Everybody is fascinated by the idea of running their own enterprise for different reasons. Some people may not be satisfied with the salary they are getting in a company. Some people may want to do something exciting and innovative rather than follow a routine in an MNC. Some people would like to work for themselves rather than work for another person. Some people may want to test out their knowledge and experience in the real world. Whatever may be the reasons for starting your own company, here are some of the steps or rules you should follow to make your startup a legal and a successful corporate:
- Choosing an appropriate legal structure: It is the most important step for any organization. Before starting one’s own company, a person should check if the business he or she is going to start is on demand in the market. There is no point in running a business which produces products or provides services which are not on demand in the market. It will only lead to losses and ultimately closure of the organization. Checking the stability of the sector and business environment is another important step. The business one is about to start should have stable demand throughout for the business to flourish. The monthly amount to be paid for taxes, running costs and cost of founding the company should be taken into consideration. The number of stakeholders and the profit sharing mechanism between the stakeholders should also be decided. The company should also get funding and legal liability protection.
- Registrations: In order to run a legal business, some registrations are necessary. Business licenses are permits issued by government authority that allow startups to start/continue to operate a particular business within its territorial jurisdiction lawfully. The nature of business activity determines most license requirements. Some of the important registrations include: Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN), VAT registration, service tax registration, etcetera.
- Intellectual property protection: Intellectual Property Rights are a very important asset class for a startup. Developing and protecting intellectual property with proper registration gives startups a competitive advantage. The company should have its own registered name, trademark, copyright and design to prevent infringement.
- Founder equity: Founder equity should be split amongst founders based on the nature of role played by each founder along with their time, effort and capital contribution to the startup. Splitting founder equity equally by default without a thorough discussion on expectations and contribution generally leads to misunderstanding and unhappiness amongst the founders as the startup grows.
- Founder agreement: An agreement between the founders is the most effective means to establish the relationship between the founders of a startup. The agreement should represent a clear understanding between the founders on all key issues related to the startup. Founder agreements should clearly mention the roles and responsibilities of the founders and have clauses detailing the decision making and operating structure of the startup.
- Employee contracts: Startups must ensure that they have clear employment contracts, detailing terms and conditions of employment, with their employees. While employment contracts are certainly valuable to the employees as it details terms regarding description of job profile, compensation and other associated benefits, a number of clauses may be attached to protect the interest of the startup such as stopping employees from setting up competing entities (non- compete clause), poaching other employees/clients/customer (non-solicitation clause), preventing employees from claiming any intellectual property right on the work done/developed during the course of employment (assignment of intellectual property rights).
- Employee Stock Option Pool (ESOP): ESOP’s are incentives given to employees of an organization to attract talent and to retain employees by rewarding ESOPs create a sense of ownership amongst employees. They are structured in such a way that they allow employees to buy shares of the company at discounted prices. This is exercised by the companies, only after an employee works for a minimum period of time (in years), for the company. That minimum period varies from company to company.
- Third party agreement: Prior to entering into a third-party agreement and while negotiating the terms and conditions with the third party, it is advisable to execute a non-disclosure agreement. If creation or development of intellectual property is a component of the third party agreement, it must clearly state that all rights to the intellectual property rights shall vest and be owned by the startup and the third – party shall not stake any claim on the same and will do all acts to ensure the protection of the intellectual property. Clauses related to breach, termination and dispute resolution should be well negotiated and recorded in all third party agreements.
- Negotiating with investors: Investors invest on different structures and on varied terms and conditions during the initial and growth phase of a startup. It is imperative for startups to seek proper legal advice before negotiating the deal terms for investment and the rights of the investors. Read more on Investments
- Compliance: Compliance and its importance are often underestimated by many startups. There are multiple laws applicable to specific entity structures under which separate event based and annual compliance is mandated. It is crucial for the sustainable growth of any business that the startup is in compliance with legal, secretarial, accounting, taxation, employee related and other associated compliances. The consequences of non-compliance can be levy of punitive fines on the startup.
If the above mentioned rules are followed sincerely, I can assure you that any startup would be successful and legal. Read more on Startups News
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