{"id":77,"date":"2019-04-10T12:15:00","date_gmt":"2019-04-10T06:45:00","guid":{"rendered":"http:\/\/www.vplus.co.in\/?p=77"},"modified":"2021-04-20T23:03:39","modified_gmt":"2021-04-20T17:33:39","slug":"choosing-the-right-legal-structure-for-your-startup","status":"publish","type":"post","link":"https:\/\/www.vplus.co.in\/blog\/choosing-the-right-legal-structure-for-your-startup\/","title":{"rendered":"Choosing the Right Legal Structure for Your Start-up"},"content":{"rendered":"

Introduction<\/h1>\n

No matter what your business is, you need a basic legal understanding and the ability to see what you really should have done and should do in future. As a startup, you invest every minute in growth and related activities, and thus, legal matters of the business often get ignored. This leads to common legal mistakes that impact your company\u2019s success or failure in the long-run. Hence, it is prudent to be aware of the legal matters of your business from the start. Starting from the correct choice of a legal structure to know about the registration process for the same, and finally, decide on the right location for establishing your entity \u2013 all these aspects need your attention.<\/p>\n

Of course, to get all your assumptions and decisions checked, you must seek advice from a law firm or any expert lawyer. For this, you need to have clear selection criteria based on which you can select your legal counsel.<\/p>\n

Common Legal Mistakes<\/h1>\n
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As an entrepreneur, you launched or are likely to launch your startup with the best of intentions, but that may result in trouble if legal issues are handled in a wrong way. A careless attitude can lead to very bad results, but a careful watch to avoid these mistakes can save you and your venture a lot of time, money and efforts. Let\u2019s look at a few of the common legal mistakes usually made by entrepreneurs in their journey:<\/p>\n

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  1. Ambiguity in terms of the agreement:<\/strong>  An element of ambiguity in the terms of the agreement between multiple shareholders may lead to consequences like co-founders leaving the organisation, differences on the rights and responsibilities, etc.
    \nSo the founders\u2019 agreement is something as basic as laying out all these rights and obligations of the parties is something that often gets missed<\/li>\n
  2. Infringement of IP rights:<\/strong> In case of infringing upon someone else\u2019s IP rights, your business ends up facing immense damage to its goodwill, consequently leading to heavy monetary penalties and wastage of time in resolving the same.<\/li>\n
  3. Non-disclosure of privacy policies:<\/strong> If you have an online presence, it is necessary to put the terms and conditions along with relevant privacy policies upon your website. This is a must to build user confidence as well as to protect you from legal lawsuits by consumers in case of a dispute.
    \nFor example, many websites take important sensitive information of the person who visits their website. Whether it is simple information like their name and age, including their address as well. There are laws in India that are very sensitive about privacy protection and data protection where you are required to have a policy that sets forth how you maintain this confidential information and that you don\u2019t sell your customer\u2019s sensitive information to other companies and all of these would lead to significant noncompliance issues. Another classical mistake in the early days is to opt for.<\/li>\n
  4. Appointment of inept legal counsel:<\/strong> Wrong selection of lawyer makes it difficult for firms to troubleshoot legal hurdles in their journey. This also leads to extra costs especially when the lawyer is unable to deal with legal lawsuits.<\/li>\n
  5. Formation of wrong entity:<\/strong> Selection of a wrong legal structure leads to trouble for entrepreneurs, either in the form of higher tax liability for the firm, recourse on personal liability of the owner in case of non-fulfilment of the company’s debt, etc.<\/li>\n<\/ol>\n

    Entrepreneurs should try and address these problems from day one itself to prevent these mistakes from becoming big, complex and costly enough to avoid later.<\/p>\n<\/div>\n<\/div>\n

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    Types of Legal Structures<\/h1>\n
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    Of all the choices that you make when starting a business, one of the most important is selecting the right legal structure for your company. Now, when it comes to deciding on which legal structure to choose for your venture, you should consider certain basic points:<\/p>\n

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    1. Your company\u2019s Tax liability \u2013 where the idea is to constantly seek opportunities to minimize tax<\/li>\n
    2. Your personal liability, where you save yourself from risking your personal assets<\/li>\n
    3. The ease of raising funds, where certain forms of entities are more common than others and are preferred by investors to protect themselves and facilitate future funding processes<\/li>\n
    4. The level of record-keeping obligations, where certain forms of entities\u2019 require a significant amount of personal collaterals<\/li>\n
    5. The cost related to the creation of the entity, since certain entity forms are more expensive to register than others. And lastly<\/li>\n
    6. Your Future Business goals of the business, say, in terms of scaling up or diversifying, where some forms offer more advantages than other<\/li>\n
    7. Under the Indian legal system, there are essentially four types of legal components that are available. Each has its own set of outcomes:<\/li>\n<\/ol>\n