Narula - Basic Legal Information for a Start-Up or a Business (India)

Contents

Preface

Legal Structure

The easiest for one - Sole Proprietorship

The easiest for more than one - The Partnership

Secure for one - One Person Company

Secure for more - Private company

Limited Liability Partnership

Saving your Intellectual Property

Trademark

Patent

Copyright

Legal Documents

Employee agreement

Non Disclosure

Employee Handbook

Website Legal Documents

Memorandum of Understandings, Agreements, Contracts

Conclusion

Preface

So you're ready to fulfill your dream of launching a new venture. Im sure you must be worried about how to settle the legal matters. In this e-book I would not be taking you through all the steps required to legally set up a business in India as such information is readily available on www.thesuits.in and various other government websites. My primary objective is to provide you with a background of the legal system in India and suggest the appropriate tools to use when dealing with the legal system in general and lawyers in particular. When you are starting a new venture it is extremely important to set it up correctly from the onset as otherwise you might end up doing something that you would regret at a later stage. I would be discussing the best way to start the process of registering your business, and to discover all the other things you need to do to comply with the many regulations that govern business and also speaking about your intellectual property rights and their registrations.

So whether you are an entrepreneur who wants to start up or already has started up, this guide shall help you a long way in your venture.

3rd edition, May 2017.

Legal Structure

The first thing that you should be concerned about is the incorporation of a business as it is the most important legal requirement out of all as your whole future is going to be based on the incorporation. The same has to be decided by you yourself, your team of attorneys, your chartered accountant or your partners. Even though you can start with one kind and end up shifting to another one, but that is a time consuming and an expensive process.

One of my clients, started out by choosing a Limited Liability Partnership when it started to save on the costs involved in registering a Company and 5 months into the business they had to shift to a company. Had they chosen to form a company on day one as suggested by us they would have saved Ninety Thousand Rupees that they eventually ended up spending to cancel their LLP.

As you must be aware by browsing the internet, there are basically four kinds of legal structures prevailing in India that a Start Up can choose from. All four of them have their own advantages and disadvantages, helping you to decide the right one for you.

The easiest for one - Sole Proprietorship

It may be the simplest ever business form, but is not a legal entity. You can choose a separate trade name but in the end everything leads back to you. All the profits, debts and the losses are yours and are taxed on your personal income tax. Ever wondered what small shops around the corner of the street choose? Yes, thats exactly what a sole proprietorship is. A sole proprietorship is an unincorporated business owned by a single person. The popularity can be traced back to its ease of setup as all you require is a personal permanent account number from the income tax department.

There may be other compulsory registrations required along with it, which are discussed at a later stage in the book.

Its what the title says, easiest . You can start a sole proprietorship today by just choosing a trade name, but thats the case if you do have a permanent account number. If not, it takes as little as 7 working days to start. If you have a time constraint, this is for you! Also, a Sole Proprietorship is extremely inexpensive to start and maintain. All you are required by law is to file your ventures business details along with your personal income returns. Theres no extra tax on your business income till the time it does not reach 9 lakhs. If legal compliance is what scares you often, the extent of the legal compliance is only limited to the annual filing of your income tax, service, professional, sales or personal taxes.

Anybody giving you free advice, be it your chartered accountant, a family member, friend, a lawyer or whom so ever it may be, may often ask you to start with a sole proprietorship and later shift to a one person or a private limited company. Please don't take that advice. What they don't tell you is, if during this period which may be as little as 3 days, 3 hours or even 3 minutes you do a deal which does not end how it was supposed to, its liability is going to be traced back to your personal assets. If the other party succeeds in proving their case, you shall be forced by a court of law, if required, to sell your assets and pay them the damages they deserve. You may also not be able to accept investments from anybody.

The easiest for more than one - The Partnership

Partnership is basically the relation between persons who have agreed to work together for common goals and to share profits. It also is one of the most popular business constitutions for businesses that are owned, managed and controlled by two or more persons. They are also as easy as a proprietorship to start and maintain, un-incorporated unless registered.

However, it may not be compulsory to register a Partnership firm but we always advise our clients to register it. If this is your chosen method of incorporation then all you need to do is, get a partnership agreement drafted from a lawyer (not just any lawyer as all he might do is draft it off a sample document and miss out on important points), print it on a stamp paper registered on the names of all partners and finally register it or get it registered with the Registrar of Firms of the state your firm is located in.

Just how the name suggests, a Partnership firm is comparatively easy to initiate as there are minimal legal formalities involved. Even though its advisable, registration is not essential. Unless registered, a Partnership firm can choose to have any name - as long as it does not infringe a registered trademark or a registered name. To avoid it from being copied whether intentionally or unintentionally it needs to be registered. A Partnership firm is also not required to file its annual accounts each year unlike a Limited Liability Partnership or Company. Since it is easy to form and manage, it is also a pocket friendly business incorporation.

Secure for one - One Person Company

When i advice this form of incorporation to my clients, their next question is if it exists in India? Well, yes it does exist in India now. The concept of a One Person Company was introduced in India through the Companies Act, 2013 mainly to promote and support single entrepreneurs who are capable of starting and running a business venture by themselves. If you are the sole owner of your business, this is it.

It is a great registration choice when it comes to a single business owner, it may have a higher price tag, however it would save up a lot of your money (especially personal) if you end up in a lawsuit. Unlike a Sole Proprietorship, you can nominate a Director in the Memorandum of Association or the Articles of Association who would become the owner of such company in case the Director is disabled/deceased/or otherwise incapable of running the company.

What you may not know about a One Person Company is that it needs to be converted into a Private Limited Company if the annual turnover crosses Rs. 2 crores.

Even though a One Person Company is easy to form, it is required to fulfil a lot of compliances in the long run. Just like other incorporated companies, it is a separate legal entity or what lawyers might tell you a separate juristic person just like a Private Limited Company established under the Companies Act. As one of its advantages, it has a perpetual succession and may be transferred to the nominated member upon the death or other departure of the sole member and continues to be in existence irrespective of the change. The company being a juristic person, can acquire, own, enjoy and alienate, property in its own name. The most important benefit of not having a proprietorship and a One Person Company instead is that it has a Limited Liability. The liability of the members in respect of the companys debts is limited.