Legal Requirements for Startups in India

As we discussed in the earlier posts, you already have a great idea, team and everything that you need to get to building a great business. You may also already have started and are growing. To grow, at some stage you will have to interact with the complex legal systems in India. This will be the most critical phase during the growth of your business as some of these will make or break your business.

India ranks 142nd on ease of doing business index by World Bank Group of 189 economies in the world.

The legal complexity to do business in India acts as a barrier to most entry businesses and kills any unsuspecting entrepreneurs. But if you can manage things right and have a right set of advisors, you will benefit.

Facts show that Reliance is spending about INR 1200 Cr every year towards legal and regulatory expenses. This helps them get a significant strategic advantage over their competitors. Some other companies spending over INR 500 Cr towards legal and regulatory expenses are Infosys, L&T and TCS.

As a startup, we are not competing with these huge budgets, but what our main focus should be on is to avoid spending on legal expenses at all. Let’s see how we can accomplish this.

  1. Incorporation

Many entrepreneurs get into incorporating a private limited company without even validating the needs and exploring options. I would recommend to get into a detailed Founder’s agreement instead of incorporating at the beginning. Incorporate only when you start generating some revenue. If you decide to incorporate right at the beginning, you should consider; tax liability of the business and managing foreign investments which many companies may take. LLP’s are cheaper than Private Limited’s in terms of tax liability and offer almost the same features. What we need to know is that a LLP can be converted to a Pvt. Ltd and vice-versa. Taking foreign investments from an offshore parent company is a smart move to save on income tax as a founder or cofounder.

2. Licenses

To conduct any kind of business in India, you will need various business licenses depending on the nature of the business. Consulting a lawyer or a CA who specializes in handling transactions for a startup is advisable. The licenses which are required are tax registrations, trade license or shop act, manufacturing and import-export require multiple licenses. As soon as you employ more than 10 people there are another set of labor and employment related licenses. Not following the licensing norms leads to heavy fines, legal suits and sometimes even business shut down. As an entrepreneur, you should have a sense of all the licensing requirements and ensure that you do not violate any license conditions at any point while conducting business.

3. Accounts and Taxation

Many businesses fail at proper accounting and end up fighting legal lawsuits, hefty penalties, sometimes imprisonment with respect to tax bills. All this just due to negligence or lack of knowledge.

When the business is very small, you don’t come under the radar of the tax officers and you are safe, but as soon as you grow, the tax officers are going to run a micro scan of all your transactions even for the entries during your startup. Any violation will lead to many legal actions and you end up paying very high amounts to tax lawyers. Avoid this by paying equal attention to legal requirements.

4. Vendor contracts

This is also an important aspect of conducting business. Here the authorities are not going to question you, but your business could be at stake if you do not have a detailed contract with your vendors. If your contracts have confusing clauses which may help your vendors to take an action for the company and using the contract the vendor play you around with your competitor, your business may incur major losses. To avoid such situations, the only way out I see is to learn some contract law because as an entrepreneur you will go through many of them.

Steve Jobs once at Apple said, “every intelligent person should know how to read and negotiate a contract, just like everyone should start learning how to code!”

This topic is very vast and I will keep writing more details of each aspect in my future articles.

Legal

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Beyond Motivation

Entrepreneurship is living a few years of your life like most people won’t, so that you can spend the rest of your life like most people can’t.

Starting up? Do you really have it in you? Let’s discuss what it takes beyond motivation to be an entrepreneur.

Apart from what we discussed in Creating a successful business and Keys to build a successful business check out what other important attributes are required.

Anyone with a strong desire, commitment and belief can be an entrepreneur. The key to becoming one is the strong desire to control your own destiny. This desire need to be so strong that you are ready to RISK your family, future and career. A belief that you have a better way, a better idea that will do wonders to the industry you choose.

Almost all successful entrepreneurs share some common personality traits, confidence, and ability to sell, setup a business and trust their intuition. Not only Confidence will help, it has to be backed up by the ability to sell your ideas, setup a business and trust your intuition in the long run.

Remember small business is fiercely competitive, and it’s you the entrepreneur with confidence who survive.

Measuring your strengths and weaknesses is a major attribute you must look at. No one has all the qualities needed to be a successful entrepreneur. The important thing is to access your strengths and weaknesses in your Personal and Professional life.

  1. Analyze your Personal attributes.

Ask these questions to yourself, am I self-motivated, am I a hard worker, am I focused, do I have common sense, am I well-organized, can I take time out for doing business and am I ready to compromise my family to achieve success in business? If the answer to all the questions is yes, you are the entrepreneur material.

Amongst all attributes mentioned above, compromising family is a major task to achieve, it’s not that you don’t give time to family, only the time is less. An emotional trait breaks down the motivation, focus and discipline which are the key attributes to a successful entrepreneurship. A balancing of personal and professional life is required at this time.

2. Analyze your Professional attributes.

Being an entrepreneur needs you to take many roles within your organization, but this doesn’t mean that you should be professionally competent in all aspects and roles. Evaluate your skill sets and find out your strengths and weaknesses, put down the attributes and rate yourself. Ex. If the attributes required for your business are technology, sales, marketing and administration. Put down your self-analysis on each of the attributes on a scale of 10. This will help you define where you are good at and where you will require help.

Additionally goal setting is a key to success of any business. Setting goals for the business will keep you on track and focused all the time to achieve them. The qualities one should aim at while setting goals are:

  1. Be specific: Set a specific goal and not assumptions. Raising funds for the business is not a specific goal, but raising $50000 by September 30 is. So be specific while setting goals.
  2. Be Positive: Being optimistic and positive is an important quality. To be able to pay office space rent is not an inspirational goal, but achieving financial security is. It depends on how you phrase it. Rephrase your goal to a broader vision to attain it with more focus and enthusiasm.
  3. Be Realistic: Set realistic goals, aiming to earn $1000000 every month when you have never reached that amount even in a single year of business, it’s an unrealistic goal. Instead set goals to achieve a 20% increase in the revenue every quarter, this is real.
  4. Set short and long term goals: Short term goals can be set for weeks then months and then a year, this helps achieve the goals in progression. Long term goals can be set for 5, 10 or 20 years. Setting more long term goals helps keep a track on progress in the long run. Just be sure you are setting realistic goals may it be short or long term.

Beyond Motivation

Importance of Policies And Procedures

Starting up? Don’t think that you would start your business and make the policies and procedures for the succession of business later. I know most of us think that making policies and procedures at a very early stage of business is a waste of time and capital, but it’s very important for the business to become successful.

The reasons why policies and procedures are required:

  1. It brings structure to a company

By creating policies and procedures, a company knows what the rules are, what success and failure is. It also helps on succession planning of a company. Mostly startups fail due to lack of policies and procedures, they focus more on the generating revenue, marketing and other things which are undoubtedly very essential but while doing this the founders come across situations where the vision diverge and things start falling apart. If we have a set of policies and procedures at this point, referring to which a decision can be made without any diversion from the vision of a company.

This will also help leverage human capital, you retain good people when you have a structure.

2. It brings operational success to a company

During succession planning, the key is operational success. If a company doesn’t succeed operationally, it cannot progress. The key to operational success is a company’s policies and procedures. There are many people and different level of authorities involved in running operations, if these people do not have a direction, the decision making will diverge and thus a company can become unsuccessful operationally. By creating policies and procedures, the operations employees are restricted to a fixed direction which is in the company’s best interest.

3. It helps Risk Management

Loss of knowledge is very critical to the success of a company. During a succession planning a company should be prepared for a planned or unplanned loss of knowledge. In such situations, the policies and procedures can direct a company to assess the risk of losing a key individual in a critical role, and can mitigate the damage caused by turnover. Here the policies and procedures will also help in onboarding a new individual in that critical role at the same time maintain decorum of a company and avoid panic impacting success.

4. It brings Control and Compliance

By ensuring that policies and procedures are in place for succession planning, businesses can also ensure they are in compliance with regulatory rules and guidelines. Compliance and control are very important to any company’s success. Control and compliance comes in place by defining the policies and procedures of a company. Essentially, the compliance and control policies of a company are dynamic and allow room for change to grow with the company.

Additionally, the benefits of policies and procedures are as mentioned below and if implemented from startup phase, it will help develop a very successful business.

  • Employees are provided with information that allows them freedom to carry out their job and make decisions within defined boundaries.
  • Employees understand the constraints of their job without using a ‘trial and error’ approach, as key points are visible in well-written policies and procedures.
  • Policies and procedures enable the workforce to clearly understand individual & team responsibilities, thus saving time and resources. Everyone is working off the same page; employees can get the “official” word on how they should go about their tasks quickly and easily.
  • Clearly written policies and procedures allow managers to exercise control by exception rather than ‘micro-manage’ their staff.
  • Clearly written policies and procedures provide legal protection.

I tell my people when it comes to Policies and Procedures; “Restrictions Apply”, Think before you do!

Policies and Procedures

Creating a successful business

 “Ultimately, there’s only one way to start your career, and that’s by starting a business. If you find yourself hesitating, remember my motto: Screw it, just do it,” – Richard Branson

Remember, starting up a business is a no easy task. Here is what you need to have within yourself to startup.

  1. Fall in love with your idea.

Falling in love with your idea is the key factor which drives you to achieve and create a successful business. Don’t start a business because you think it will make profits. Think of what the subjects and problems are that interest you and then justify which idea to convert into a business. Find out a talent or industry knowledge you have, then carry that with passion and love. This will help drive achievement.

2. Start locally

Now that you are sure of your idea and have justified it, start looking for the problems you have as a customer in the product or service you intend to sell/provide. Start with your area/city and think how your business could help overcome the problems you and your friends face. This way you would figure out what the market is missing and design solutions in your own product/services that could make the customer experience better. Once you have achieved in a smaller areas, think of expanding to other areas/cities.

3. Work around things

Just focus on designing your product and service to serve the society, this is the way how business work, : “by improving other’s lives”. Once you have done that, you make more money than you spend to create the product.

4. Listen to advice and overlook discouragements

Ensure to take advice from the ones who have experience in your field and be careful not to confuse discouraging comments for good advice. There will be numerous people who will tell you that you won’t succeed, you need to overlook discouragements but at the same time you also need to listen to those people too.

5. Stay Focused and Stay Motivated

In the first year, focus and motivation is a key to success. You need to dream big but at the same time you need to concentrate on establishing your business and surviving through the first year. Set small targets for each day, then week, month, quarter and a year, this way you will be motivated at all times and enjoy your success very frequently.

6. Be passionate of what you do

Passion is a vital part of your business. Enjoy and be passionate of what you do, let your employees be passionate and love what they do and so your customers.

Just adding an image which may feel irritating to the eyes, but if you focus on the word “focus”, it will give comfort to the eyes. So Focus is the key to success.

Focus
Focus

Keys to build a successful business

Startup is a term that means you start with a new business. I would now like to bring in focus on business, which is what the core of a startup is.

If you think that starting up your business needs a very unique idea, you need to rethink. It’s not only a unique idea that will succeed. Even if it is a very popular theory to be the first in the market to be a successful company, it’s not always the most important tactic, and it’s like playing a major risk businesswise as you don’t know what the customer reaction to it will be.

An entrepreneur can cut down the risk by entering into a business that already exist even though his idea is not unique.

Building a successful business takes “drive, determination, belief in what you’re creating, bulls**t and charm.” – Richard Branson.

This is what you need to create a successful business. A unique idea is no bad, but entering into a market that already exist is not bad too.

It’s a tricky thought, entering into a market product that already exist may be a major risk as we are actually competing the already existing successful businesses. All it takes is, long term vision for your company, its customers and your determination.

Think about the changes that you would like to see as a customer. Even if you have found only a few, those little changes may add up to a bigger idea that leads to an entirely new and truly disruptive product or service. It’s less necessary to have entire knowledge about the industry you enter with a business but it is necessary to have the drive, determination and belief in your company and its products/services.

A classic example to this is Virgin records, Richard and his team lacked the insider knowledge about the music industry yet created a very successful business, and instead this lack of knowledge was countered by the idea of inviting potential customers to a cool shop they setup where customers could spend hours listening to their favorite music.

Judge from your own customer experience, you will always find better ways of doing the same thing. “Just do it.”

I think drive, determination and belief are the 3 keys to a successful business.

 

Why Startups Fail

I think, to succeed, we should know what failure is and what it takes to fail.

We look at numerous startups that fail. Why?

The first problem is a weak business model, market research and strategy.

As a startup, entrepreneurs have to operate with most uncertainty, they do not yet know who their customers are and what should their products be. A strategy can be worked out by accurate forecasting and planning, startup lacks those due to insufficient or no historical data to analyze.

An extensive process and management is required to apply all the above in startups. It may sound a little weird to perform analysis and derive forecast with no historical data, but this can be done on approximation to forecast closer to accurate. Knowing what your product should be and who the target customers are will help a startup to succeed. A market research and validation of product with the target customers is required at this phase.

The second problem is that early entrepreneurs may think of the traditional approach about managing a business is old school and follow the “just do it!” approach where things become less managed and more chaotic. “Just do it!” approach is essential to get started with your idea, but the same approach don’t apply when it comes to managing a business. Even if startups are excited and enthusiastic, chaotic management approach never work, it may seem very disinteresting to make all the policies and processes to run a business in an organized manner; however, it is essential. Keeping this right will help when the business is scaling. While the business is scaling, any entrepreneur will want to focus more on operations of the business instead of making policies and processes. Policies and processes are essential to run a business and if focused at startup phase, it’s more likely for a business to succeed.

The other problems arising later in a startup are product problems and capital. The key job of the entrepreneur here is to set financial milestones for raising capital. An entrepreneur should understand how much capital is left and should be able to analyze whether the remaining capital is sufficient to reach the financial milestone and a positive cash flow. A product problem may lead to a failure, the initial product that is launched may not be required by the market and hence is discarded by its users. This problem can be overcome by the entrepreneurs by validating their ideas with the customers before and during development. Later a feedback mechanism can be implemented to know the specific customer needs and make iterations to the product when required.

I found David Skok’s article on “Why Startups Fail” very helpful and also focus deeply on some additional aspects. Check out,  Why Startups Fail by David Skok