LEGAL FOR START-UPSNSRCEL – 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 companyOne 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: Proprietor’s 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 an Association Of Persons (AOP); AOP can’t 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 company’s 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 LLP Act. 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. A contract 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 law’s 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:

1. Factories Act

2. State law on Shops Commercial Establishments

3. Provident Fund Act

4. Payment of Gratuity Act

5. Payment of Bonus Act

6. Employees State Insurance Act

7. Maternity Benefit Act

8. Industrial Disputes Act

9. Contract Labour Act

10.Law related to sexual harassment in the workplace

Employees and Workplace Law - 3

A. What labour law applies? Some thumb rules

What’s 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 EU’s data protection directive and UK’s 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 Tech Act, 2000

THANK YOUNSRCEL – IIM-BQUASAR LEGAL