Legal For Startups


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From the point of choosing the appropriate business structure to the scope and extent of necessary contracts, there are numerous legal issues to address when starting a company. While certain legal issues may even bring a start-up to a grinding halt if neglected, there are many others that are possible to be handled with ease, provided you have the right information to make timely decisions. Given their importance across sectors, the following issues and details will be covered in “Legal For Startups”.
• Legal Aspects for Starting Up:
• Contractual safeguards:
• Employees and workplace regulations:
• Data Protection

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Legal For Startups

  1. 1. LEGAL FOR START-UPSNSRCEL – IIM-BQuasar LegalCopyright, Quasar Legal, 2013. All rights reserved.
  2. 2. FORMS OF BUSINESS - 1Factors to consider:ConvenienceLiabilityTax
  3. 3. FORMS OF BUSINESS - 2Sole proprietorshipPartnershipLimited Liability Partnership (LLP)Private limited companyOne Member Company (proposed by theCompanies Bill, 2012)
  4. 4. FORMS OF BUSINESS - 3Sole proprietor• Convenience: Easiest to start, operate andclose• Liability: Sole proprietor is personally liable for debts andother business obligations• Tax:Proprietor’s incomefromthebusiness = his income; so heis personally taxed• Limitations:• Works well for professionals and small traders and entrepreneurs but not businesses of anyscale• Difficult to get structured investment: FDI is allowed only by NRI/PIO on non-repatriationbasis. FDI by NRI/PIO on repatriation basis and FDI by non-NRI/non-PIO requires priorapproval.• Basicregistrations: labour laws, taxlaws.
  5. 5. FORMS OF BUSINESS - 4Partnership• Convenience: Some formalities – partnership agreement, registration with the Registrar of Firms;commencement, operations and closure regulated by the Indian Partnership Act, 1932 and thepartnershipagreement.• Liability: Not a separate legal person (but see below). Partners - agents of each other + the firm.Unlimitedliabilitytothirdparties.Partnersmaylimittheirliabilitytoeachotherunderthepartnershipagreement.• Tax: Firm assessed as a person under income tax law. If certain formalities not complied with – taxedasanAssociation OfPersons(AOP);AOPcan’tclaimcertaindeductions thatafirmcan.• Limitations: More structured than a proprietorship but suffers from similar limitations. Also, greaterchancesofpartnerdisputesaffectingthebusiness.FDIrestrictions–similartothoseonproprietorships.• BasicRegistrations:Registration withRegistrarofFirms,labourlaws,taxlaws.
  6. 6. FORMS OF BUSINESS - 5Private Limited Company• Convenience: Most structured and regulated – registration with the Registrar of Companies;commencement, operations and closure regulated by the Companies Act, 1956 (a new 2012 law ispending).Mostconducivetoobtaininvestments, includingFDI,anddebt.• Liability: Separate legal person. Shareholders (members), directors and the company itself – separatefromeachother.Liabilityofmembers-onlytocompany,limitedtounpaidshareprice.Members–notpersonally liable for the company’s acts and omissions. Directors – may be liable under specific legalprovisionsforactsandomissions ofcompany.• Tax: Assessed as a person under income tax law. Dividend distributed by company is also taxable –currently company picks up the tab. Income from sale of shares – treated as capital gain in the handsoftheseller-shareholder.• Limitations: Mostregulatedformofbusiness.Considerablepaperwork.InIndia,difficult toclosedown,• BasicRegistrations:Registration withRegistrarofCompanies,labourlaws,taxlaws.
  7. 7. FORMS OF BUSINESS - 6Limited Liability Partnership (LLP)• Convenience: Hybrid of partnership and limited company – registration with the Registrar ofCompanies; commencement, operations and closure regulated by the Limited Liability PartnershipAct,2008.• Liability:Separatelegalperson–partnersareagentsoftheLLP,notofeachother.OnlyLLPisliableforits acts and omissions, partners are not personally liable. Designated partners are liable for non-complianceoftheLLPAct.UnlimitedliabilityofbothLLPandthepartnersforfraud.• Tax:Treatedasapartnership.IncometaxedinthehandsoftheLLP,notinthehandsofthepartners.• Limitations: Mostregulatedformofbusiness.Considerablepaperwork.InIndia,difficult toclosedown,• BasicRegistrations:Registration withRegistrarofCompanies,labourlaws,taxlaws.
  8. 8. CONTRACTUAL SAFEGUARDS - 1Liability - two broad typesCivil liability Statutory liability: failure to comply withthe law Tortious liability: harm topeople andproperty Contractual liability: failure to perform obligations orkeep promisesCriminal liability Is always statutory. Private parties cannot agree that something is an offence. Anoffence is always created and punished by law made by Parliament or by thestatelegislatures.
  9. 9. CONTRACTUAL SAFEGUARDS - 2Contracts: May save you from statutory liability if the statute itself permits a contract to override itsdefaultprovisions. Example: Every partner must diligently attend to the business. This is subject to a contracttothecontrary. Maynotsaveyouinadvance from tortious liabilitybutmaybeusedtosettle aclaimintort: Example: Your customer with whom you have a contract to supply software services hasdeputed an executive to visit your office. He falls on wet stairs and sustains serious injury.Yourcustomerholdsyouliable. Willsaveyoufromcontractual liabilityifusedwell Will not save you from criminal liability unless the law permits a contractual settlement of theclaim. Usually possible in specific, individual oriented, minor offences like bounce cases. Notpossibletocontractually settle matters becauseinmostcrimessocietyisaffected.
  10. 10. Contractual Safeguards - 3• People are generally free to enter into contracts – contracts: aform of private law which courts enforce• ‘Freedom of contract’ – a cardinal principle /doctrine of thelaw of contracts• However - freedom hemmed in by law and by certaincommercial practices and realities• Law of consumer protection, labour laws and a variety of other laws checkthisfreedom.Acontractthatviolates a legalprovision is a voidcontract.• Commercialentities also haveunequal bargaining power.
  11. 11. Contractual Safeguards - 4• Ways to safeguard your venture through contracts:• Limitation of liability provisions: specify the maximum amount youwould be liable for, and excludeliability from remotelosses.• Default obligations: Know what the law prescribes as your minimum/ defaultobligationsand do not assumingobligationsin excess.• Escalation and dispute resolution: have provisions for pre-formaldispute resolution; if those methods fail, then use alternate disputeresolution(ADR) like arbitration.• Payments and performance: Analyze how your payments are linkedto your performance; have clear acceptance conditions; option tosuspendsupply if payments are not timely.
  12. 12. Employees and Workplace Law - 1Employer – employee relationship regulated by: Law ContractThumbrule: Aperson in a supervisory or managerial capacity is not treated as a ‘workman’or an ‘employee’eligible for labour law’s benefits. Such a person – governed byhisemployment contract alone. All other workmen or employees – governed first by law and then by contract.Because very often labour law prevents an employee from contracting out of abenefit.
  13. 13. Employees and Workplace Law - 2Important labour laws:1. FactoriesAct2. State law on ShopsCommercial Establishments3. Provident FundAct4. Payment of GratuityAct5. Payment of BonusAct6. Employees State InsuranceAct7. Maternity BenefitAct8. Industrial DisputesAct9. Contract LabourAct10. Law related to sexualharassment in the workplace
  14. 14. Employees and Workplace Law - 3A.What labourlaw applies? Some thumb rules What’s your business activity? Manufacturing? – FactoriesAct;ITServices? –Shops & Commercial Establishments Howmanypersons are employed? Usualtrigger number = 10or20B.Is your employee entitled to aparticular benefit? Whatis her wage? Whatkind of work does she do?
  15. 15. Employees and Workplace Law - 4Employment contracts: Salient aspects Ownershipof work productcreatedbyemployee v/sby independent consultant Separation issues: Withdrawalof resignation andforcedresignation Termination simpliciter, termination forcause (dismissal) Post-employment non-compete v/spost-employment confidentiality obligations Minimum service stipulations (or bond)
  16. 16. Protection of Data - 1Protecting your confidential data (trade secrets): Confidentiality clauses in: Founderagreements Employment contracts Vendor contracts Customer contracts Suitable policies related todata access atthe workplace
  17. 17. Protection of Data - 2Protecting personal information you may process: Be aware of your obligations under EU’s data protection directive and UK’s dataprotection law– ifdata is coming infrom EU Register under theUS Safe Harbor process India –Comply withthe 2011 Security Procedure Rules under theInfoTechAct,2000