LEGAL CHALLENGES FACED BY STARTUPS

Compiled by Anish

The startup culture in India is picking up pace in recent times. But starting a new venture is highly risky and requires planning in not only marketing and growing the business but also in other aspects like fundraising, compliance requirements and any mitigating any other legal challenges faced by startups. If proper planning is not done it could derail the venture even before it starts business. 

SOME COMMON LEGAL ISSUES FACED BY A STARTUP: 

1. Incorrect Formation of a Company based on type of Entity: 

While starting your own firm, you are constantly concerned with Legal Registration and Paperwork. The chosen business model has an impact on the company’s funding possibilities, its tax obligations, and the owners’ personal liability. The proper structure can reduce taxes and safeguard the owners’ private assets in difficult times. In India, there are 5 types of legal entities that can be used to register a business: 

1. Sole Proprietorship Firm 

2. Partnership Firm 

3. Private Limited Company 

4. Limited Liability Partnership Firm (LLP) 

5. One Person Company (OPC). 

2. Not having a proper Co-Founder’s Agreement: 

A co-founder’s agreement lays down all the terms and conditions between the co-founders of a start-up regarding how the business will be operated. The co-founder’s agreement is a written agreement which provides legal binding in case there is any dissonance between the co-founders. 

A co-founder’s agreement must be drafted on the lines of the business and should state all the provisions relating to factors for which the co-founders are liable. The following provisions are the most important clauses of any co-founder’s agreement: 

1. Ownership Clause 

2. Responsibilities of each member 

3. Intellectual Property 

4. Employment and Finances 

5. Withdrawal/Removal of Ownership 

6. Conflict Resolution and Laws Applicable 

7. Winding up of Business 

3. Annual Compliance: 

When a company is formed, it is subject to various statutory and regulatory requirements. A company registered in India is required to follow the various annual legal compliances outlined in the Companies Act. Businesses. Companies that are registered are frequently unable to keep track of their annual compliance requirements and fall under the scrutiny of the Ministry of Corporate Affairs (MCA). 

 A Private Limited Company’s mandatory annual compliance requirements include the following: 

1. Auditor Appointment 

2. Board of Directors Meeting 

3. Annual Return and Financial Statements 

4. Maintenance of Company’s Registers and Records 

5. Company’s Income Tax Return 

4. Ignorance of Taxation Laws: 

Taxes are an unavoidable part of any business. Certain businesses may be subject to a variety of taxes, including central taxes, state taxes, and even local taxes. Different business and operating sectors are taxed differently, and knowing this ahead of time is essential. 

The Indian government launched the ‘Start-up India’ initiative in order to reduce the financial burden of taxes on startups. According to this initiative, recognised start-ups that receive an Inter-Ministerial Board Certificate are exempt from income tax for three consecutive years after incorporation.     

5. Proper acquaintance of Labour Laws: 

It is critical that you understand the labour laws that apply to your company. Minimum wage, gratuity, PF payment, weekly holidays, maternity benefits, sexual harassment, and bonus payment, among other laws, must be followed. 

Start-ups registered under the ‘Start-up India’ initiative can complete a self-declaration (for nine labour laws) within one year of incorporation to avoid labour inspection. The nine labour laws that apply under this scheme are as follows: 

1. The Industrial Disputes Act, 1947 

2. The Trade Unit Act, 1926 

3. Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act, 1996 

4. The Industrial Employment (Standing Orders) Act, 1946 

5. The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979 

6. The Payment of Gratuity Act, 1972 

7. The Contract Labour (Regulation and Abolition) Act, 1970 

8. The Employees’ Provident Funds and Miscellaneous Provisions Act,1952 

9. The Employees’ State Insurance Act, 1948. 

6. Not having proper Business Licenses: 

Starting any type of business necessitates the acquisition of licences. Several licences are required in India depending on the nature and size of the business. Knowing which licences are required for your new venture and obtaining them is always the best way to get started. Business licences are the legal documents that allow a company to function. A lack of relevant licences can result in costly lawsuits and unnecessary legal battles. 

Conclusion 

A person deciding to start a venture should go through all the legal aspects before starting to prevent any untoward incident that may prove to be fatal for the venture. Despite all these legal issues government is doing their best to support and promote startups by various schemes like Startup India Initiative, Credit Guarantee Fund Trust for Micro & Small Enterprises [CGTMSE], Stand up India Schemes, etc. These schemes launched by the Government of India have been instrumental in the rise of startup culture in India and is responsible for some of the biggest names in various industries like Zerodha, Razorpay in fintech Unacademy, BYJUS, Physicswallah in Ed Tech Swiggy and Zomato in Foodtech and many more.