What Is The Need Of A Lawyer For A Start-up?

Introduction

Being aspired to start your start-up with an innovative idea and becoming a success is a rosy picture for everyone. Regardless of the ratio of the start-ups failing in their initial years, almost every entrepreneur carries only certain things to take care of to succeed such as a product or service, a probable market, methodology about reaching to that market, a funnel, increasing sales & collection, growth and profit. Very few of them understand that the business has to follow specific rules, regulations, compliance and must run on certain guidelines predefined by the government or the law of the land.

How are you going to abide by the law while chasing your success? What if there is a legal hurdle? How are you going to manage all the documentation to remain compliant? There are various such aspects one must also think about while being aspired about a business. This article is going to present you the issues, areas and many examples when you would need a competent lawyer, present to you that you - most certainly - are going to need a lawyer for your start-up and it is advised to have one right from the beginning.

Types of Companies registered as start-ups

A lawyer helps in establishing a company which is fit for the business and capital requirements of the client. The following are the types of companies that can be registered suiting the business requirements -

1. Private Limited Company- Start-ups and growing companies choose this simplified business structure because it allows for easy raising outside capital, reduces their shareholders' liabilities and will enable them to offer employee stock options to attract top talent. Since these boards have to hold meetings and file annual returns with the Ministry of Corporate Affairs (MCA), they continue to be regarded with greater integrity.

2. Limited Liability Partnership - A relatively cheaper way to incorporate compared to a Private Limited Company which needs less compliance; the main improvement over the General Partnership is that it restricts its partners ' obligations to their company activities and gives each partner protection against negligence, misdeeds or other partners ' incompetence.

3. Partnership Firm - A General Partnership is a business structure in which two or more people manage and operate a business according to the terms and goals set out in the Partnership Deed. Since the introduction of LLP, this structure is thought to have lost its relevance because its partners have unlimited liability, meaning their personal liability for the business' debts.

4. Sole Proprietorship - A sole proprietorship is an organization owned and run by a single person. Within ten days you could have one up and running, which makes it very common among the unorganized sector, especially small traders and merchants.

5. One Person Company - Recently, the establishment of a One Person Company (OPC) was introduced as a significant improvement over a sole proprietorship. It gives full control over the company to a single promoter while limiting his / her liability for the company's contributions.

Reasons To Need A Lawyer For Start-up

Right from the evolution of an idea, start-up faces many hurdles such as financial, legal, compliances, taxation etc. Legal aspects are very crucial in the whole process and take undue time and energy if not appropriately handled. Expert legal advice can ease the entire process. A few most common yet essential reasons for the legal help are described below:

1. Incorporation - While incorporating the business, various legal things need to be taken care of. This list might start from deciding the Type Of Business you would like to register you would want to register your business, for a while, considering the benefits you might want to obtain. Types of business one can register for are Sole Proprietorship, Partnership, Limited Liability Corporation (LLC), One Person Company (OPC), Private Limited, Public Limited etc.

2. Partnership Agreements - Partnership Agreement is required when a partner or co-founder is involved. The agreement is necessary to avoid future conflicts such as profit sharing, decision making, equity splits, etc.

3. Employment Agreements- With a growing business, you may require to hire employees or contractors. There are different agreements for each of the two, which needs to be drafted and enforced.

4. Protecting Idea - Start-ups usually come with an innovative idea which requires to be protected from the competitors until established. With the help of a lawyer, you can file a patent application if the concept can be protected. Moreover, the start-up may require alliances yet want to protect the business idea. A Non-Disclosure Agreement (NDA) needs to be enforced in such cases. All this becomes easy with a lawyer.

5. Multi-State Business - The registration or incorporation norms for the business established in one state may differ with the rules of another state. A lawyer will help to remain compliant in such cases.

6. Navigating the Regulatory Environment - Depending on the nature of the start-up, there might have been several regulations applicable which affect business. A lawyer can guide you to comply with regulations and how to avoid fines for non-compliance.

7. Generating Website Documents And Dealing With Data Privacy Issues - It would need a thoroughly crafted Terms and Conditions of Usage Agreement if the business is modelled on a website. A privacy policy, user agreement, the details like user's code-of-conduct, warranty disclaimers and disclaiming liability for third-party sites etc. also get involved in such a scenario. A lawyer is the only retreat to such requirements.

8. Issuing Stock to Co-founders - After the incorporation, stocks may be issued to co-founders. It is in the company's interest to ensure all the members contribute to the business. A Lawyer can help with an appropriate vesting schedule.

9. Complying with Security Regulations - The issuance of equity instruments to founders, seed investors, capitalists or stock options must be registered with the security authority. You would most certainly need a lawyer to handle situations like this and their nitty-gritty along with complex security laws.

10. Financing Your Business - If a start-up requires and decides to bring the funds from investors, it is essential to make sure to get possibly the best deal on the best possible terms. Financing options may include personal savings, seed investors, venture capitalists, crowdfunding or any other. Each of them come with specific legal issues. A lawyer can help to anticipate and resolve the problems while closing the deal.

11. Intellectual Property Necessity - Patenting its innovations and ideas is the surest way a company will compete against larger rivals. Patents level the playing field between entrants and incumbents by receiving appropriate incentives for those who invent. When a start-up patents its ideas, it increases its valuation and will probably attract more investors. Investors are more likely to acquire a start-up which has protected its intellectual property rights. When a start-up patents its ideas, it's the only entity that can take advantage of its patentable ideas commercially. A lawyer can help in applying for the IPR's and drafting the terms and conditions for it.

Conclusion

And the list above is not exhaustive. What if there are compliances to raise invoices, or delayed payment in the current regime of GST where you duly paid the taxes to the government because you had raised the invoice before the cut-off date of filing, and you are yet to collect the payment? What if your business is such which provides goods or services to overseas clients? How would you comply with regulations related to taxation and other aspects? What if you have a fairly doing business and get a call from a giant for merger or acquisition? How would you take care of the lengthy process of Due Diligence?

There are numerous cases, conditions, scenarios or whatever you may call them, but what remains unchanged is that business certainly needs to be in consultation with a lawyer. It is evident that entrepreneurs should often interact with their legal team/person on regular intervals, possibly right from the beginning.

By: Advocate Kunal Sinha
The author can also be reached at kunaldev@gmail.com