Do you need legal assistance at an early stage of business? How do you assess your legal risks?
Every early-stage entrepreneur is faced with these questions. During the inception of the business, entrepreneurs are usually busy working extra hours formulating the best possible business model to scale the growth of their venture.During this time, they tend to miss out on the legal technicalities, which later on hamper their growth.
There are several examples of businesses which have started off well but the absence of legal help has interrupted their operations. Be it a huge company like General Motors who had to exit from India or the infamous Facebook dispute at its inception, every project requires a robust legal structure to back its business plan and ensure accountability from all parties involved, be it the promoters, service providers, vendors or customers.
Following are the 5 legal concerns that arise at an early stage of business, which the entrepreneurs must address on a timely basis to ensure alignment with their company’s vision:
- Legality of your business idea
Many business ideas in India tend to emanate by modifying similar concepts abroad or bringing completely new products/services into the market which lack rules or legislation. Hence, an early-stage entrepreneur must consult a lawyer, to help him develop his business model ensuring it is in coherence with the extant law. The legal consultant can also inform the entrepreneur of any licenses, permissions, applications which the entrepreneur may require to begin their business.This helps not only in ensuring smooth operations of your business once begun, but also in mitigating any future penal costs from non-compliance. Start-ups are usually strapped for cash and hungry for business. If legal hiccups arise during their initial boom phase, it tends to cause cash crunches and takes away the focus from business growth and profits. Hence, having a legal counsel from the very inception, helps in curbing such unforeseen situations.
2. Type of Business Structure
Once you have a business model at hand, you need to decide the manner in which you would like to establish yourself in the market. Along with the branding and the logo, comes the business format. Your options being –
-> Sole proprietorship
-> One Person Company
-> Limited Liability Partnership
-> Private Limited Company
-> Franchise format (if applicable to your business)
-> Not-for-profit organization
-> Charitable trust
The above options can change depending on the type of your business, but these are the ones largely prevailing in the market.Your general counsel can help you navigate through the best possible business format for your venture, keeping in mind your entrepreneur group (if any), product/services, target market, vendors, departmental requirements,funding requirements, and future possibilities of funding by attracting investors or listing on the stock market (IPO).
Having a business format suited to your venture’s activities helps in creating a stable start and smooth continuity to grow in the field and gain investors as and when required.
3. Co-founder Agreement
Your agreement with your Partner/(s) or other Promoters will set the tone for working under good faith, and help in dividing the responsibilities from the very beginning. Many businesses tend to suffer from promoter disputes or management unrest in their early stages with respect to key decisions, thereby completely slowing down their growth at a crucial stage.
A Shareholders’ Agreement (in case of a company) or a Partnership Deed, drafted to suit the needs of your business and foreseeing the roadblocks that need to be addressed, can largely help mitigate disputes and reduce confusion as to the duties of every player in the team. Having defined roles, along with enlisted liabilities (existing or future) helps clarify to all promoters/partners regarding their commitment to the business and their dues in the event of a default.
Existence of such co-founder agreements allows for streamlining of legal processes, such as, taking approvals for expenses, data management responsibilities, tech development responsibilities, thereby holding accountable respective persons for their duties only, and reducing the risks of promoter frauds and disputes.
The benefits of drafting a co-founders’ agreement is manifold, which we will discuss in detail in a fresh article.
4. Contracts & Contract Management
Having standard contracts in place will help the business determine their terms of service at an early stage while covering all possible scenarios that may arise.
These can be contracts relating to employment, with vendors, key suppliers, service providers, and customers.
Setting the terms during the inception of the transaction, helps in mitigating future disputes and clarifying roles and responsibilities of each party. It can also largely help in increasing your cash flows by simply setting the terms of payment on a regular basis for services you are providing, including advance money or security deposit, if required. Furthermore, it sets the timeline for the services, thereby reducing ambiguity in respect of deliverables and opportunity for either parties to take undue advantage of one another.
The benefits of executing contracts and contract management are manifold, which we will discuss in detail in a fresh article.
5. Intellectual Property Management
Most businesses are tech-driven, and must ascertain their eligibility to register their tech or design for a patent or copyright, as the case may be. In any case, every business name or logo itself is susceptible to a trademark dispute, should it be similar to an existing name or a well-known mark. In such a case, entrepreneurs must consult with their legal counsel regarding the applicability of trademark registration. Your entire business initiative including your marketing and branding budgets are hinged on your brand name and tech. Should the brand or tech fall into a dispute, the entire expense and effort shall be rendered obsolete and cause grave harm to the venture. Hence, Intellectual Property management is a crucial aspect while starting up your own venture.
Start-up businesses are usually strapped for cash, and therefore do not go for adequate legal advice. In such a case, entrepreneurs must try to identify their business goals, and share the same with a potential general counsel, who can help them grow, and link their expectations with key business milestones of your venture.
This would help your enterprise grow fruitfully, while covering all operational and legal aspects.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.