Starting out: what does the entrepreneur need to have in place?

For many young entrepreneurs, the legalese around formally setting up shop in India can seem quite
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, and several factors weigh in while making such 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 you see around you follow this
model, which 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 to
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, to the extent that it limits the liability of the partners to
the extent of their investment, and gives the partnership a corporate identity, while maintain its overall
form and running style.
Where you envisage one or more co-founders, employees, overseas (or domestic) funding from
prospective investors, a private limited company will be your best bet, and 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.
Once the documentation is in place, 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, and provide six options in order
of preference. There are also certain conditions which must be met with while choosing a name, such
as not being misaligned with the objects of the company, 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), and can also apply for director identification
numbers for its directors. 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 4 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 documents clearly 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 maintenance of statutory

records, having a functioning board of directors that meets and takes decisions as per law,
making relevant time and action driven filings with regulatory authorities, and 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 (and 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 and whether it
needs a license to operate, 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 seeking 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.

Contracts: Another thing to ensure from a business perspective, is that when you contract into
something, whether thats with your employees, vendors, customers, or anyone else, that 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 may be a lot more at stake. An investors 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.