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

Last Updated at: October 22, 2019

Gangsters and mobsters may not be favored 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.

Nothing can slow down a business like the courtroom, particularly in India. It costs money, you invest effort and – worst of all – it can shift your focus from growing your business to a petty matter. This is why every business must take measures to ensure minimal damage in case any relationship – between co-founders or with rivals, clients and employees – is headed the wrong way.

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Let’s find out what these measures are:

Arrive at a Consensus

Your co-founders may be your friends or family, but you can never be too sure. Disagreements can grow, over what the role of each founder is, what the vision for the business is, among much else. 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 it will be worth it once it’s resolved, as such conversations tend to build respect between teams. A Founders’ Agreement, being a binding agreement, also puts to rest any confusion over the actions of any promoter. For example, it will address crucial matters, such as what will happen in case a founder-member leaves in say, under 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. In the Internet age, you need to live up to it. After all, they can do serious damage on social media if the matter is small and even take you to court if the need arises. So be nice and tell them the terms and conditions of using your website or service and what you do with 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 friviolous complaints.

De-risk Outside Engagement

By outside engagement we mean everyone besides the promoters of the company. You may not want to be suspicious about your employees and business partners. But that’s exactly why you need to have them sign non-disclosure and non-compete agreements with the company. 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 all you’re putting at risk every day you let them access your code, business plans or customer database.

Comply with the Rules

We shouldn’t even be discussing this, but more than a third of Indian businesses end up paying fines over non-compliance. There are no bills or reminders. But if you don’t do your annual filings, hire an auditor, maintain the minutes of your board meetings, you’ll one day receive notice for a fine, which can go up to Rs. 5 lakh for LLPs and Rs. 1 lakh for private limited companies. Aside from this, there are also registrations for service tax and VAT you need to do, depending on the nature of your business and 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 are 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.