India: Jurisdiction for Incorporating Business Startups

A Start-up is faced with several issues that have to be dealt with in order to grow into a successful organization. In the beginning, an entrepreneur is required to make two key decisions i.e., where and when to incorporate a new Start-up.

Apart from planning the most effective business strategy, the Start-up needs to look at the regulatory environment, various legal issues, and the laws of the country where the Start-up is proposed to be set up.

Failing to incorporate in the right place can hobble the business with an unfriendly Start-up ecosystem, lack of talent, high taxes, and inability to protect its intellectual property. The tax advantages to a Start-up of incorporating in a tax-friendly yet reputable jurisdiction typically outweigh the additional administrative costs in the long run for many successful businesses.

A location that has a population of sufficient size, education, and skills to meet business’ human resource needs is a win-win position for a Start-up. The jurisdiction of an entity will have very important and long-lasting consequences on its business.

Additional Resource: How to Register a Startup In India

Reasons to Incorporate a Business Entity in India

Dealing with a challenging regulatory environment is a drain on resources that an entrepreneur can utilize for growing his business. The Government of India understands this and has gone to great lengths to create a business-friendly regulatory environment as a way of enticing entrepreneurs to move. Attempts have been made in the creation of business straightforward and ongoing compliance regulations are minimal.

If you own a successful business that is now looking to expand overseas organically or through acquisitions, an entity in India can facilitate your plans. Such an approach has the following benefits:

1. The Government of India has set up the Start-up India hubs where the incorporation,   registration, grievance, handling, etc., are easily handled. On the online portal, the government has set up a hassle-free registration system, so that registration can be done from anywhere and anytime.

2. India has emerged as one of the world’s fastest-growing economies and a desirable investment destination due to economic reforms and a vast consumer base. 

3. The Government has provided relaxation in many sectors and has enhanced the FDI cap in many industries.

4. Various schemes/ exemptions have been granted to the eligible start-up under the tax laws of the Country which gives lots of benefits and enable them to save taxes.

5. India has one of the world’s youngest populations which converts to a workforce that will remain active and productive for an extended period.

How to Overcome Mistakes

There are numerous legal aspects that affect the Start-up that the entrepreneurs are not aware of and then make them vulnerable to lawsuits. With changing government policies, tax law, and corporate law structures, new entrepreneurs and Start-up businesses often make common errors. If the mistakes are not identified in the early stages of growth, Startup finds difficulty in raising the funds that they need for growing their business, and lack of that can huge cost down the road.

A business might have a lot of growth potential but being incapable of avoiding the common errors can put the business off track. Therefore, it is necessary to learn how to avoid common errors so that business becomes successful and profitable in the long run.

A startup is primarily designed to grow and develop at a rapid pace.

The following are some of the more common and problematic legal mistakes that Start-ups make:

1. Informal/ Non-written Agreements/ Non-Standard Agreements

An agreement that legally establishes the rights, ownership, responsibilities, dispute resolution, and other terms executed between the founders and the company forms a foundation for the journey of a business. Many Startups do not get their commercial understanding with vendors/ customers/ clients or even with the promoters captured on paper often leading to misunderstandings which later turn into disputes. In cases where the agreements are in place then they are not in a standard form of contracts. No matter how good relationships may be, they can come to a halt when agreements are not put in place.

Most Startups lack such standard agreements often with the founders or entrepreneurs. In the event of a disagreement or dispute arising between the Parties, the agreement with all necessary details acts as a guide. Therefore, Clauses related to breach, termination, and dispute decisions need to be effectively negotiated and captured in all third-party agreements.  

Therefore, there must be standard form contracts for dealing with customers or clients. A contract can be customized to be more advantageous to one side. However, the key is to make it appear appropriately acceptable that the other side doesn’t attempt to negotiate its terms.

2. Not Choosing a Viable Business Structure

The biggest mistakes that Startups make are not registering their business or picking the right business model. A lot of Startups fail to select a viable legal structure for their business in the absence of the pros and cons of the available business structure options. From a legal perspective, the entrepreneur must separate his personal and business finances before starting a business. Starting up a business without registering results in the personal liability of the owner thereby allowing the creditors to have access to his assets. Form of business structure like limited liability partnership firm and private limited company has separate legal entities that protect the personal assets of the owner from the business debts and liabilities.

Thus, the legal structure serves as an essential part of running a business. It is necessary that every establishment must understand its options. One must choose the best legal structure from permitted models to do business and achieve success.

 When it comes to business structure, individuals should wisely choose their business structure as it allows the venture to operate efficiently and reach the desired targets and profitability.

3. Name of Start-up

Choosing a name that reflects your brand and ensuring that it hasn’t been claimed is important for any organization as it creates the identity for its products and services. Thorough research has to be done before selecting a name so that it does not lead to infringement of trademark or domain name problems.

4. IP Issues & Confidentiality

Intellectual property rights (“IP Rights”) are exclusive rights of the owner of a Start-up who puts the idea of it. While it’s true that ideas are often less valuable than the execution founders put behind them, innovation is still at the heart of any successful Start-up.  Appropriate steps need to be taken to protect the IP rights and reasonable measures to be taken to not infringe the third-party IP rights.

A sensible first step toward protecting your ideas is to form a legal entity and turn these IP Rights into an asset of a company (rather than individuals). Developing and protecting intellectual property with proper registration may help Startups achieve an aggressive advantage.

There are certain situations where using a non-disclosure agreement (NDA) can go a long way in helping to keep a company’s confidential information outside of the public domain. If the creation or development of the intellectual property is a part of such a third-party agreement, it should clearly state that all rights to the IP Rights shall vest and be owned by the Startup and the third party shall not stake any claim on the same and will do all acts to ensure the safety of the IP Rights.

IP Rights are a very important asset class for a Start-up. One basic way to protect IP rights is through the use of a confidentiality and non-disclosure agreement. This type of agreement deals with confidentiality issues, but can also ensure that the ideas, work products, and inventions the employee creates that are related to company business belong to the company and not the employee.

5. Non obtaining of licenses/ permissions/ approvals

Depending on the nature of the business, a business may need permits, licenses, or qualifications for carrying out its operations. The absence of such approvals attracts penalties/fines from the regulatory body and eventually leads to the closure of the business operations. Therefore, it is a prerequisite for an entrepreneur to identify the legal requirements before starting a business.

6. Tax Aspects

Start-ups need to pay attention to a variety of key tax issues arising out of their business. Without proper planning, founders can find themselves or their Startups liable for unintended and unanticipated taxes, fines, and penalties. They need to examine the regulatory and tax regimes of locations it plans to do business in.

7. Non-maintaining proper corporate

Compliance and its importance are often overlooked by many Startups.  Many Startups do not maintain proper corporate and employee/HR-related documentation. This becomes problematic when they intend to raise funds from investors or get involved in claims or litigation with an employee-customer/client or regulatory body.  Thus, there is a need for maintaining the proper records as there are a number of legal requirements that need to be fulfilled depending on the entity structure, and a law firm is best suited for this assignment.

It is extremely important for the sustainable development of any enterprise that the Start-up complies with authorized, secretarial, accounting, taxation, employee-related, and other related compliances as noncompliance is usually a levy of punitive fines on the Start-up.

8. Legal Counsel

Start-up businesses often hire inexperienced legal counsel, including lawyers who are friends or relatives, or those who offer steep fee discounts. In doing so, the founders deny themselves the advice of experienced legal counsel who can help avoid many legal problems.

In a misguided effort to save on expenses, they make their business vulnerable to legal issues. The founders should retain a firm that can handle some, if not many, of the areas of expertise listed above so as to provide continuity between the founders and their lawyers.

Conclusion

In general, it is a good idea to incorporate your business as soon as possible since incorporation brings many benefits. However, it is also important to carefully choose the location where you will perform the incorporation as jurisdictions differ significantly among themselves. When and where to incorporate is an important decision as it will have long-term implications for the business and the entrepreneur. Therefore, the decision should be made with care and forethought.

A successful Start-up is not built by one single person alone. It must be surrounded with subject matter experts more particularly startup legal experts on whom the founder can lean and learn. Therefore, having a legal expert on your side is always an added advantage for the growth of any business.