Start-ups are growing companies started/founded by entrepreneurs with limited funding, capital, and experience at the initial stages. Starting one’s work has considerable risks and comes with many responsibilities such as fundraising, making a place and name for themselves in the market, and complying with the legal requisites.
While establishing a start-up, one needs to find ways to grow and solve/eradicate the possible bottlenecks the company might face. The legal risks need to be looked into and avoided to prevent a start-up from getting derailed before even starting.
Few of the legal challenges faced by start-ups while a commercial value is being set up are-
1. Incorrect Establishment of type of entity for the company’s formation
Legal registration and documentation is an essential aspect of businesses. The selected type of business influences the tax responsibilities, the eligibility for funding, and personal liabilities of owners. Having a proper format can help save taxes and protect personal assets.
In most countries, there are five categories for the Legal Entity for Business registration-
Sole Proprietorship Firm
Partnership Firm
Private Limited Company
One Person Company (OPC)
Limited Liability Partnership Firm (LLP)
2. Licensing and Permit Issues
Start-up owners need to be aware of the various licenses, permits and permissions required to carry out their idea/business without paying penalties.
GST registration, Import and Export Code, Food Authority license are examples of few common registrations required for most companies, including start-ups, for smooth functioning.
3. Lack of proper legal due diligence before fundraising.
Angel Funding, Seed Round funding and Growth/Early-stage funding are the various stages start-ups need to go through for fundraising.
4. Equity Distribution
The amount of company’s shares that the start-up is willing to sell to investors in exchange for an amount of money is the equity distribution. Equity shares must be stated and maintained clearly and regularly.
5. Zonal Laws relating to Infrastructures
Being aware of the local and zonal laws is vital to know for being aware of the taxation laws that apply to commercial properties and not residential ones. Also, zonal regulations have different prescribed height and location and map criteria for various sectors.
6. Intellectual Property Rights Protection
Most start-ups fear the possibility of their idea or innovation being stolen, which is why taking proper steps to secure it is crucial. Using patents, Trademark/service mark, copyrights, and confidentiality agreements could come in handy in such cases to strengthen the security.
7. Contract Management
Drafting and signing contracts are crucial, and attention to details must be paid regarding this aspect. Lengthy drafting methods and tricky legal words could be replaced with specific, simple and summarized contracts to make it easier for people from non-legal backgrounds to understand.
8. Ethical Issues
One cannot forget ethics in the process of growing and making a name for the company. Duties towards customers, employees, environment, community and labour must be practiced with sincerity to help establish a healthy environment and establish trust with a good reputation.
These were a few of the many legal issues that start-ups and any company could face. Having an idea of what one is getting into and all the legal aspects always helps prevent issues and penalties later!
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