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6 aspects that make your business legally sound

Vakil Search
9th Jan 2015
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image credit: Shutter StockWhether you are setting up a new business, planning to expand your existing business, looking to sell it off or looking for more investors, there are some steps you need to take to ensure that the business is legally protected.

Although it may seem like adding unnecessary cost, it will be safe to incur these costs initially to prevent any problems in the future, which would be far more expensive, in terms of money, time and effort - Prevention is always better than the cure!

Further, the following steps ensure that the foundation of your business is strong and legally sound. Here are a few aspects you need to look into to ensure that your business is legally protected:

1.       Appointing a legal advisor

First and foremost, it is advisable that you appoint a legal professional for handling the legal matters of your business. An expert will be able to advise you even before you start your business - whether you can carry out the activities you intend to, what rules/ laws apply to your business, what type of entity you should set up, taxation, insurance, etc. This way you can be secure about your business, without having to worry about the legality of your activities.

2.      Forming your business into a legal entity

Next, you will need to form your business into an entity such as a private/public company, partnership, sole proprietorship or a limited liability partnership. A legal expert will guide you on the most suitable type of entity for you based on your business ideas and future plans. This is extremely important since this would affect your personal legal liability, tax implications, costs of establishment and management and future investment.

3.      Chalk out a sound business plan

It is necessary that you prepare an exhaustive business plan which would be a blueprint for you as well as others (like potential investors or partners) interested in your business to understand what you have planned for the future of your business. It should set out the objectives and a realistic timeline for growing your business; and should cover the executive summary, business summary, marketing strategy and your financial plan. It is again a good idea to consult with a lawyer here, to cover all bases and ensure that it is legally sound.

4.           Brand protection

If you are launching a new business, this may not seem like a very important step initially, but in the long run, you will realize that your brand is the most valuable asset of your business. This is how your customers will identify you and/or your product, so it would reflect the goodwill and reputation of your business. By not protecting it from the beginning, you are potentially allowing misuse of your brand by unrelated parties, weakening your brand and reputation. You can easily protect your brand by getting a trade mark for the most distinctive feature of your brand - be it the name, logo, tag line, etc.

5.           Ensure that the core legal documents are in order

The core legal documents of your business would depend upon the type of entity you choose to set up. From a partnership or a limited liability parternship firm, the partnership agreement would be the core document; for a company, the Memorandum of Association (MoA) and Articles of Association (AoA) would be the core documents. These documents contain the name and address of the business, name of the persons involved (partners or directors and shareholders respectively), and how the business is owned by these persons. The objectives and proposed activities of the business and responsibilities of the persons involved should also be specified clearly and unambiguously as these documents form the foundation and would govern the entire business.

6.                Legal agreements

You would have to enter into several business relationships to conduct your business efficiently. By reducing the agreed terms to writing, in the form of a legal contract, you are legally binding the other person to fulfill the promises made and honour the terms of the agreement. Therefore, it is important to ensure that these agreements are watertight and drafted properly as it is essential that both parties understand the terms and responsibilities they are agreeing to be bound by.

Some important business contracts are:

  • Founders agreement

This agreement is among the founders of a company. Unfortunately, the importance of this agreement is often underestimated. This agreement would set out the objectives of the company, the roles and responsibilities of the founders, how the company is controlled and decisions are made, shareholding and vesting and what happens when a founder wants to leave. Reducing these terms to writing would bring clarity about the expectations of the founders and ensures that the founders are on the same page. This will prevent disputes and differences in the future; and if they do arise, this agreement will govern how the disputes are addressed.

  • Employment and consultant document

When you hire full-time or part-time employees for running your business, consultants or freelancers, you will need contracts to define that relationship. Again, this will clearly specify what is expected of the employee/ consultant, the payment terms, working hours, work description, leave and termination. This will govern your relationship and will describe what the employee can or cannot do - this avoids future disappointments and disputes.

  • Vendor or service contract

For the smooth running of your business, you will need varied products or services of different kinds. It is advisable to record the terms of service being provided, payment terms and dispute resolution, in writing to avoid any future conflicts or liabilities.

  • Non-Disclosure Agreement (NDA)

You might have to disclose some private information to someone during the course of your business - existing employees, consultants, etc. or during discussions for a potential business relationship, potential employment or business partner. The easiest and most effective way protect this information that you share is by entering into an NDA with the other person/ entity. You can ensure that your trade secrets, client information, business contacts, private product information, business plans, etc. are not disclosed, published or otherwise compromised by legally binding the other person to keep the data confidential. You can also initiate legal action later, on the basis of this agreement, if the information is disclosed and recover compensation for losses that you suffered by the disclosure of the information.

This list only covers the basic essentials and is not exhaustive. It does not cover every type of legal protection you may need. You should consult a legal expert who would be able to advise you based on the specific nature of your business to ensure that you are completely protected.

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