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

1. LEGAL FOR START-UPS
NSRCEL – IIM-B
Quasar Legal
Copyright, Quasar Legal, 2013. All rights reserved.

2. FORMS OF BUSINESS - 1
Factors to consider:
Convenience
Liability
Tax

3. FORMS OF BUSINESS - 2
Sole proprietorship
Partnership
Limited Liability Partnership (LLP)
Private limited company
One Member Company (proposed by the
Companies Bill, 2012)

4. FORMS OF BUSINESS - 3
Sole 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 any
scale
• Difficult to get structured investment: FDI is allowed only by NRI/PIO on non-repatriation
basis. FDI by NRI/PIO on repatriation basis and FDI by non-NRI/non-PIO requires prior
approval.
• Basicregistrations: labour laws, taxlaws.

5. FORMS OF BUSINESS - 4
Partnership
• Convenience: Some formalities – partnership agreement, registration with the Registrar of Firms;
commencement, operations and closure regulated by the Indian Partnership Act, 1932 and the
partnershipagreement.
• Liability: Not a separate legal person (but see below). Partners - agents of each other + the firm.
Unlimitedliabilitytothirdparties.Partnersmaylimittheirliabilitytoeachotherunderthepartnership
agreement.
• Tax: Firm assessed as a person under income tax law. If certain formalities not complied with – taxed
asanAssociation OfPersons(AOP);AOPcan’tclaimcertaindeductions thatafirmcan.
• Limitations: More structured than a proprietorship but suffers from similar limitations. Also, greater
chancesofpartnerdisputesaffectingthebusiness.FDIrestrictions–similartothoseonproprietorships.
• BasicRegistrations:Registration withRegistrarofFirms,labourlaws,taxlaws.

6. FORMS OF BUSINESS - 5
Private 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 is
pending).Mostconducivetoobtaininvestments, includingFDI,anddebt.
• Liability: Separate legal person. Shareholders (members), directors and the company itself – separate
fromeachother.Liabilityofmembers-onlytocompany,limitedtounpaidshareprice.Members–not
personally liable for the company’s acts and omissions. Directors – may be liable under specific legal
provisionsforactsandomissions 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 hands
oftheseller-shareholder.
• Limitations: Mostregulatedformofbusiness.Considerablepaperwork.InIndia,difficult toclosedown,
• BasicRegistrations:Registration withRegistrarofCompanies,labourlaws,taxlaws.

7. FORMS OF BUSINESS - 6
Limited Liability Partnership (LLP)
• Convenience: Hybrid of partnership and limited company – registration with the Registrar of
Companies; commencement, operations and closure regulated by the Limited Liability Partnership
Act,2008.
• Liability:Separatelegalperson–partnersareagentsoftheLLP,notofeachother.OnlyLLPisliablefor
its 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. CONTRACTUAL SAFEGUARDS - 1
Liability - 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. An
offence is always created and punished by law made by Parliament or by the
statelegislatures.

9. CONTRACTUAL SAFEGUARDS - 2
Contracts:
 May save you from statutory liability if the statute itself permits a contract to override its
defaultprovisions.
 Example: Every partner must diligently attend to the business. This is subject to a contract
tothecontrary.
 Maynotsaveyouinadvance from tortious liabilitybutmaybeusedtosettle aclaimintort:
 Example: Your customer with whom you have a contract to supply software services has
deputed 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 the
claim. Usually possible in specific, individual oriented, minor offences like bounce cases. Not
possibletocontractually settle matters becauseinmostcrimessocietyisaffected.

10. Contractual Safeguards - 3
• People are generally free to enter into contracts – contracts: a
form of private law which courts enforce
• ‘Freedom of contract’ – a cardinal principle /doctrine of the
law of contracts
• However - freedom hemmed in by law and by certain
commercial practices and realities
• Law of consumer protection, labour laws and a variety of other laws check
thisfreedom.Acontractthatviolates a legalprovision is a voidcontract.
• Commercialentities also haveunequal bargaining power.

11. Contractual Safeguards - 4
• Ways to safeguard your venture through contracts:
• Limitation of liability provisions: specify the maximum amount you
would 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-formal
dispute resolution; if those methods fail, then use alternate dispute
resolution(ADR) like arbitration.
• Payments and performance: Analyze how your payments are linked
to your performance; have clear acceptance conditions; option to
suspendsupply if payments are not timely.

12. Employees and Workplace Law - 1
Employer – employee relationship regulated by:
 Law
 Contract
Thumbrule:
 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 by
hisemployment 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 a
benefit.

13. Employees and Workplace Law - 2
Important labour laws:
1. FactoriesAct
2. State law on Shops
Commercial Establishments
3. Provident FundAct
4. Payment of GratuityAct
5. Payment of BonusAct
6. Employees State Insurance
Act
7. Maternity BenefitAct
8. Industrial DisputesAct
9. Contract LabourAct
10. Law related to sexual
harassment in the workplace

14. Employees and Workplace Law - 3
A.What labourlaw applies? Some thumb rules
 What’s your business activity?
 Manufacturing? – FactoriesAct;ITServices? –Shops & Commercial Establishments
 Howmanypersons are employed?
 Usualtrigger number = 10or20
B.Is your employee entitled to aparticular benefit?
 Whatis her wage?
 Whatkind of work does she do?

15. Employees and Workplace Law - 4
Employment 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. Protection of Data - 1
Protecting your confidential data (trade secrets):
 Confidentiality clauses in:
 Founderagreements
 Employment contracts
 Vendor contracts
 Customer contracts
 Suitable policies related todata access atthe workplace

17. Protection of Data - 2
Protecting personal information you may process:
 Be aware of your obligations under EU’s data protection directive and UK’s data
protection law– ifdata is coming infrom EU
 Register under theUS Safe Harbor process
 India –Comply withthe 2011 Security Procedure Rules under theInfoTechAct,2000

18. THANK YOU
NSRCEL – IIM-B
QUASAR LEGAL