Startups usually begin with just an idea. Then, one of the founders come up with a way to commercialize that product and cater to the general market. Prudent founders come with solutions to most problems that business will encounter.
They come up with ideas for handling human resources requirements, commercialization and mass production of products, streamlining and funneling the conversion channels, and every other requirement. However, the problem arises when it comes to identifying what regulatory frameworks apply to the startup.
There isn’t one startup law. The regulatory aspects that affect startups are similar to those that apply to every other company. It depends on what the founders decide to register the company as — a partnership or a company. In that context, some laws that apply to startups that founders should be aware of are.
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Founder’s Agreements is probably the most important aspect of a regulatory framework that applies to any startup. Every founder in the fray must have a document defining their relationship. If a startup wants to register as a private company or LLC, having an internal governing document explaining the relationships among the founders and outside the founders is important.
In many cases, registrars and courts rely on this agreement to settle any disputes that might arise within the LLC or with third parties. In a partnership or an LLP, the deeds themselves are important because they are part of the registration process.
Having your startup registered provides numerous benefits. For that to happen, a lot of legal compliance has to be done, a part of which is submitting the relevant documents. The first thing that any registrar asks is an internally governing document.
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This is a crucial element of regulator compliance because it involves financial matters spanning several third parties. There are several regulatory bodies like SEC that govern how companies across the US deal with investments and use of funds.
There are several limitations on how much money can be raised and how that money can be used. It is important to have a clear idea of how the numerous legislation work because the repercussions of not following the law can be crippling for the startups. Several rules govern the venture capitalists and angel investors as well. In that context, drafting clear agreements is one step towards legal compliance.
Licensing and Compliance
A key element of any business is the successful licensure of various proprietary elements that a business will use in its operations. When a company commences the business, several documents need to be obtained. They include certificates for the commencement of business and registration certificate with the income tax, service tax, and other taxes.
Where applicable, it also includes environmental clearance, food safety, professional tax, VAT registration, registration with the labor law authorities. For firms in certain industries, compliance with the capital market regulators and any other license that the government may decree mandatory from time to time are important.
In addition to this, startups should also register and take a license for any patents or trademarks for any proprietary information generated. This is to ensure that the startup has full control over the proprietary information that is essential to running its business and acts as the USP for the startup.
In addition to that, several other compliance requirements will be mentioned by the relevant authorities. For example, the income tax authorities require the maintenance of books in a certain manner and for a certain period.
In addition to this, depending on how the company registered itself as, the accounting compliance will change. The documents and the statements that need to be submitted and the due dates for submission of the said documents are rigid and unforgiving. There are also requirements such as compulsory audit and compliance with other financial control frameworks. This is a vast field, and startups should spend time understanding the relevant laws that are applicable to them.
This is, perhaps, the most important of all the laws that startups should be aware of. Because the livelihood, and in some cases, the lives of employees are at risk, the government has mandated that employers adhere to a certain code when hiring employees.
If it is a manufacturing concern, there are laws like payment of wages, prevention of child labor, payment of gratuity, times of work, and other relevant matters that influence how the employer-employee relationship is addressed. In case the startup is a non-manufacturing concern, the hours of work, payment of salaries, and such aspects come into force. Depending on the industry that the startup is working in the laws that govern labor relations differ.(1)
Winding up the Business and Treatment of Disputes
Founders’ contracts should consider how to treat business in case of any disputes. The clauses regarding arbitration and dispute settlement should be mentioned clearly in the contract. The circumstances that can lead to winding up of the business and the method of settlements, in that case, should also be mentioned clearly. In the absence of that, courts may decide on terms that are unfavorable to any one or all the parties.
Navigating the maze of legal compliance can be difficult for startups when they commence their business. Before beginning commercial activities, the founders need to spend some time studying all the applicable laws and what to do for those regulations. Several contracts are required for the successful execution of any arrangements with third parties.