Legal Basics that Every New Business Should Know
The Companies Act of India was created in 1956 to ensure one thing, that a company is treated as a separate legal entity from the people who are running it. This was primarily done if due to any gap or removal of a member/partner, the company does not end.
When you are starting a company, there are many legalities that you should know about when you are planning to run a business.
1. Company Formation
The Companies Act, 2013 which is more refined and covers many more aspects of business than
the previous Act. It explains what type of a company you need to choose and run. According to the
Companies Act of India, you can choose between the following:
- Sole Proprietorship
- Partnership
- LLC
- Private Limited
- Family Business
The companies Act, 2013 lays down the rules and regulations on how each of these firms can be set up and what are the legalities you need to follow
2. Understanding Tax & Accounting
- One of the reasons you need to choose your legal entity smartly is also because it will decide the amount of tax you are going to pay and the Companies Act of India gives a detailed account of it.
- You need to know the income tax you are liable to pay to the government and if there is a cess over and above that. Each legal entity has a tax structure they need to follow. Some legal entities are also entitled to a few exemptions which can be found out by going through the Act in detail
- Maintaining of accounts and bookkeeping is essential for SMEs to manage their money smartly
- Financial Statements will help in keeping a check of your debts incurred, expenses and profits made. This will help in managing your funds optimally
3. Raising Money: Checking financing options
There are 3 types of financing options that you can explore:
- Finance through Investors– When you are getting capital from a VC, then these are the must have documents- letter of intent, share subscription agreement and shareholders agreement
There are many forums where you can get a list of Angel Investors & Venture Capitalists who would invest in your business and claim a stake in your profits
- Finance via debt or loan- The main documents needed are- application for loan sanction papers, sanction letter, loan agreement letter and collateral documentation. Now days it has become very easy for SMEs to avail a loan from the bank.
The Government has also introduced many schemes and initiatives under which SMEs can apply for a loan
- Self-funded- Obviously self-funding is the easiest and the most hassle-free finance option out of the lot. You can use your own money or borrow from your close relatives or friends to give your business that boost
4. Labour Laws
Like the Companies Act of India is needed to set up a company, similarly you need to abide by the Labour Laws when you are hiring for the company and formulating employee agreements
5. Dispute Resolution & Contracts
When you are starting a company and formalizing a structure it also important to know how contracts are formulated and if a dispute arises, how can you solve it.
The main aim is to:
- What works under Indian law and what does not?
- Traps to avoid; and
- Practical drafting solutions
It is advised to agree to an offshore arbitration where possible, if not then go for an Institutional arbitration with a neutral party. Try and keep it as simple as possible
If you are setting up a company and going to run a business, it is important to understand the know-how of the Companies Act 2013 because this sets the foundation of all the legalities involved in running and managing an organization.