Legal & Compliance 101: Blueprint for Entrepreneurs

Setting up a business entity is an initial and unarguably the most exciting step in one’s entrepreneurial journey. While founders spend their valuable time mastering the product, building a perfect marketing plan, and managing client satisfaction - they often put legal, compliance, accounting, and financial visibility matters on the back burner. Lack of financial planning and funds management is a known major reason for many startups to fail. Ignorance in compliance matters and lack of transparency in financial matters have created difficulties for startups in fundraising, due diligence, and even resulted in the termination of founders from management positions.

While It is best to rely on professionals to make sure your entity is compliant with the law and your business interests are secured, founders should know the basics enough to seamlessly manage their businesses. Read on to learn the basics of legal and compliance hygiene, that all founders must know.

Step 1: Choose your business formation Type

The first step while starting a new business is to choose a business structure. Business registration as a company, LLP, partnership, and proprietorship are popular options available in India. Each formation type has advantages and limitations. A critical assessment and informed choice are a must for managing the interests, roles & responsibilities, and liabilities of both the business and its founders. Here is your quick guide for assessment:

1. Taxation benefits
2. Compliance requirements
3. Ownership rights to employees through ESOPs
4. Limited personal liability of the founders and directors
5. Separation and flexibility in management vs. ownership
6. A separate legal identity of the business from the owners
7. Ease of raising external capital through ownership participation

Step 2: Protecting your business interest

As opposed to capital-heavy conventional businesses, most new-age businesses are valued based on their branding, know-how, competitive advantage, and other intellectual properties they own. Once you’ve set up your business, it's critical to protect your business interests.

Legal Contracts & Agreements:?

As a business, you deal with various other businesses and individuals. May that be your co-founders, employees, agencies used for product building, businesses that supply raw materials, franchisees and agents operating as sales channels, or your clients. Legal contracts are the basis of commerce. As a rule of thumb, ever you find a need to formalize a commercial arrangement with a third party that needs to have legal standing, you need to consider having a contract or agreement in place. Here are some examples:

1. Non-disclosure Agreement (NDA) to protect business secrets and know-how
2. Employment Contract to formalize the employee-employer relationship and bring clarity around duties, responsibilities, limitations, compensation, etc.
3. Co-founders Agreement to outline the roles and responsibilities of each co-founder, vesting of equity, and clarify consequences in case of non-performance
4. Terms of Usage, Privacy Policy, and Refund Policy are critical for web-based businesses to ensure compliance and standardize policies across all clientele
5. Service-level Agreement to clarify the scope of service, deliverables, payment terms, service tenure, and other terms with vendors

Intellectual Properties Protection:

IP rights provide you benefits like exclusive usage, competitive edge, the ability to create revenue streams out of selling or licensing, and more. Trademarks, Patents, Copyrights, and Designs are basic IPs that can be protected in India through registration. Confused about which one is applicable? Here is a quick guide:

1. Logo, slogan, brand name, company name, 3D or animation work, or anything that has a branding advantage and helps your clients to distinguishably identify your business vs. competition can be protected through Trademark
2. Any novel literary or artistic work can be protected through copyright. Think of original website content, novel, song composition, artwork, photographs, or software code that is original in nature
3. Any innovation or invention that is not available in public domain knowledge, has a bonafide use, and has commercial application shall be patented
4. The shape, configuration, pattern, or ornamentation of the product that gives a unique appearance is protected through design registration

Step 3: Registrations and Compliance

Ensuring that your business is valid and can legally indulge in commerce completely depends on meeting the registration and compliance requirements. Apart from registering your business entity, additional registrations with local or central government bodies and agencies are required to comply with the law. Here are the registrations to consider at the minimum:

1. Mandatory registration based on volume or nature of business like GST, Shops & establishments, PF/ESIC, etc.
2. Industry-specific requirements like RERA for real estate construction or FSSAI for food businesses
3. Registrations that aren’t mandatory but can benefit your business like Startup India, MSME registration, or quality assurance through Agmark or ISI mark

Apart from obtaining registrations, the business must comply with regular filing requirements mandated by law. Company and LLP have mandatory annual compliance requirements. Apart from that, you may need to file regular returns for GST, PF/ESIC, TDS, and more. Non-compliance can attract interest, penalties, and other financial consequences or even disqualification of directors or dissolution of a business entity. It is best to rely on professional services to manage regular filing and compliance requirements for your business.

Step 4: Knowing your finances

Finally, knowing your finances is very important for any business owner. This means staying on top of your financial statements and Accounting data. Making sure your books are in order not only helps when your business gets audited but also helps you ensure that your business’s funds are being utilized appropriately. It helps avoid financial fraud and gives you the tools to keep your company from going under.

?Keep in mind these are just the basics. Professional guidance can help you in navigating through compliance challenges and keep you in check with your financial commitments.

About the Author:

Shrijay Sheth is a founder of LegalWiz.in, a LegalTech company that serves over 7000 MSMEs and Startups with business registration, IP protection, and day-to-day legal compliance. Shrijay shares an extensive background in LegalTech, Analytics, and Business Management with over fifteen years of working with leading global brands.