5 Common Legal Blunders Startup Founders Make and How They Can Be Avoided

Read Time: 06 minutes

Home to the world’s third-largest startup ecosystem, India has more than 92000 startups recognised by the DPIIT (Department for Promotion of Industry and Internal Trade) as of February 2023. While this colossal number can make it seem like starting a business is an easy job, setting it up and ensuring it stays afloat in today’s competitive world takes a tremendous amount of work and effort.

There are several aspects to be considered, including finding a robust core team, developing the product/service according to market demand, analysing how the business will fare in the long run, etc. With so many elements to be looked at, it’s easy to overlook certain things, and unfortunately, one of the most common areas where startups have a slipup is failing to establish a solid legal foundation. On that note, here are 5 of the most common legal mistakes startup founders make and what can be done to steer clear of them.

Choosing the wrong legal entity/structure for the business

Choosing the right legal entity for your startup is vital for its legal viability. Available options include a Registered Company (Public or Private), Sole Proprietorship, Partnership Firm, or a Limited Liability Partnership (LLP). Each structure has its own advantages and disadvantages, with considerations such as tax treatment, individual liability, legal expenses, and growth plans.

Skipping a formal written agreement with co-founders

In the dynamic startup landscape, change is inevitable. To avoid future conflicts, irrespective of how trustworthy your co-founders are, having a well-drafted founders' agreement is crucial. This agreement should clearly define the roles and responsibilities of co-founders, decision-making authority, equity distribution, intellectual property rights, remuneration, and exit clauses.

Safeguarding Intellectual Property

Intellectual Property (IP) is a valuable asset for startups. Registering trademarks, patents, and copyrights is essential to protect your innovative ideas from infringement. By securing IP rights, startups can stand against industry giants and safeguard their creativity. This is often overlooked by startups, resulting in legal complications later.

Complying with mandatory registration and compliance

Startups must comply with various registrations and regulatory requirements, such as income tax, GST, and industry-specific registrations like Food Safety and Standards. These are crucial in a startup’s journey, and the sooner the business complies and completes the required registrations, the better. Adhering to these legal obligations ensures smooth operations and prevents potential penalties.

Emphasising Wel-drafted agreements

Contracts are legally binding, and startups engage in numerous agreements with suppliers, employees, and other parties. To protect the interests of the startup and avoid future liabilities, it is crucial to have well-drafted contracts. Enlisting the guidance of experienced legal counsel can be immensely helpful in capturing the right language and preventing legal complexities.

Summing up

The success of a startup depends not only on its innovative ideas but also on a robust legal foundation. By avoiding these common legal mistakes, entrepreneurs can enhance their startup's chances of success and mitigate potential risks. Taking proactive legal measures can be a significant investment in the long-term growth and sustainability of the business.