If you are a law student you might have been approached by that ambitious friend of yours, who is planning to open a startup or has registered one, and now is puzzled by the rigmarole of legal compliances. He probably doesn’t understand the complex legal jargon and the google’s vastness has added on to his confusion. The exorbitant costs that the lawyers might be charging to advise him are out of his budget. He can’t pay INR 15000 to draft a contract.  

He finally turns to you, in a hope that your last 5 years at law school have enabled you to help him out of this situation. Can’t you charge him INR 5000 instead and make that contract? After all, if he could learn to code and start building software while in college, surely good law students also know how to draft contracts and advise entrepreneurs, right?

Little does he know that academics in a law school is way different than application of the law in the real world. He probably is unaware that you just sat through the nights to clear your papers, and 2 out of your 5 projects were quite plagiarized. You survived viva after viva thanks to chits passed by your friends that then you passed on to others, and your ‘intellectual debates’ on social media are usually informed by newspaper reports.

Coming back to help your friend, as much as you want to do it, you realize there are just two ways to go about it. One, to either accept you don’t know about it and look like a complete fool or confuse him further so that he doesn’t call you again.

Is there a third option? Could you actually learn the practical aspects of business laws while still in college and start helping real-life entrepreneurs? Could you earn some money while doing so although you are just a college student? Have you considered that all these could give you a massive advantage when it comes to getting a job and making it big as a corporate lawyer if you want to? Given the kind of startup boom that India is witnessing right now, you can actually become a full-time startup advisor. Many law firms in the last few years have made a fortune advising on venture capital investments after all.

Anyway, let’s not get too far ahead of ourselves. Let me help you with certain basics and not so basic things that you can help your friend with and make yourself look like the legal dexter in front of your peers. And yes, if you do it well you can start earning too, like many of our students reported.

1# Incorporation of the company

You might have heard of the type of companies and about registering a company with the RoC. However, your friend probably might be sweating over even identifying what kind of entity (partnership, LLP, OPC or Pvt Ltd?) to register as he might be unaware of the risks, advantages, and costs associated with each kind of entity. It is very important that you suggest to him to register his startup as a certain type, depending on objectives and circumstances. For example, a small budget company could probably start as an LLP, or a private limited company if the goal is to seek venture capital in times to come. Here is a basic chart to get you started.

 

Type of Company Process for incorporation Pros Cons
Sole Proprietorship
  • No formal registration required. However, following registrations help at a later stage:
  • Tax registration (GST) (mandatory)
  • Any local/central/state-body registration
  • MSME Registration Online Certificate
  • License under the Shop and Establishment Act/ Factories Act etc. depending on what business it is
  • Udyog Aadhar registration
  • Current bank account on the firm/business name with 2 identities/licenses proof on the firm’s name.
  • Easy to launch
  • Lesser Compliances, costing and fees
  • Complete control of the business, you are the sole decision-maker.
  • Unlimited liability
  • Sole liability for all credits.
  • No differentiation between personal and business asset.
  • Difficulty in raising capital.
  • Banks reluctant to pass loans.
Partnership Firm
  • Registration not compulsory technically but extremely necessary. Not registering a partnership is suicidal.
  • File an application with the signature of all the partners with the Registrar of firms.
  • Enclose the application with the appropriate fees and following documents:
  1. Application for registration as prescribed in form 1 under the registrations act.
  2. A duly filled specimen of an affidavit.
  3. Certified true copy of the partnership deed.
  4. Proof of ownership of the place of business.
  • Register for PAN and GST
  • Get a current account
  • Very quick to set up
  • Suitable for very short-term businesses between very trusted people
  • Not recommended for any long terms business at all
  • Unlimited personal liability even for wrongs done by other partners
One Person Company
  • Obtain digital signature certificate (DSC) for the proposed director.
  • Obtain Director Identification Number (DIN) for the proposed director.
  • Application to Ministry of Corporate Affairs for registration.
  • Memorandum of Association (MoA) and Articles of Association (AoA)
  • Benefit of sole proprietorship as well as the company.
  • Only nominee and director, no need for another person to form the company.
  • No requirement to host AGM or EGM.
  • No need of filing Cash Flow with the ROC.
  • Financial statements to be only signed by the director.
  • Cannot open another OPC.
  • Cannot convert into a public/private company before 2 years or crossing a threshold of 50 lakhs paid-up share capital.
  • Cannot carry operations of NBFC.
  • Cannot convert to section 8 companies.
  • You need to inform ROC about every contract entered into.
Limited Liability Partnership
  • Obtain Digital Signature Certificate.
  • Obtain Designated Partners. Identification Number (DPIN).
  • Register on MCA website.
  • Apply for a unique name (Form 1 on the portal).
  • Once the name is reserved, draft and register your partnership deed (Form 2).
  • Within 14 days of filing form 2, certificate of incorporation under form 16 will be issued to you.
  • No mandatory minimum contribution.
  • No limit on the maximum number of partners.
  • Lesser registration costs than a company.
  • Non-applicability of Dividend Distribution Tax (DDT) – therefore significant tax benefits
  • Compulsory audit not mandatory.
  • Easier exit process.
  • New Companies Act has made LLPs highly lucrative due to flexibility, simplicity, and lack of extensive compliance requirements compared to Pvt Ltd.
  • Slightly higher penalties in case of non-compliance than companies.
  • Investors not willing to fund LLPs in most cases
Private Limited Company
  • DIN and DSC
  • Application for company name availability
  • Drafting of AoA and MoA
  • Filing of e-forms with the Registrar of companies.
  • Payment of  RoC fees and stamp duty.
  • Verification by the RoC.
  • Issuance of Certificate of Incorporation by the RoC.
  • Limited liability of the members.
  • More credible.
  • Easy to secure funding.
  • Transferable ownership
  • Complicated to incorporate.
  • Stricter compliances.
  • Difficult to wind up.

 

2# Co- founders agreement

In most of the cases, your startup friend must have another enthusiastic “best friend” of his partnering up with him on this ambitious project. He could be sure that this best friend has stood by him through thick and thin, and will vouch that nothing can ever go wrong with them. However, you might want to raise some questions about this, before giving him an advice on the co-founders agreement. First, remind him that co-founder conflict is the top reason for startups shutting down. Second, ask him to watch Social Network, where Mark Zuckerberg and Eduardo Saverin were great friends in college until one of them screwed the other out of Facebook. Here is a TechCrunch article by a former Y-Combinator partner that gives some practical advice on how to manage co-founder conflicts and credits it as the biggest danger for startup founders to look out for.

Let’s take an imaginary example. You and your extremely enthusiastic friend start up a business of pizza delivery. You are the chef and he has decided to take care of the rest of the work. You know he is the right choice because he has always boasted to be a perfect manager of things, and he perfectly organized the most amazing trip you and your group of friends have been to. Moreover, your friendship with him over the years has brought you guys extremely close to each other. You are working extremely hard to make it work and are coming up with new recipes every night. However, your friend is visibly not contributing as much. He has been saying “it will reach by tomorrow,”every time you ask him about the new menu and kitchen equipment for which you guys already paid. The labor he has managed to hire is overcharging and not ready to work. Marketing plans are still in form of rough papers of what you discussed with him during early planning days. What will you do? What if the business starts to run and do well but 3 years down the line he loses interest in the food business and wants to become a yoga teacher instead?

If you are a budding entrepreneur, you must have seen a not so famous, but amazing movie called Rocket Singh – Salesman of the year. For a minute imagine yourself to be the owner of the computer manufacturing company, and Rocket Singh to be your co-founder. Now imagine, looking at your business idea, while working in your company as a co-founder, he also opens up another business on the side that competes with yours. He has tapped into all your flaws and made a firm providing better services to whom you are losing your major clients. You ask him to leave your company. Can he refuse to leave? In absence of a co-founder’s agreement, can you force him to shut his firm? Or claim any damages? Do you know a way to ensure that this does not happen in the future?

Let’s take another example. You and your co-founder friend started a website to write about politically unbiased news. The sole aim of this initiative was to provide get rid of paid media reports to get rid of political polarization. The first few years went extremely smooth and you gained immense popularity in the media circuit. While you got busy with marketing and sales, your friend handled content creation and editing. However, one fine day you realized that most of the reports on your website are not unbiased at all. Your ‘efficient’ co-founder has taken a huge donation from the ruling party. Can your conscience allow you to continue with him? What can you do?

These are not imaginary situations at all. These are very common situations that I have actually seen happening in various startups.

If you haven’t done it yet, it is the time that your startup friend and his co-founder need to sit and set the rules in writing, and then seal it legally with a co-founders agreement. A co-founders agreement is a clear set of rules and understanding between the founders, in black and white, which play an extremely crucial role in safeguarding both of your friend’s, and his ventures interests.

There can be a number of issues between the co-founders. Issues like who the key contributor effectuating money generation? Who is doing more work? Or even usual policy related disagreements turning into a major fight. These are some of the issues that might not just take the company down but also ruin the relationship between two partners. A co-founders agreement can pre-empt all such circumstances.

Imagine how happy your friend will be one day when he actually has a conflict situation and your agreement saves the day. That’s how amazing reputation is built.

3# Registration with startup India

We are thankfully living in an era where most of the procedure has become online. Ask your friend to register with startup India website, and upload all the documents and submit the application. Startup India campaign is a major boost for most of the startups who are trying to establish themselves. The benefits range from permissibility for self-certification, a holiday from inspections for a period of 3 years, and a lot more.

Following are the benefits of registering your firm with the startup India campaign.

  1. A registration with startup India campaign can get you rid of labor law inspection and consistency with environmental law compliance, post self-certification.
  2. Funding of patent defense and rebate up to 80% of the costs of obtaining the patent. Payment of the fees of facilitator and faster IPR registration.
  3. Availability of single clearance window for registrations, clearances, and approvals.
  4. Manufacturing startups exempted from “turnover/prior experience without any relaxation in quality standards.”
  5. Tax exemption for the first three years.

Make sure that you tell your friend about the following list of documents he needs to be ready with to ensure a hassle-free registration :

  1. a) Letter of recommendation
  1. A recommendation of the incubator in the DIPP format or,
  2. A letter of support by the incubator in case the funding is under some government scheme or policy or,
  3. A letter of recommendation by the incubator, recognized by DIPP or,
  4. A letter of funding of at least 20% by incubation fund/  angel fund, private equity fund/ accelerator/angel network, duly registered with SEBI endorsing the nature of startup or,
  5. Copy of the patent publication in the Indian Patent Office.
  6. b) Certificate of Registration/incorporation
  7. c) Statement of business (brief description of your business)
  8. d) Certification by Inter-Ministerial board or recognition by DIPP (To avail tax exemptions)
  9. e) Self Certification

4# Basics of Taxation

You might have studied tax, but the latest GST update might have ruined it for you and probably your faculty too. However, more than you, your startup friend might be fretting over GST. Here is all you need to tell your friend about taxes :

  1. Remind them of two most important dates. 30th September of every year to file the Income-tax returns and exactly a month later, i.e., 30th October, to file the financial statements with the ROC.
  2. Ask them to register on online GST portal and get a GSTN. Further, in order to ensure that the compliances are taken care of, make sure to guide them to link aadhar and pan to the account.
  3. If your friend is yet to plan a startup or has started his venture after 2016, he gets a tax holiday for 3 years on his profit. Which means if its total revenue does not exceed 25 Crores, he will be exempted from paying taxes for the first 3 years of his establishment.
  4. In case your friend startup has 50% of the investment through shareholding or up to 50 Lakh or investment, they will be treated as mutual funds, thereby exempting from tax.

 

5# Labour laws, Employment Policies and Employee Contracts

Every organization, big or small is obligated to adhere to labor laws. It is simple when you start an organization, you hire individuals to take care of various functions and tasks. Your friend regardless of the size of the organization needs to know about all the laws he will have to comply with to take services from any of these individuals.

However, here is a tip you can specifically give to your friend, that not many would be able to give. If your friend is incorporating his startup with the Start-up India initiative, he can give an express declaration under these 9 labor laws, that can exempt himself from labor inspection. This exemption can be extended for two years by merely filing a self-certified declaration for the two consecutive years.  :

  1. Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act, 1996
  2. The Contract Labour (Regulation and Abolition) Act, 1970
  3. The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
  4. The Employees’ State Insurance Act, 1948.
  5. The Industrial Disputes Act, 1947
  6. The Industrial Employment (Standing Orders) Act, 1946
  7. The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979
  8. The Payment of Gratuity Act, 1972
  9. The Trade Union Act, 1926

You can also guide your friend on the way to draft an attractive employee policy. Most of the start-ups engage various freelancers and consultants along with the full-time employees. A stable employee policy will cover both the parties and ensure that the organization’s and employees’ concerns are taken care of. An attractive employee policy also attracts talent and can act as a major factor for boosting an employee’s loyalty and productivity towards the organization.

It is a common practice for startups to hire from the pool of their friends. It is easier to often induct them and align them with the objective of the firm as their psyche and talents are no mystery to the founders. However, in case of non-productivity or any other issue at a later point in time, it becomes even more difficult to point it out to them. Decide for yourself, your friend has joined you for work and he is not as effective as you assumed him to be. Will you be able to point that out to him without affecting your friendship?

In order to avoid such a situation, you need to recommend your friend that there must be an employment contract and a set of policies from the very beginning of his startup. This will ensure a system of right checks and balances and the contract would do the job of eliminating awkwardness and formalizing the relationship of your friend with his friends, at least at the workplace.

There are a series of other issues like financial planning, licenses, CSR, winding up, audit compliances, IPR, winding up etc., that you need to learn and advise your friend up on. You can sign up for courses like these and become the ultimate go-to person for many people like your friend and earn extra pocket money. Deeper into the subject can also help you carve out a career in corporate law or maybe starting your own law firm for startups right after your law school.

After all, this deed of yours to help your friend in need can be your first step to something much bigger, much better, in your own career.

Just imagine what is possible, if you have the right skills and the right knowledge to help the budding entrepreneurs.

If you enjoyed this knowledge, you will definitely love to learn about business laws in a more structured way. If you want to learn more practical skills and knowledge that you can use to advise startups and other businesses, check out the syllabus of this business law course.

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3 COMMENTS

  1. Thankyou for this Information, Yes, that is really important, these is need to know especially the people who wants to startup their business because this knowledge about legal compliances is one of most important in business, it can help your business in many aspects that’s why this is a must read for every people who wants to create their own business.

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