Why Do Startups Fail? 5 Legal Aspects Startups Overlook
Startups often find themselves reinventing the wheel when it comes to catering to different requirements from time to time. While IT and hiring are taken care of by an in-house dedicated team, often this is not the case with other departments.
Other aspects are often outsourced to professional services providers. Right from company registration to keeping books of accounts and even filing GSTR, other companies often help them focus on core aspects of their business.
Based on our experience, there are a few things that startups tend to overlook while starting out.
1. Failing to choose the right business structure
We have observed businesses struggling to choose the right business structure that fits their requirements. Each business structure has its pros and cons with a different set of legal implications involved.
There are chiefly three business structures that one can register in India.
Registering as a Company
Register as a body corporate under the Companies Act. The following are possible:
– Private Limited Company Registration
– One Person Company Registration
– Registering a Public Company
– One Person Company Registration
It is registered when the business is owned by a single individual and involves the least compliances. Though registered, it does qualify to be a legal entity and remains an informal structure.
This is a business structure formed to share profit by a group of people. There are 3 ways to do so; limited liability partnership (LLP) or a general partnership where the former acts as a body corporate giving all the legal rights.
Choosing the structure involves considering the size and type of your business and how you envision its growth. Generally, a sole member would prefer a proprietorship firm or an OPC. However, to avail benefits of other structures, some founders count on family members or friends to fulfil the structural requirements.
2. Business licensing
Some businesses require licensing to start, as a part of mandatory compliance. For example, FSSAI licensing for food businesses. Startups need to be cautious in adhering to licensing requirements as consequences of not doing so can put the business at great risk of facing lawsuits.
Ensure your startup has all the necessary and even optional licenses or registrations like Udhyog Aadhar-MSME to higher the fundraising chances.
An ideal way out is to consult business professionals and ask if your startup requires any licensing. Be sure to get documents ready and apply, if required. One important document is the business incorporation certificate based on which the required licenses can be sought.
3. Getting contracts and agreements done
Such operational dependencies will result in an agreement that involves working policies and norms of employment laid down by startups.
An employment contract contains work commitments, deliverables and salary details along with the ESOP details if offered. If , you are starting up then getting clarity on such aspects and having a contract helps. Eventually, this will mitigate the risks of uncertainty to help scale effectively.
Although vendor agreement is not a mandatory compliance, it is best to have those in place too. This is to secure business transactions and promote long-term synergies to equate the symbiotic demand and supply relationship.
Also, there is a trend among startups these days wherein a co-founders’ agreement and shareholders’ agreement is done. Having such agreements will help to demarcate the business-specific roles and responsibilities of co-founders and others.
4. Work safety and minimum wages
The Ministry of Labour and Employment has laid down a few safety, health and environment regulations for a workplace. If your startup deals with any hazardous substance or if workers are exposed to certain chemicals, then adhering to such standards is mandatory. Don’t put your business in jeopardy by avoiding such set standards.
There is also the Payment of Minimum Wage Act, 2005 that spells out the minimum wage payment as per industry norms. Again, startups employing labour for miscellaneous work must fulfil those criteria to keep itself compliant. This is because a startup is responsible for the health and safety of its staff when they are at work.
It is recommended to perform a risk assessment that helps identify potential hazards and measures to combat those.
5. Intellectual Property Protection
Intellectual properties are one of the most valuable assets of any business. Startups especially must take appropriate steps to keep them secured.
The most common IP are:
Patents protect products/processes that are novel, inventive and have utility. For example, a software company must file for a patent if they have created a unique and new computer programme.
Trademarks protect the brand name, logo, signs/slogans etc. For example, if companies like Apple had not applied for their well-known logo, they would not have been able to create a billion-dollar company.
Copyrights are very important for startups that have businesses related to creative, artistic works. A multimedia company must register the songs/ movies it creates.
IP protection is important because;
– It provides the startup with maximum protection from infringers and a legit legal backing that prevent others to use the brand
– It maximizes startup security by protecting it against theft and preventing any counterfeit products from entering the market
– Can lure investors and clients willing to buy out your brand at a later stage. Also, assigning or licensing others to use your IP can earn your profits.
There are plenty of other things that startups should not overlook when it comes to being compliant. Keeping a compliance partner onboard is the best way to get started so that you can focus on doing business. From company registration to keeping track of day-to-day accounts of the business to taking care of statutory compliances on a monthly basis, all of it needs to be done properly.
The key is to relieve yourself from such burden and carry out the business activities without reinventing the wheel for branch out an altogether new department.
Recommended Read: How To Register A Logo For Your Business