5 Tips for Start-ups to Stay Out of Legal Trouble

Last Updated at: Dec 23, 2020
5 Tips for Start-ups to Stay Out of Legal Trouble
As per a recent Nasscom study, COVID-19 has put brakes on the growth of Indian startups. It said that 90% of the startups faced a decline in revenues and nearly 40% are in the process of temporarily shutting operations. Just 8% were believed to be able to run operations for over 9 months.


Gangsters and mobsters may not be favoured by the law but you can learn some valuable lessons from their movies. Yes, you heard that right you can understand the importance of following legal mandates if you watch movies such as Donnie Brasco and Satya. Their hidden messages might also be valuable.

None can slow down a company like the courtroom, especially in India. It costs cash, your efforts and your attention will change from expanding your company to a small matter. That is why each company must take steps to ensure limited damage in case any relationship between co-founders or with competitors, employees and customers are headed in the wrong direction.

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Let’s find out what these measures are:

Arrive at a Consensus

Your friends or family can become your co-founders but you can never be too confident. Disagreements may grow over what each founder ‘s role is, what the business vision is, among several other things. This needs to be discussed by all those concerned. Sure, it will be difficult and you may have some tough days at the office but once it’s resolved, it’ll be worth it, because these discussions continue to create confidence among teams. Also, a founders’ agreement, being a contractual document, puts all doubt about all promoter’s acts to rest. For instance, it should discuss important problems, such as what should happen if a founding member leaves within, say, less than a year. It will also keep you out of the courtroom. Remember The Social Network? Imagine how much shorter it would be if Eduardo Saverin had just signed a founders’ agreement with Mark Zuckerberg.

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Be Clear with your Clients

Gone are the days when ‘Customer is King’ was just an adage. You need to live up to that in the age of the Internet. After all, if the matter is small, they could do actual damage on social media, and even bring you to court when the need arises. So be nice and tell them the terms and conditions of using your website or service and what you do with the information they provide you. These agreements are binding; while documents that are too one-sided are regularly set aside by the courts, it does help to have these regardless because they can keep people from issuing frivolous complaints.

De-risk Outside Engagement

By external engagement, we imply everyone except the company’s promoters. You would not want to be wary of the staff and corporate partners. Yet that’s precisely why you want them to sign non-disclosure and non-compete arrangements with the firm. This applies even more if the company you’re building is new or untested. You may feel awkward asking them to sign one, but it’s part of the game. If they’re professional, they won’t mind one bit. After all, think of everything you place at risk every day if you allow them to access your application, company plans or customer database.

Comply with the Rules

More than a third of Indian companies wind up paying penalties for failure to comply. There are no bills or reminders. But if you don’t make your annual filings, employ an accountant, keep your board meetings minutes, one day you’ll receive notification for a penalty that can go up to Rs. 5 lakh for LLPs, and Rs.1 lakh for private limited companies. Apart from this, there are service tax and VAT registrations you have to do, based on the nature of your business and annual turnover. And if you don’t make the payments and file the returns, there’s fine for these too. It may sound like a lot, which is why many don’t end up complying at all, but it’s part of your business and you have no choice. If you consistently fail to comply, you could even be blacklisted.

Protect your IP

Your brand, content and inventions are valuable, and their value will only increase as your business grows. So it should go without saying that it needs protection. Now, this is largely because while intellectual property is always the property of the owner, it is generally assumed that the first person to file for registration is the owner. This applies to trademark, copyright and patents. So if you fail to protect these before someone else does, you may end up spending months in the courtroom to prove that your IP is actually yours.

It is beyond doubt that avoiding legal scuffles resulting out of tax evasion and avoidance is good for your business. Letting your focus drift away from critical areas can lead to a thinner bottom line. You must not lose your objectivity by being cognizant of the essential factors and following mandatory provisions.

Legal Benefits

There are various legal benefits provided to startups by the Indian government:

They are as follows

Facilities to access funds: The government is setting up a 10,000 crore rupees fund to offer venture capital funding to the startups. The government also offers the borrowers incentives to enable banks and other financial firms to provide investment capital.

Request tenders: Startups may apply for public tenders. These are exempted from the requirements of “prior experience/turnover” applicable to regular firms reacting to government bidding.

Cost-reduction: There is a list of patent and trademark facilitators available in India. The government will pay all facilitator costs and can only charge the formal costs for the launch. 

Zero time-consuming compliance: For entrepreneurs, multiple compliances were streamlined to save time and resources. Startups must be allowed to self-certify enforcement with 9 labor laws and 3 environmental laws.

Simple Exit: In the event of a departure – A company will close its business within 90 days of the date of termination

Meet other businesspeople: Government has suggested hosting 2 start-up festivals annually, both nationally and globally, to allow a start-up to reach different stakeholders. This will provide tremendous opportunities for networking.

Choose the investor: Under this plan, startups would have the luxury of deciding between the VCs, allowing them the opportunity to select their partners.

Investors’ tax savings: Those who spend their capital gains in the government-instituted venture funds should be shielded from capital gains. It will help attract more investors to startups.

R&D services: Seven new Research Parks would be built to provide facilities for R&D start-ups

3 Year Tax Holidays: Similarly, the government will exempt startups from paying income tax for 3 years, provided they receive an Inter-Ministerial Board (IMB) certification.