Starting a business is no easy feat, it requires meticulous planning and a significant amount of effort. Before putting a new company together, there are many things that one needs to consider, such as, having a strong team, product development that meets market demands, project design, and a concept proposal. These are all prerequisites for a startup that must be well-managed for it to succeed. The list does not end here; there are many more factors that need to be kept in mind, in addition to several tasks that need to be completed. Due to the nature of this mammoth task, avoiding making any and all mistakes is basically impossible.
When setting up a new business, it's pertinent that each step is carefully considered. Many Startups end up making poor decisions in the present that result in difficulties for them in the future. One of the most common is making a mistake when establishing a solid legal foundation. In my opinion, the catalyst for such mistakes is due to them being uninformed about the basics of investing and starting a business. To assist with this, I've compiled a list of a few common mistakes every startup should seek to avoid.
1. Choosing the wrong legal entity or structure for their business.
The first and most crucial step for making a startup legally viable is to choose the correct business entity. In this regard, a startup has various options to choose from a registered company (Public or private), a Sole Proprietorship or Partnership firm, or a Limited Liability Partnership (LLP).
Before selecting from these options, one needs to consider the pros and cons of both and decide accordingly what works best for their company. A few important factors that an entrepreneur must consider are tax treatment, individual liability, legal expenses, and growth plans while selecting the appropriate structure for their startup.
2. Lack of a formal written agreement with co-founders.
A startup is a dynamic structure where things can change unpredictably. Likewise, startup founders work in a dynamic environment where changes often occur unexpectedly. It is commonly said, “In the startup ecosystem, the only constant thing is change”. Hence it is essential to have a properly drafted agreement in place. This will help avoid unnecessary chaos at a later stage. The agreement should specify critical roles and responsibilities of co-founders, decision-making, intellectual property rights, equity breakdown, remuneration, and exit clauses.
3. Not complying with mandatory registrations and compliances.
A startup cannot work smoothly unless everything is legally approved and processed. An entrepreneur needs several licenses and registrations for their startup. These things come with compliance requirements which need to be fulfilled such as income tax, GST, Udyog Aadhaar, Food safety, standards, etc. In addition to this there may be other compliances that need to be fulfilled as well depending on the type of company. It is essential to get these registrations and compliances done beforehand, and to fulfil all the requirements.
4. Not having any protection for intellectual property.
Intellectual property or ‘IP’ is a company’s most valuable asset. There are various components of IP, such as Trademarks, Patents, and Copyrights. Due to the widespread use of technology, Intellectual properties can be easily infringed. This can be very harmful to a company and ultimately lead to losses. To avoid this, it is essential to get your IP registered. This is a crucial step as securing IP allows startups to protect their innovation and to compete against prominent players in the industry .
5. Lack of well-drafted agreements between parties and the startup.
A contract is an agreement that is enforceable by law. In a startup, a person goes through several contracts with suppliers, employees, etc. Contracts between the startups, suppliers, and employees must be well drafted. This protects the startups from any liability or any such future issues. Otherwise, it could create conditions in the future that could lead to losses for the startup.
Startups are advised to engage an experienced counsel to help protect their interests and capture the correct language. An engagement with an experienced counsel ensures that there are no unnecessary legal hassles in the future. A good counsel will take care of the startup's accounting, taxation, compliances, and legal needs, so that the startup can focus on growing its business. It will also help solve countless problems that investors and entrepreneurs may encounter in the businesses.