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Legalities To Keep In Mind While Forming A New Business Entity formation, agreement among founders and commercial contracts are few of the things to be kept in mind

By Danesh Mehta

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Every business begins with an idea. This idea could be a solution to an existing problem or even a product or service that the public didn't previously know that they required. But as most established entrepreneurs would know, an idea is only the beginning of this journey and has no significance if not acted upon. The following are the legalities involved when starting a new business venture.

Entity Formation

An extremely important decision for you to consider is what entity and business model should you adopt for your business. Some common entities are sole proprietorship, limited liability partnership (LLP) and private limited company, among others. To choose the right entity, one must consider various issues including tax implications, long-term business goals and statutory benefits under the respective governing laws. Choosing the right entity from the beginning ensures smooth functioning of the business and avoid entity conversion at a later stage.

Agreement among co-founders and owners

Co-founders of businesses could be from different backgrounds, pouring their expertise into the same venture. Just as you may have your own views and ideas as to how the business must run, similarly your co-founders would have their own ideas as well. Before commencing any business, it is of utmost importance that you and your co-founders discuss your respective roles in the business. For example, an LLP agreement should state the powers and roles of each partner in a limited liability partnership. Similarly, for a private limited company, shareholders agreement would discuss the shareholding pattern of the shareholders along with their rights and liabilities. All agreements between co-founders should be in writing and not oral, to avoid any legal issues in the future.

Intellectual Property

Another very important aspect to your business is your intellectual property. Intellectual properties include trademarks, copyrights, patents and trade secrets, among others. For example, if you wish to manufacture a product and sell it under your brand name, it would be beneficial for you to register the brand name as a trademark. You may even invent a new process with an industrial application, in which case you should consider getting the same patented. Registering your intellectual property is important as it shows that you legally own the property and you can enforce this right against someone who may duplicate it.


Entrepreneurs try to finance their business by investing their personal assets (bootstrapping). However, it is not always that they have the money to do so. Therefore, as an entrepreneur you may look for investments in two ways—one, selling an ownership stake or equity in the business, and two, borrow necessary funds. Selling equity of your business to an investor has its own advantages and disadvantages. Depending on the amount of control the investor has, the business may turn in a direction different from the one envisaged by the entrepreneur. Further, when it comes to taking loans, banks would not loan money if the business does not have sufficient assets that may be secured against the loan. Financing is a very big step for an entrepreneur and one must ensure that at time of equity financing all documents reflect the intentions of the parties. Legal advice at this stage is strongly recommended.

Commercial Contracts

It is likely that your business may need to outsource certain items from another. In such a case, a contract would be required to be signed and executed. It is important to lay out all the terms agreed upon clearly in the contract to avoid confusion. You must take legal advice before entering into any contracts, and the same must be drafted by a lawyer to ensure that neither you nor your business are not taken advantage of. Entrepreneurs must also keep ready standard employee agreements which must be signed by the employees once they join the business. This legally safeguards your business data from possible breaches.

E-commerce/online business

Today it is common to sell one's products/services online. The products may be sold on one's own website or on a third party's website or both. It is important to get all your legalities in order where this is concerned. Your website should have a "terms of service' and "privacy policy', should not use another's intellectual properties and should have authentic reviews and genuine information about the product and service. You must keep in mind that anyone in the world can access your website and provide their opinion on the same.

Exit strategies

Businesses are built usually for one of two reasons—either build the business and sell it for a lot of money or continue the business throughout your lifetime. At times, it is difficult to take this call right at the start, yet an entrepreneur must always keep his or her options for exiting the business ready. A clause for exiting the business should ideally be mentioned in the co-founders agreement, this way there is no ambiguity later on as to what would happen in case of anyone leaving the business.

When starting a new business a lot of different factors have to be considered. The above is just a guide and not an exhaustive list to help you understand the various legal formalities you must fulfill when starting your business.

Danesh Mehta

M Mulla Associates, Advocates & Solicitors

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