5 Legal Mistakes Startups Make

15 July 2021

Setting up your startup involves a lot of work and effort. Many things need to be considered such as finding the correct team to begin with, developing the product/service as per market demand and size, developing a proof of concept and setting the project design. With these many things to be handled, slips are bound to happen. One of the most common areas where most startups make a wrong choice is establishing a solid legal foundation.

For this purpose, we have put together a list of few essential things every startup must keep in mind while setting up its business. We believe that one of the main reasons for these mistakes is that people aren’t informed with regard to the basic terms and principles of investing and starting a business.

1.            Not choosing the correct legal entity or structure for the business

When forming a new business, choosing the right business entity plays a critical role in making your startup legally viable. There are different structures that are available to choose from – Registered Company (Public or Private), Sole Proprietorship or Partnership Firm or a Limited Liability Partnership (LLP)). Each such structure comes with its own set of pros and cons. The most important factors that a new founder should keep in mind while considering the correct structure for its startups are tax treatment, individual liability, legal expenses and growth plans.

2.            Not having a formal written agreement with Co-Founders

Startup founders work in a dynamic environment where things can change unpredictably. In the startup ecosystem it can be said that the only constant thing is change. Therefore, it is extremely essential to have a properly drafted founders’ agreement in place in order to avoid unnecessary hassles at a later date. A founders’ agreement should establish the key roles and responsibilities of co-founders, decision making authority, equity breakdown, intellectual property rights, remuneration and exit clauses.

3.            No protection for intellectual property

One of the most valuable assets a startup owns is intellectual property (“IP”). Trademarks, patents, and copyrights are the three essential components of IP. It is essential to protect your IP from getting infringed due to the ease of access through the widespread use of technology. An important aspect is to get all IP registered. Securing IP allows startups to protect their innovation and compete against large players in the industry after patenting the invention.

4.            Not complying with mandatory registrations and compliances

Startups need to take several licenses and registrations and they come along with certain compliances which are required to be done by the startups, such as income tax, GST, and Food Safety and Standards (for food business owners), udyog adhaar and any other industry specific registrations that may be applicable.

5.            Not giving enough importance to various agreements entered into between the various parties and the startup

An agreement enforceable by law is known as a contract. A start-up goes through several contracts with suppliers, employees, and others. All contracts between the startups and all such parties should be well drafted and should protect the startup from any liability on a future date. It is best to engage an experienced legal counsel to help the startup in protecting its interest and capturing the correct language in order to ensure avoidance of unnecessary legal hassles at a later date.

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