LEGAL FOR START-UPS

NSRCEL IIM-B
Quasar Legal

Copyright, Quasar Legal, 2013. All rights reserved.

 FORMS OF BUSINESS - 1

Factors to consider:
Convenience
Liability
Tax
 FORMS OF BUSINESS - 2

Sole proprietorship
Partnership
Limited Liability Partnership (LLP)
Private limited company
One Member Company (proposed by the
Companies Bill, 2012)
 FORMS OF BUSINESS - 3

Sole proprietor
Convenience: Easiest to start, operate and close

Liability: Sole proprietor is personally liable for debts and other business obligations

Tax: Proprietors income from the business = his income; so he is personally taxed

Limitations:
Works well for professionals and small traders and entrepreneurs but not businesses of any
scale
Difficult to get structured investment: FDI is allowed only by NRI/PIO on non-repatriation
basis. FDI by NRI/PIO on repatriation basis and FDI by non-NRI/non-PIO requires prior
approval.

Basic registrations: labour laws, tax laws.

 FORMS OF BUSINESS - 4

Partnership
Convenience: Some formalities partnership agreement, registration with the Registrar of Firms;
commencement, operations and closure regulated by the Indian Partnership Act, 1932 and the
partnership agreement.

Liability: Not a separate legal person (but see below). Partners - agents of each other + the firm.
Unlimited liability to third parties. Partners may limit their liability to each other under the partnership
agreement.

Tax: Firm assessed as a person under income tax law. If certain formalities not complied with taxed
as anAssociation Of Persons (AOP);AOP cant claim certain deductions that a firm can.

Limitations: More structured than a proprietorship but suffers from similar limitations. Also, greater
chances of partner disputes affecting the business. FDI restrictions similar to those on proprietorships.

Basic Registrations: Registration with Registrar of Firms, labour laws, tax laws.
 FORMS OF BUSINESS - 5

Private Limited Company

Convenience: Most structured and regulated registration with the Registrar of Companies;
commencement, operations and closure regulated by the Companies Act, 1956 (a new 2012 law is
pending). Most conducive to obtain investments, including FDI, and debt.

Liability: Separate legal person. Shareholders (members), directors and the company itself separate
from each other. Liability of members - only to company, limited to unpaid share price. Members not
personally liable for the companys acts and omissions. Directors may be liable under specific legal
provisions for acts and omissions of company.

Tax: Assessed as a person under income tax law. Dividend distributed by company is also taxable
currently company picks up the tab. Income from sale of shares treated as capital gain in the hands
of the seller-shareholder.

Limitations: Most regulated form of business. Considerable paperwork. In India, difficult to close down,

Basic Registrations: Registration with Registrar of Companies, labour laws, tax laws.
 FORMS OF BUSINESS - 6

Limited Liability Partnership (LLP)

Convenience: Hybrid of partnership and limited company registration with the Registrar of
Companies; commencement, operations and closure regulated by the Limited Liability Partnership
Act, 2008.

Liability: Separate legal person partners are agents of the LLP, not of each other. Only LLP is liable for
its acts and omissions, partners are not personally liable. Designated partners are liable for non-
compliance of the LLPAct. Unlimited liability of both LLP and the partners for fraud.

Tax: Treated as a partnership. Income taxed in the hands of the LLP, not in the hands of the partners.

Limitations: Most regulated form of business. Considerable paperwork. In India, difficult to close down,

Basic Registrations: Registration with Registrar of Companies, labour laws, tax laws.
 CONTRACTUAL SAFEGUARDS - 1

Liability - two broad types

Civil liability
Statutory liability: failure to comply with the law
Tortious liability: harm to people and property
Contractual liability: failure to perform obligations or keep promises

Criminal liability
Is always statutory. Private parties cannot agree that something is an offence. An
offence is always created and punished by law made by Parliament or by the
state legislatures.
 CONTRACTUAL SAFEGUARDS - 2

Contracts:

May save you from statutory liability if the statute itself permits a contract to override its
default provisions.
Example: Every partner must diligently attend to the business. This is subject to a contract
to the contrary.

May not save you in advance from tortious liability but may be used to settle a claim in tort:
Example: Your customer with whom you have a contract to supply software services has
deputed an executive to visit your office. He falls on wet stairs and sustains serious injury.
Your customer holds you liable.

Will save you from contractual liability if used well

Will not save you from criminal liability unless the law permits a contractual settlement of the
claim. Usually possible in specific, individual oriented, minor offences like bounce cases. Not
possible to contractually settle matters because in most crimes society is affected.
 Contractual Safeguards - 3

People are generally free to enter into contracts contracts: a

form of private law which courts enforce

Freedom of contract a cardinal principle /doctrine of the

law of contracts

However - freedom hemmed in by law and by certain

commercial practices and realities
Law of consumer protection, labour laws and a variety of other laws check
this freedom.Acontract that violates a legal provision is a void contract.

Commercial entities also have unequal bargaining power.

 Contractual Safeguards - 4

Ways to safeguard your venture through contracts:

Limitation of liability provisions: specify the maximum amount you
would be liable for, and exclude liability from remote losses.

Default obligations: Know what the law prescribes as your minimum

/ default obligations and do not assuming obligations in excess.

Escalation and dispute resolution: have provisions for pre-formal

dispute resolution; if those methods fail, then use alternate dispute
resolution (ADR) like arbitration.

Payments and performance: Analyze how your payments are linked

to your performance; have clear acceptance conditions; option to
suspend supply if payments are not timely.
 Employees and Workplace Law - 1

Employer employee relationship regulated by:

Law

Contract

Thumb rule:

A person in a supervisory or managerial capacity is not treated as a workman

or an employee eligible for labour laws benefits. Such a person governed by
his employment contract alone.

All other workmen or employees governed first by law and then by contract.
Because very often labour law prevents an employee from contracting out of a
benefit.
 Employees and Workplace Law - 2

Important labour laws: 6. Employees State Insurance

Act
1. Factories Act
7. Maternity Benefit Act
2. State law on Shops
Commercial Establishments 8. Industrial Disputes Act

3. Provident Fund Act 9. Contract Labour Act

4. Payment of Gratuity Act 10. Law related to sexual

harassment in the workplace
5. Payment of Bonus Act
 Employees and Workplace Law - 3

A. What labour law applies? Some thumb rules

Whats your business activity?

Manufacturing? Factories Act; IT Services? Shops & Commercial Establishments

How many persons are employed?

Usual trigger number = 10 or 20

B. Is your employee entitled to a particular benefit?

What is her wage?

What kind of work does she do?

 Employees and Workplace Law - 4

Employment contracts: Salient aspects

Ownership of work product created by employee v/s by independent consultant

Separation issues:

Withdrawal of resignation and forced resignation

Termination simpliciter, termination for cause (dismissal)

Post-employment non-compete v/s post-employment confidentiality obligations

Minimum service stipulations (or bond)

 Protection of Data - 1

Protecting your confidential data (trade secrets):

Confidentiality clauses in:

Founder agreements

Employment contracts

Vendor contracts

Customer contracts

Suitable policies related to data access at the workplace

 Protection of Data - 2

Protecting personal information you may process:

Be aware of your obligations under EUs data protection directive and UKs data
protection law if data is coming in from EU

Register under the US Safe Harbor process

India Comply with the 2011 Security Procedure Rules under the Info TechAct, 2000
THANK YOU
NSRCEL IIM-B
QUASAR LEGAL