name can be trademarked and your logo can be both copyrighted as well as trademarked.
The website of your business can also be copyrighted.
You also need to take care that you do not infringe upon someone else’s intellectual property while deciding on a logo and brand name for your business.
Author: This blog is written by Ms. Pragya Chaturvedi, student of Faculty of Law, University of Delhi, a passionate blogger & intern at Aapka Consultant.