9 Legal Mistakes That Can Seriously Trip Up Your Startup

Start-ups are not just about creating a great product, but involve paperwork like any other business. Avoid these 9 rookie legal mistakes that can really harm your start-up journey!

Start-ups are not just about creating a great product, but involve paperwork like any other business. Avoid these 9 rookie legal mistakes that can really harm your start-up journey!

The Indian Start-up Story is heating up every day and the Government of India Economic Survey 2015-2016 shows that the country has more than 19000 technology empowered startups. Of these 19000 new enterprises set-up, consumer internet leads the categories followed by financial services. To offer a fillip to the entrepreneurial spirit in India, the government has set up several projects like Make in India, Startup India, Skill India and Digital India.

With so much support, it is no wonder then, that India is home to more startups than others; yet not all of them are as successful as they could be. There are a few pertinent reasons like lack of finance and insufficient business know-how, but one of the most common and overlooked reasons is the law.

Yes, you read it correctly – unnoticed legal issues can trip up your startup faster than your head can spin. Legal matters don’t even make it to the to-do-list when you are excited about setting up your venture and launching it. However, this doesn’t mean other enterprises would allow you to infringe upon their trademarks or you can provide false or incorrect information to your investors.

Whatever business model you pursue, the law will be a part of the process, which if used correctly, can help you fulfill your goals, and position your startup for success. However you look at it, the only way you can spare yourself the needless anguish is by avoiding these common legal mistakes that most start-ups and entrepreneurs make.

Incorrect corporate entity 

Deciding to branch out on your own is not an easy decision. But, now that you have, choosing the right corporate or legal identity is very important. You can choose from the different types of structures such as a sole proprietorship, partnership, a registered private or public limited company or LLP. Each structure of organization offers different benefits and legal advantages.

For example, if you want to deal with foreign clients, setting up a registered company is a must.  On the other hand, if you do not want to be held personally liable for any losses or liabilities incurred by the startup you can decide on an LLP or a Limited company identity. To avoid legal hassles and higher tax liabilities, make sure you choose the right corporate identity.

Not signing a Founder’s Agreement 

When you decide to team up with a few friends to launch a startup, agreeing on a few things in writing is a must. Just verbal agreements between the founding team, because you are friends, is a rookie mistake a lot of entrepreneurs make. To become successful, having a clear and concise founders’ agreement is the right thing to do.

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This agreement should clearly mention the ownership rights, the roles and responsibilities each co-founder will have, and the measures that will be taken in case of failure. Not signing such an agreement will leave you open to discord if your opinions do not match and you will not be able to take legal recourse if one of the founders decides to leave the startup.

No expense tracking 

Setting up a business is often money intensive. There are many important details that require money and what you often end up doing is spending such amounts without keeping an account of it. Not tracking spends whether they are big or small throughout the year is yet another mistake many startups make.

Like always, you tend to scramble around collecting all your receipts only when you need to file your returns. As a rule, expenses that are not accounted for cannot be deducted from your tax returns, which means you would not get the tax benefit, though you have spent the money for the business. You can select from the various options available to track and manage your expenses and hire accountants if required.

No documentation

When you are setting up your business, the founding team and you may meet a lot of people to discuss different ideas and agree on a few things. To remember every conversation and what was agreed upon is difficult. Maintaining a record of all the documentation and each interaction is needed and important. Without documentation, legal due diligence is not possible, especially if you want to secure that investment deal you have been working on for the last year.

Mingling expenses

When you set up your own business venture, the biggest investments are money and time. Along the way business and personal expenses tend to overlap and can’t be distinguished, creating a confusion when you file your taxes. In some instances, some deductions may not be allowed on an ad-hoc basis by the tax department, which means you end up paying more taxes. To make things simpler and hassle free, maintaining separate accounts for your business and personal expenses and records is crucial.

Not safeguarding your IP

Your concepts and ideas are the origins of your startup and one of the most prized assets of your company. In the startup industry copying is not unheard of today. Making sure that others are unable to steal your ideas and concepts is what intellectual property is all about. It includes trademarks, patents for innovative concepts or ideas and copyrights to the invention.

Many startups fail to safeguard their intellectual property rights and then suffer when they are embroiled in copyright infringement cases. To avoid such circumstances and to claim your rights, a startup should make sure IP rights belong to them.

Not complying with Securities Laws 

Many startup entrepreneurs offer stocks to their friends, family and angel investors. Often, such initial stocks options are offered without disclosing all the facts and filing the required documents under the securities law.  This non-compliance can create serious legal issues in the future. To avoid these aggravations, registering with the Securities board and complying with their requirements is a must.

Not filing tax returns on time

Every organization whether it is proprietorship or others must pay certain taxes in advance; which means determining taxes for the year in advance and paying it in the recommended installments. If businesses fail to make a tax payment on time, they may have to pay penalty charges over and above the accrued taxes. To avoid such issues, maintaining a profit and loss statement for each quarter and paying taxes on time becomes important.

DIY for tax issues

Every startup wants to spend as little as possible to set up a company and to do so they often end up doing a few things themselves, especially tax related issues. Though following a DIY for some things is not bad, doing so for taxes would take away time and focus from your company. Appointing a tax consultant will give you more time to build your company, form alliances and strategic partnerships and let you ensure that all the rules are being complied with.

Ignoring these small but relevant details is a recipe for disaster when setting up a new business venture. Avoid these rookie mistakes to make your business the success it deserves to have.

Top image via Pixabay

First published here.

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Archana Chettiar

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