What Startups Should Do When They Are Not Legally Fit?

Himanshu Gupta, Founder & CEO, Lawyered

Practicing legal hygiene is critical for any company’s success. Many entrepreneurs work day and night to make their startup or venture a success but overlook the company’s legal needs. This can put them at the risk of legal backlash. Having a company’s legal health in check makes sure it is in control of the legal risks and safe from a lawsuit.

As a startup owner, entrepreneurs work on a tight budget and have even lesser resources to spend on legal needs. However, it is significant for start-ups to appoint or consult a lawyer in the initial stage to avoid any sort of legal crisis in the later stage. Investing in a professional legal consultation saves not only a startup but also well-established companies from getting shut or sued. One of the most popular legal incidents happened in 2013 when the Swedish telecom giant Ericsson sued a lot of smaller telecom companies from India and China. Some of the Indian companies such as Micromax, Intex and Lava mobiles were highly affected because these companies were using Ericsson’s patented products.

Several legal issues can affect a startup's legal performance and overall business health. Many startups have already started using online legal toolkits to customize legal documents and save their business from legal pitfalls. Some of the common legal issues that a start-up might face are:

Registering a Business Entity
Adopting a legal route in the registration of a business entity is vital. Whether it a sole proprietorship or a partnership, legal documents of business registration should be made to avoid legal disputes or failure of the venture. For instance, three partners started a café without entering into any agreement in the initial stage. After a few months, the café started yielding profits but resulted in disputes between the co-founders regarding their role and share in the business.

This further led to legal disputes that enforced the partners to dissolve the partnership and exit from the business. Thus, a cofounders agreement defining the role and responsibilities of each partner including equity ownership, non-disclosure agreement and dissolution of the partnership is needed for smoother operations of the business.

Employment contracts
Employers are the asset of any startup or any company. The relationship between an employer
and its employees should always be amiable and free from disputes and disagreements. In this regard, employment contracts play a crucial role to avoid problematic situations in the company. It is proof of the employer and employee relationship. It also clearly defines the path of the employee’s journey in the organization.

Furthermore, it makes the employee and its employer aware of the roles, responsibilities and remuneration of the employee and makes both the parties bound by the law. Based on the nature of the work, companies can make different types of employment contracts such as Fixed-Term Employment Contract, Casual Employment Contract, Zero- Hours Workers Contract and ESOPS – Employee Stock Ownership Plan.

Real Estate Agreements and Contracts
There are different types of real estate agreements that are signed and executed between two or more parties. This facilitates a smoother exchange of any property or performing a real estate transaction. Sunil started a clothing manufacturing company by taking a property on lease from his friend and he purchased different machines on hire-purchase arrangement. Sunil failed to make the payment of the machines even after several reminders by the bank.

After failing to make the payment for a long time, banks auctioned his machines which further led to the closing of his factory. To avoid such situations in starting up a business, both parties can seek professional legal help and enter into a real estate agreement or contract. The different types of real estate agreements involve – Hire-Purchase Agreement, Lease Agreement and Power of Attorney.

Compliances of a Company
Every company needs to have a proper legal structure which will prescribe certain rules and regulations for its effective functioning. There are mainly two types of legal compliance regulations. Statutory compliance and Audit Compliance that ensure the proper functioning of an organization. Statutory compliance mainly refers to a number of corporate labour and taxation laws prevalent in the country. The non-compliance of these results in heavy penalties and fines.

A case happened in 2012 with a construction company that was initially following all the regulations of the government regarding taxation and treatment to the employees. Later it started neglecting its employees and it led to an increased attrition rate in the company. Further, due to evasion of tax, an enquiry was done by the Income Tax Department which asked the company to pay heavy fines because of which it faced huge losses. In the same way, a company needs to stay in compliance with external rules, regulations or internal guidelines like corporate bylaws, controls and policies and procedures to prevent future deficiencies.

Bottomline
Following legal processes and compliances is an ongoing process for a business. It can get very difficult for startup founders to gain knowledge about all kinds of corporate law. Thus, the imperative is to appoint a professional lawyer or a consultant for the successful setup and rise of the business. Additionally, specialized lawyers help the founders engage in healthy legal practices that further ensure the startup is running proactively on a safe path and can stay away from all possible legal risks.