Top 8 Legal Mistakes Made by Startups

Do you get an innovative idea and wants to register a company? Setting up a startup requires a lot of work and effort. Many things require attention, including developing a proof of concept, finding a product/market match, and employing the first set of employees.

Some of the most common legal mistakes made by startups

1. Wrong legal entity

It is important to choose the right legal entity from the very beginning. Some structures to choose from include a registered company (Public/Private Limited), LLP, ownership, and partnership. The registered company is widely accepted, especially in the case of any transactions with foreign clients or taking loans from bank or investments from investors.

2. Not protecting intellectual property 

Intellectual property (IP) is the most valuable asset of a startup. Trademarks, patents, and copyrights are the three basic elements of IP. It is essential that you do not allow anyone to apply for the right to your IP address. Confidentiality agreements are a way to provide this. Startups often neglect IP protection and suffer later.

3. No tracking expenses

Another mistake commonly made by startups is not to track their expenses throughout the year. There are many options for managing expenses. The company can also hire accountants to manage these records if the volumes are high.

4. Lack of documentation 

Every interaction, be it meetings or anything else, must be documented. It is important that all documents are always in order. Legal due diligence may cause or interrupt the investment transaction.

5. No founder contract 

The founders’ contract should contain all relevant clauses, such as ownership, rights to acquire rights, and the roles and responsibilities of each founder, including remuneration and terms of employment.

6. Mixing capital costs and revenues

If the equipment or equity items are accidentally deducted as a cost of revenue, the tax department can determine that the expenditure has been incorrectly characterized and the deduction is not applicable. Therefore, watch out for all expenses.

7. Non-compliances

The founders are not able to take care of their weekly/monthly/yearly compliances of their startups and often give shares to investors, family, and friends. However, stocks issued without meeting specific disclosure requirements and filing securities in accordance with the law may lead to serious legal problems at a later stage. The company can also hire a legal firm to take care of the above-mentioned problems.

8. No regular tax payments

Companies, regardless of whether they are proprietors or directors of the limited company, can get into trouble if they do not pay taxes on time. Therefore, it is important to regularly take stocks of the income statement in each quarter and pay tax on time

Choosing a Legal Structure

One of the most important decision while creating a new company is choosing a legal structure.

Here are your options:

1. Sole Proprietorship: An entity run by a single person and generally employed in traditional businesses.
2. One Person Company: A company run by a single person who is also the shareholder and the director.
3. Traditional Partnership: It has at least two people as partners. Businesses now prefer registering themselves as LLP’s.
4. Limited Liability Partnership (LLP): like a Traditional Partnership Firm but with limited liability. It blends the benefits of a traditional firm (fewer regulations, more control), and of a corporate entity (limited liability of the partners).
5. Private Limited Company: Formed by at least two shareholders. As compared to an LLP, it has Equity shares instead of a Profit sharing ratio. However, it is a very compliance-heavy form of an entity