Have you made a legal mistake?

Starting a business is exciting in itself and many entrepreneurs tend to overlook the legal essentials in their starting-out euphoria. Here are six legal mistakes startups often commit in their formative years:

1: Opting for a wrong choice of business entity

Startups today have multiple ownership structures for their company. From sole proprietorship to partnership, Limited Liability Partnership (LLP), one person company (OPC) etc the choices can be difficult to make. Young entrepreneurs in their quest to start business operations often end up picking the wrong ownership structure overlooking the long-term vision. Ideally the services of a legal attorney should be availed to ensure your startup picks on the right legal entity status at its launch.

2: Choosing the wrong place of incorporation

Picking a wrong state or city to start business operations is another common mistake often overlooked. States have their own startup policies offering sops and financial assistances. The criterion for such assistance is not the location but incorporation of the startup entity. For example, if a startup or business entity is registered in Gujarat and has its business operations in Maharashtra, the sops offered to startups in Maharashtra may not be applicable. Choosing the city or state for business incorporation should be evaluated as per the sops offered by respective states.

3: Not protecting intellectual property

Intellectual property needs to be protected and safeguarded at all times. Startups often overlook the importance of using various protective tools such as patents, copyrights, trademarks, service marks etc. To ensure water- tight legal entity startups should cover all applicable intellectual property rights ensuring no one steal names, business ideas and brand entity.

4: Overlooking exit strategy

New business owners’ especially first time entrepreneurs are often engrossed in formation and business set-up overlooking formation of an exit strategy. Just as the business is set up, its exit policy should also be formulated giving founders and co-founders transparency and clarity. When things go wrong, it’s important to have an exit strategy in place to ensure that the founding team is not faced with any dispute or legal hassle.

5: Ignoring founders’ agreement

Startup or business may be small today but will grow with time. In such an event the possibility of confusion on business ownership is commonplace. By not creating a founders agreement, business owner including founders and co-founders walk on a tight rope. A startup founder’s agreement between various founders should be a legally embedded document clearly defining roles and ownership, percentages, among others.

6: Not having employee contracts

Having an employee’s contract is essential for startups to avoid any disputes and ensuring employees’ rights are safeguarded at all times. The contract between the company and employee works both ways ensuring clarity on role, salary, working hours and leave agreements etc. Having a legal contract gives companies and employees a document to fall back on in the event of any misunderstanding or dispute.

Entrepreneurs in their quest to start early often overlook legal essentials. The above mentioned legal documents should be a part of all startup checklists.

Is there any other legal clause which should be included in the startup contract document to ensure a safer trip? Please put in your comments.