Legal Issue and Challenges faced by startup
Legal Challenges are one of the most important challenges encountered by startup companies. The startup companies might lend up into trouble when the corporate fails to satisfy all the legal requirements.
For a startup, it is impossible to pool in resources adequate to the deep-rooted corporate house. However, with proper knowledge and support from the proper consultancy, the risk can be prevented or diminished.
1. Startup Business Structure.
First is that the most vital thing for the startup to settle the right constitution of business Legal Registration and Documentation. The proper type of business selected influences the funding options for the corporate, its tax responsibilities, and the personal liability of the owners. The proper format can help save taxes also as protect the private assets of the proprietors in times of crisis. There are few categories of Legal Business entities for business registration in India- 1. Sole Proprietorship Firm, 2. Partnership Firm as per the Partnership Act, 1932, 3. Private Limited Company as per companies Act 2013, 4. Limited Liability Partnership Firm (LLP) as per LLP Act 2008, 5. One Person Company (OPC) as per companies Act 2013.
2. Co-Founder’s Agreement Documentation:
A co-founder’s agreement lays down all the terms and conditions between the co-founders of a start-up regarding how the business is going to operate be operated. The co-founder’s agreement may be an agreement that provides legal binding just in case there is any disagreement between the co-founders.
A co-founder’s agreement must be drafted on the lines of the business and will state all the provisions concerning factors that the co-founders are liable for. The following provisions are the most important clauses of any co-founder’s agreement;
(i) Ownership Clause
(ii) Responsibilities of each member
(iii) Protection Intellectual Property
(iv) Employment and Financial matter
(v) Incoming and outgoing of member Ownership
(vi) Dispute Resolution and relevant Laws Applicable
(vii) End up of Business
3. Sound knowledge of Employee Stock Option Plan (ESOPS) for startups:
The invention of Startups has also indicated the new age of employee Benefit/compensation structures. Startups are innovative ‘by default’ and their creativity also extends to the sphere of how their employees are compensated. There isn’t mean startup hire fewer skill employee due to cash constraints but have to manage skilled employee within cash constraint by compensation ie ESOP
Equity is ownership. Equity represents the share of ownership interest during a given company. There are no rights thanks to dividing equity and it depends on the situations of every start-up. For the investors investing during a start-up, Equity means the share of the company’s shares that a start-up is willing to sell to investors for an amount of cash.
5. Lack of SEBI Listing Requirements:
If a start-up wishes to list its securities in a stock exchange, it has to compliance SEBI regulations. These regulations pertain to the conditions that a start-up possesses to fulfill before it can list its securities.
6. Industry-specific Business license.
Starting any type of business license required a proper advisory firm that assists in relying on the character and size of the business, several licenses are applicable in India. Knowing the applicable licenses for your start-up and obtaining them is typically the only because of starting a business. Business licenses are the legal documents that allow a business to figure out. If a license did not obtain promptly which will attract cause costly lawsuits and unwanted legal battles.
7. Customer, Vendor, and employee Contract management:
A Contract is required to ensure the smooth functioning of business and is a great mechanism to ensure recourse in case of non-fulfillment of work.
Employee contracts are one of the foremost crucial aspects to be looked into while starting a venture. Various provisions of the Indian Contract Act, 1872 are required to be looked into at various stages as and when required.
For establishing better business environment organizations need the proper standard operating procedure, so that fulfills the company mission and vision.
8. Protection of Intellectual Property:
The root of a start-up is the protection of the Intellectual Property Rights of a startup. A unique product or an idea, formulas must be protected with a patent with the brand name, logo, etc., and must be secured with trademarks. Copyright laws must be used for obtaining the right to use original works of authorship like software or advertising content. Correctly obtained copyrights and authorship will help the organization safeguard its valuable assets from rivalry firm usage and protect its right to commercially exploit the assets.
9. Compliances under Direct Tax and indirect Taxation
Taxes are a very important part of succeeding in every business/startup. In India, there are two types of taxation, such as Direct Taxation (Income-tax Act, 1961) and Indirect Taxation (GST Act, 1961) even local taxes that may be applicable for certain businesses/startup but after the introduction of the GST Act, 2017, it is almost abolished. Different business and operating sectors attract different taxes and knowing this beforehand is necessary.
Direct Taxation (Income-tax Act, 1961)
Full acquiescence with tax laws is compulsory to avoid punishment and penalties. Startups should ensure that they are aware of the new taxes, their impact on the business model, and their liabilities.
‘Start-up India’ initiative launches the Indian Government to provide a boost to start-ups and introduced many exemptions and tax holidays period for start-ups and new businesses.
Indirect Taxation (GST Act, 1961)
The startup is a creative idea, GST is a bigger reform in India, that helps startup to implement properly and GST will provide a boost to startup in India and archive its potential
For Startup in 31st GST Council provided the greatest help stretched out to startup and small businesses by waving off of late fees on GSTR-1 and GSTR-3B return. The GST Council has declared
10. Various Compliance under Labour Law
As you are aware, without an employee no startup can inaugurate its operation and It must know the very importance of compliances under Indian Labour laws, and how may labor law applies to the startup. Some of the laws being highlighted below
Start-ups registered under the ‘Start-up India’ initiative can complete a self-declaration (for nine labor laws) within one year from the date of incorporation in order and get an exemption from labor inspection. The nine labor laws applicable under this scheme are:
Minimum Wages Act, 1948
Payment of Wages Act, 1936
Payment of Bonus Act, 1965
Employees Provident Funds and Miscellaneous Provisions Act, 1952
Employees’ State Insurance Act, 1948
Payment of Gratuity Act, 1972
Contract Labour (Regulation & Abolition) Act, 1970
The Employee’s Compensation Act, 1923 (formally referred to as “The Workmen Compensation Act, 1923”)
Industrial Employment (Standing Orders) Act, 1946
Weekly Holiday Act, 1942
Equal Remuneration Act, 1976
Maternity Benefit Act, 1961
Sexual Harassment at the Workplace (Prohibition, Prevention and Redressal) Act,
11. Compliances under companies act
As Startup is incorporated as Companies Act, there is a lot of; it is subjected to different statutory and regulatory compliances under the Companies Act. Following are the Annual Compliances that fall under the Ministry of Companies Act
The compulsory annual compliance requirements of a Private Limited Company include the following:
Board of Directors Meeting
Annual Return and Financial Statements
Maintenance of Company’s Registers and Records
KYC of director and Company
Event-Based Annual Compliance of Company
The Event-based compliances of a Private Limited company include:
Loans to other Companies.
Loans to Directors
Appointment of managing or full-time director.
Change in Authorized or Paid-up Capital.
Allotment of new shares or transfer of shares
Opening or closing of a bank account or change in signatories of the bank account.
Appointment or change of the Statutory Auditors.
12. Documented of Non-Disclosure Agreements:
It is a very important document for the success of any startup company. It creates a confidential relationship between parties and also protects the information and idea of any startup. It assures the theft of ideas or any information being shared between parties that not harmful for the startup.
13. Winding up:
Closer of any start-up, it is a very hard decision for any entrepreneur, it not only the laying off all employees but in advance through proper board meeting must convey to all stakeholder
There are three ways to wind up a start-up under the companies Act 2013
Fast Track Exit Mode
Court or Tribunal Route