Shivpriya Nanda: Starting out - what does an entrepreneur need to have in place?

There is no one size fits all answer to how an entrepreneur should get his business off the ground

For many young entrepreneurs, the legalese around formally setting up shop in India can be overwhelming. Having a game-changing idea for the next big disruption is great, but for that idea to be executed in business is quite another thing. To that extent, if the idea is the foundation of your business, the legal and commercial tenets are the support structure around which your business will build itself. 

There is no one size fits all answer to how an entrepreneur should and could get his business off the ground - several factors weigh in while making such a decision. For a one-person consultancy, a sole proprietorship or one-person company is likely to work best. A sole proprietorship is a fairly hassle-free and age-old mode of doing business. Most mom-and-pop stores follow this model. This has limited investment and scale, and correspondingly limited legal and accounting requirements. On the other hand, a one-person company enables doing business as a sole-proprietor but within the broad corporate legal framework. The proprietor can be the sole shareholder and director in the company, unlike a private limited company.
 

For a group of people getting together to do the same thing, a partnership may work better. Partnerships typically tend to bring together like-minded people pooling together their capital to pursue business in a specific area. In partnerships, the business is not independent of its partners, legally, and the partners are liable to sue and be sued for any actions by or against their firm. India has, somewhat recently (i.e. in 2008) introduced limited liability partnerships, which is a hybrid between a company and a typical partnership. It limits the liability of the partners to the extent of their investment, and gives the partnership a corporate identity, while maintaining its overall form and running style. 
 

Where you envisage one or more co-founders, employees and overseas (or domestic) funding from prospective investors, a private limited company will be your best bet. This is the weapon of choice for most start-ups. With a recent overhaul in company law in India, incorporating a private limited company has, at least in theory, become less cumbersome. A vanilla incorporation (without the bells and whistles of companies with more complicated structures) will require:
 

(a) digital signatures for the directors (who are also likely to be the promoters of the company); 
 

(b) director identification numbers, and 
 

(c) standard charter documents such as the articles of association and a memorandum of association. 

Based on your need and capacity, these documents can be prepared using standard formats available online (including through the official website of the Ministry of Corporate Affairs) or with the assistance of a professional lawyer and/or company secretary. 
 

A company in the making will need to apply to the Registrar of Companies to check whether the name it proposes to use is available. There are also certain conditions which must be met while choosing a name, such as being aligned with the objects of the company, not being identical to another existing company, etc. Once the name is approved, the company can, along with its charter documents and certain other documents required, file for incorporation (online). The incorporation process from the time an application for name availability is made, to the issuance of a certificate of incorporation, can take up to four weeks. 
 

With a certificate of incorporation having been issued, consider the easy (yes, easy) part done. Although incorporating a company has been made easier in India, running one has not, and much to the dismay of many an entrepreneur, will require some amount of dedicated attention every now and then.

Some key lookouts once you have incorporated your company include: 

- Having a clear and well-documented inter-se relationship between the co-founders: It is likely that your co-founder will be a good friend or family member. However, as Hollywood has taught us, not all relationships (and nowadays seldom) last forever, and a co-founder agreement may be considered a prenup for the start-up world. It clearly documents the relationship, stake, and responsibilities between the co-founders, their relationship with the company (lock-ins, management and decision making, and such) and what happens in the event of a serious disagreement. In a mature company, which yours will turn into in due course, an agreement such as this will fall away and be replaced by a shareholders' agreement. The second article in this series discusses co-founder agreements in greater detail. 

- Compliances from a company law perspective: This includes: (i) maintenance of statutory records, (ii) having a functioning board of directors that meets and takes decisions as per law, (iii) making relevant time and action driven filings with regulatory authorities, and (iv) ensuring that shareholders' rights are protected. In the long-run, it is much easier to pay some attention to these requirements regularly rather than having a lot to clean up at a later stage. Be rest assured that a serious investor will always make you clean up before coming on board. 
 

- Compliances from the perspective of other laws: The location of the office, operating licences, liability for payment of sales tax, service tax, value-added tax or others, employee entitlements to any special benefits by law, etc,  are all factors that you should look to analyse as early as possible after setting up, and on an ongoing basis to stay on top of things legally. 
 

- The law that applies to your business: From a business perspective, it is critical to understand the legal regime surrounding your core business activity. As recent events have showed us, the law, not just in India but all around the world is playing catch-up with an ever-evolving economy, especially as far as start-ups are concerned.

In India, there is good and bad news in this regard. The good news is, that with most laws being archaic and taking a long, long time to catch up, there are often loopholes in the law (call it clever interpretation) that allow new businesses to set-up in areas that are, strictly, unregulated or regulated in a manner that require compliance at an umbrella level, but not down to each specific activity a business conducts. The flip side to this is, that the government can, one fine day, use the same lack of statutory backing for your business to ask difficult questions and more often than not, throw a spanner in the works. This, of course, is bad.

Once you have a sense of precisely what it is you are doing and will do in the near future, seek professional help around understanding the legal regime and risk around your business. If nothing comes up, it may even be a good idea to proactively engage with the relevant government regulator or authority to let them know you are out there, doing what you do, and suggest assistance in firming up regulations around your business sector. The recently introduced regulations around taxi aggregators are a great example of how governments can and will eventually, sit up and take notice. Later in this series, we will also cover some of the new policy initiatives for start-ups.
 

- Contracts: Another thing to ensure from a business perspective is that when you contract into something, whether with your employees, vendors, customers, or anyone else, you do it smartly. In the rush of the moment, many young companies enter into hastily drafted and inadequately (if at all) negotiated contracts, the terms of which come back to bite them further down the line, when there maybe a lot more at stake. An investor's diligence will reveal these gaps in your contracts, and cause a major headache further down the line - one that can be easily avoided from the very beginning. 
 

With the factors and requirements discussed above in place, you should be ready to get your future billion dollar business off the ground, with a firm foundation and a legal safety net to count on. 

Shivpriya Nanda  - The author is a Partner with JSA, Advocates and Solicitors. The views expressed here are her own.

Arnav Joshi, associate with JSA, Advocates and Solicitors, contributed to this article.