It is of paramount importance that the new start-ups, as well as the entrepreneurs, take into consideration the legal complicacies that may occur after having set-up their businesses. Herein below, to facilitate a better decision-making process of startups and entrepreneurs, we shall endeavor to discuss how these legal hurdles could be avoided by simply ensuring compliance of certain procedural or otherwise necessary requirements.
START-UP: LEGAL DEFINITION
The Department of Industrial Promotion and Policy (Ministry of Commerce and Industry) through its Gazette Notification No. G.S.R 364 (E) [hereinafter referred as 'the Notification'] dated 11.04.2018 defined a Startup business as following:
An entity is to be considered a startup as per Rule 1(a)
(i) "a start-up for up to seven years from its date of incorporation/registration if it is incorporated as a Private Limited Company or Registered as a Partnership firm or a Limited Liability Partnership.
(ii) Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs. 25 crore.
Setting-up of the startup
Classification of a Registered Company on the basis of liability is mentioned herein below:
Unlimited Liability Companies: In these kinds of companies, the liability of members of the company is unlimited and thus, it can be invoked as per the interest of each member in the company. These sets of companies may or may not have share capital. An unlimited liability company can either be a public company or a private company.
In unlimited liability companies, the main risk lies with the Directors and shareholders in 'losing everything' at the time of winding up of such a company. It could eventually extend to losing personal assets by the Directors and shareholders to the creditors to pay off their liabilities.
However, there are certain advantages that can be availed by Unlimited liability companies, for example, confidentiality- these set of companies do not have to file annual reports to the Office of Registrar General, although the directors need to prepare the financial statements of the company. Secondly, the information of the company is not available for public records, meaning, the company can operate without disclosing its information while it can always look through the information of its competitors. The other possible advantages are Creditor Confidence and Improved management. This is so because the creditors would have increased faith and trust in the company that it wouldn't take credit more than its payback capacity, moreover, the shareholders would have a keen interest in the management of the company which may stand a chance of dissolution, thereby keeping the company conscious of careful risk management.
In the opinion of the author, this form of company format is not opted by entrepreneurs as this involves a great amount of personal risk, which outweighs the advantages as mentioned above. Additionally, it is not well understood by general public as well as the courts.
Company Limited by Guarantee: Then comes the Company Limited by Guarantee wherein, the liability is limited to an extent or amount as is undertaken by each such member of the company, in accordance with the memorandum, to contribute to the assets of the company in the event when the company is going to wind-up. The members of the guarantee company are placed in the position of guarantors of the company's debts up to agreed amount.
In these types of company, the status of a company stands as a separate legal entity. The company can buy and sell properties, employ people, borrow money, defend itself in a legal suit in its own capacity, thereby meaning, that the members of company are protected from being held personally liable for debts arising in the business of the company. Mostly this format of companies is opted for by the NPOs, clubs, charity societies etc. because the company itself thereby retains the profits arising out of the business and does not distribute them among the members.
Companies limited by shares: A company that has the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them is termed as a company limited by shares. For example, a shareholder who has paid Rs. 75 on a share of face value Rs. 100 can be called upon to pay the balance of Rs. 25 only. Companies limited by shares are by far the most common and may be either public or private.
Firstly, in the situation of financial difficulties arising in the company the personal assets and finances of the shareholders are protected. Secondly, no tax is levied on the dividends accrued by the shareholders on their shares. Moreover, these set of companies are only taxed as per profits made by them, thus no higher tax payments like sole traders or partnerships. Thirdly, it's an entity separate from its owners. Fourthly and most importantly, limited liability companies enjoy professional status and reputation as for an impression of reliability. Limited Liability companies therefore are deemed to be one of the most preferable company formats by entrepreneurs.
Therefore, at the outset, a startup is advised to choose among the above provided possible options and the process of incorporation in accordance with the provisions of Companies Act, 2013 should be undertaken. Thus, after the idea of incorporation has been conceived, the startups should make endeavors to form an adequately informative Memorandum of Association [herein after referred to as 'MOA'], providing the complete information related to the objects of business and its activities, which essentially works as a binding force for the area of operation of business. Moreover, another decisive instrument, known as, Article of Association [herein after referred to as 'AOA'] should be put on papers, which contain the regulations related to the business.
Legal Mistakes commonly made by Startups
There are measures that every start can take to avoid certain risks by taking care of the following points at the nascent stage of incorporation of a startup.
It is suggested that before the entrepreneurs kick start the process of consolidating bigger business plans, they must firstly ensure that attention to smaller, yet important legal aspects is paid. Therefore, the entrepreneurs must choose a correct legal entity for their respecitve startups to avoid paying higher taxes or other legal difficulties that possibly may arise later. Some of the structures are, Registered Company (Public/Private), LLP, Partnership etc.
Legal implications wrt Startups in socio-economic sector
So, if the startup meets any of the above given conditions, they may be required to create a committee to enforce its CSR mandate.
Legal implications of securing legitimate funds for start-up
Startups are often seen to be securing their funds by either the way of private equity investors or Angel investors. In other cases they also opt for Debt financing, viz., obtaining loans or Commercial borrowings. We shall have a look at the legal requirements to be fulfilled in both the cases hereinbelow.
For a startup, Private Equity [hereinafter referred as PE] is indeed one of the first large investment considerations for any startup. And as a result, convertible instruments are used as most common instruments of securities for PE investment. These securities are essentially of two types, compulsory convertible preference shares and compulsory convertible debentures. Between the investors and startups execution of the below mentioned documents are carried out:
C. Debt Financing
A startup is a serious effort undertaken by any entrepreneur to give shape to his business ideas and bring the same into a functional form. To encourage a smooth and efficient functioning of a startup, the author has tried to give a detailed and concise insight on the subject to help the new ventures surmount the potential hurdles that might arise due to some miniscule mistakes of the ventures at its nascent stage. The need of addressing the issues concerning non-warranted legal problems faced by startups has been long felt. Unwanted litigations or legal hurdles often get the entrepreneurs astray from their primary objective and thus, to avoid these problems to a certain extent, the ventures can always keep a track on the changing legal scenarios vis-à-vis commerce by placing timely reliance upon legislations that may affect their business.
Authored by –
 Notification of Department of Industrial Policy and Promotion, Ministry of Commerce and Industry (11.04.2018) available at https://dipp.gov.in/sites/default/files/Startup_Notification11April2018_0.pdf
 Section 7, The Companies Act 2013.
 Section 2(21), The Companies Act 2013.
 Section 2(22), The Companies Act 2013.
 Decoding amended Section 80-IAC available at https://taxguru.in/income-tax/decoding-amended-80iac-startup-section-act-1961-commercial-viability-legal-provisions.html
 Supra at 1.
 Supra at 6; In section 80-IAC of the Income-tax Act, in the Explanation below sub-section (4),–– (a) for clause (i), the following clause shall be substituted, namely:–– '(i) "eligible business" means a business carried out by an eligible start up engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation;'; (b) in clause (ii),–– (i) in sub-clause (a), for the figures "2019", the figures "2021" shall be substituted; (ii) in sub-clause (b), for the words, figures and letters "previous years beginning on or after the 1st day of April, 2016 and ending on the 31st day of March, 2021", the words "seven previous years beginning from the year in which it is incorporated" shall be substituted.
 Supra at 1.
 Nikita Bhatia, 10 legal mistakes made by startups available at https://yourstory.com/2016/03/legal-mistakes-startups
 Laura Plimpton, Secrets to a successful business contract, ENTREPRENEUR INDIA available at https://www.entrepreneur.com/article/175364
 Supra at 12.
 Mendonça S. et al., Trademarks as an Indicator of Innovation and Industrial Change, p.7
 Supra at 12.
 Section 135, Companies Act 2013.
 Draft Amendments to SEBI Regulations, 2012, BOARD MEMORANDUM available at https://www.sebi.gov.in/sebi_data/meetingfiles/apr-2018/1524117274041_1.pdf
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