How to Legally Protect your Small Business?

As a small business owner who’s just starting out, everything is new and exciting; however, it’s easy to overlook the risks that come along with owning a business. Furthermore, it can be very time-consuming to learn how to run a small business without getting into various troubles. In fact, many small businesses fail to mitigate the critical risks that lead to problems in the course of business. As such, business owners are responsible in their power to mitigate the risks and ensure the seamless functioning of their business.

Here are a few steps to legally protect your small business from any risk or liability:

Hire a Lawyer

Business owners must know the various laws that they need to adhere to in relation to their business activities and processes. Although there will always be some legal risks, being informed and proactively aware of the laws applicable to your business shall help stay clear of any potential legal complications.

It is strongly recommended that new business owners have a lawyer on retainer, who they can reach out to when looking for legal advice on different matters. It is advisable to hire a lawyer or retain a law firm that is familiar with the various legal aspects relevant to your specific business and has ample knowledge of the local laws and customs in the area where your business primarily operates. You must further ensure that the lawyer or legal firm you hire/retain have extensive experience in fields like taxation, dispute resolution, Intellectual Property rights, etc. Besides, having a lawyer on retainer shall also allow you to timely deal with any legal action against your company or initiate legal proceedings against any party.

Choose the right form of business

After hiring a lawyer, one can proceed with choosing the best form of corporation suitable for their business model and a lawyer would certainly help you in figuring out this. In India, a typical best business structure for a small business is sole proprietorship for those who are looking to start their businesses with less capital. However, it's not necessarily the best choice to protect your business.

It is important to note here that a sole proprietorship structure does not protect the personal assets of the business owner as there is no distinction defined under the law between a business owner and their sole proprietorship.

For instance, if a customer or vendor decides to sue you for the payments that your business can’t afford, then your savings, home, and other assets could really be in danger. On the other hand, to avoid such scenarios, one can opt for incorporating a Company as a separate legal entity as defined under the Companies Act, 2013, with the help of a lawyer. A model like this will not only help the business owner to separate their personal assets from the Company but it will also provide your business with a separate legal entity.

Registration of the Business

Registration of Sole Proprietorship

• Name the Sole Proprietorship.
• Apply for PAN card.
• Once a PAN card has been obtained, you must open a bank account in the name of the sole proprietorship.
• File an application for the ‘Certificate of Registration’ for sole proprietorship under the Shops & Establishment Act of the state where the business is situated in.
• If the business has a turnover of more than INR 20 lakhs, a sole proprietorship must also complete their GST registration.

Registration of a Company

• Considering a Digital Signature Certificate (DSC) is a must for all proposed directors and subscribers of the Memorandum of Association (MoA) and Articles of Association (AoA), an application for DSC must be filed.
• File an application for Director Identification Numbers (DIN); a DIN is an identification number that must be obtained by anyone who wants to be a director in any company.
• Register the company on the Ministry of Corporate Affairs (MCA) portal.
• Once the registration application has been filed along with all the relevant documents, the Registrar of Companies (RoC) shall review the same. Once the application and documents have been verified, the RoC shall issue a Certificate of Incorporation of the Company.

Registration under MSME

MSME registration is provided by the Government of India to the Micro, Small and Medium Enterprises (MSME) Industries. The MSME registration aids MSMEs in obtaining numerous government perks for startup and expansion.

MSME registration can be obtained from Udyam registration portal. Although MSMEs are not mandated to get registered, it is advised to do so to avail of the various benefits you become eligible for doing so in relation to taxation, credit options, loans, etc.

Classification of MSME

An MSME can be classified into different categories based on their investment and annual turnover:

• Micro: Investment is less than INR 1 crore and the annual turnover is less than INR 5 crores.
• Small: Investment is less than INR 10 crores and the annual turnover is less than INR 50 crores.
• Medium: Investment is less than INR 50 crores and the annual turnover is less than INR 250 crores.

Benefits of MSME Registration

• The Government of India has made it possible for all small and micro business sectors to avail of collateral-free credit, which basically means applying for loans without providing any collateral.
• Bank loans can be availed of at a much cheaper rate, approximately 1-1.5% lower than the interest on regular loans.
• The Government of India has increased the time for carrying forward credit for Minimum Alternate Tax (MAT) up to 15 years from the previous limit of 10 years.
• Getting a patent or the expenditure of setting up the company is decreased, considering the numerous rebates and concessions available for registered entities.
• MSME registration helps easily obtain government tenders, considering the Udyam Registration Portal is integrated with the Government e-Marketplace and several other State Government portals that allow easy access to their marketplace and e-tenders.

Register your Intellectual Properties

Businesses often invest time and money on intangibles properties like innovations, information, designs, marks, trademarks, and services that uniquely identify the company or its products. If you have done the same, you need to plan to register such properties as your Intellectual Properties by seeking early legal advice from a proficient and experienced intellectual property attorney in order to safeguard your brand and its intellectual properties. This will be especially crucial at the time of incorporation of the company as it will enable you to stay safe while striving to carve yourself a niche in the industry.

Hire a Chartered Accountant

A Chartered Accountant (CA) is an important role in any business as a CA undertakes and offers several services that are critical for any business establishment. The CA undertakes duties of accounting and implementing accounting system. Further, a CA prepares the financial budget for the business. In addition, they not only save you money on your taxes while complying with the relevant tax regimes but can also provide valuable advice on how to structure your business and the best way to expand your finances and business.

Always use Written Agreements

When it comes to doing business with other entities, it is important to document the terms and conditions agreed upon between the parties in the form of an agreement. A handshake deal offers nothing to a business but exposure to various disputes and litigation. Hence, to avoid dealing with such disputes and litigations, it is advised to make sure that all the terms and conditions agreed between the parties are reduced to a written agreement. If you comply with this advice, it will be relatively easier to resolve any conflict as you can simply refer to the various provisions of the contract.

Get Contracts for Employees

Once some employees have been brought on board, you must make sure that you comply with all the relevant employment laws, you fulfill your obligations as the employer and have aptly provided all employee rights. As this is another legally complicated aspect, seeking advice from a competent lawyer will prove to be quite helpful in drafting aspects like the code of conduct, discrimination, working hours, etc.

If your employees are working on the premises, you are also obligated to conduct a thorough risk assessment, take all the precautions and provide a safe working environment with all the required equipment. Besides, if an employee ever files a suit against you in a court of law, you can simply refer to the terms and conditions mentioned in the contracts of such an employee to deal with the matter.

Get Insurance for your Business

Although one might think that they will never need it, every small business should take out liability insurance. Insurance basically provides financial protection to the business in case it is sued by any third party such as a customer or a vendor. A general liability insurance does not cover anything that may happen to you, your employees or the business premises. As such, you may have to consider additional policies such as professional liability insurance, commercial auto insurance, workers’ compensation insurance, etc.

Conclusion

Establishing a company or running a small business is not the easiest job in the market, considering you are obligated to take care of a lot of things related to your business. While you may hire more personnel to take care of various aspects of your company at a later stage when your business has been aptly established, it is imperative to ensure things are done properly right from the first day. From registering as MSMEs to ensuring compliance with all relevant laws, business owners have numerous things to manage when starting off a small business. As such, it is always advisable to stay informed and reach out for advice to competent professionals whenever it is required to do so.