Legal documents to be in place before funding

Most of the times all the discussions and agreements for funding of the business is complete and the investor is ready to wire the money but still funding is delayed…why? Because some of the legal requirements are not met yet.

This is very common scenario in many a times when the start-ups go for funding. This delay in getting the money in to the bank account and set the ball rolling can be avoided if the entrepreneurs are little pro-active in having in place some of the legal things well in advance.

 

What are the things that the entrepreneurs should be taking care of?

Legal documentation wise all funding activities usually start with investors sending a term Sheet to the investing company. The term sheet, though not a legally binding agreement, contains all the terms of investment for clear understanding of both the parties. One of the terms of investment shall be investee company obtaining a clean certificate from the due diligence team of the investor who does legal, financial and accounting due diligence of the investee company for detecting any hidden legal or financial risks.

If the Due Diligence team finds any deficiencies in legal documentation, all corrective measures for rectifying such deficiencies shall get in to Investment Agreement  as Conditions Precedent for investment. This is where the delay begins as you need to approach your CA/Company secretary to get these documentations done before investment can happen and the documentations take time.

So, lesser the findings at the time of due diligence, faster will be further steps. After conducting due diligence for hundreds of start-ups, this writer has observed that, there are certain grey areas, in which most of the start-ups will have issues. Hence an effort is made to list out many of the legally mandatory stuffs which the start-ups might have ignored during the course of their initial business operations, but are very important at the time of investment.

  1. Issue of share certificates to founders and initial angel investors.

Usually after the incorporation of the company or further allotment of shares to angel investors, issue of share certificates to the shareholders will gets missed out. This is because, unlike many other legal documents (like MoA, AoA, return of allotment etc), the share certificates doesn’t needs to be filed with any statutory authorities. Consequently legal consultants may not have given much of a heed for issue of share certificates to the shareholders. But, in fact share certificates are very important corporate legal documents to prove the ownership of shares and as per the provisions of Section 56 (4) of the Companies Act, 2013 every company is obliged to issue share certificates within 2 months of allotment of shares. If your company has not yet issued share certificates, share certificates should be issued before due diligence starts.

 

  1. Loan Agreements with promoters/founders

Usually promoters do spend their personal money for company during its initial days of operation. This money is in fact a loan given by the promoter to the company which will be usually formally not documented through a loan agreement. So a formal loan agreement should be made between the company and the promoters for any amount of personal money spent by the promoters which they wish to get back in future from company.

 

  1. Employment agreements with executive Directors

The founders, who will also be working for the company might have issued employment contract to all their employees but usually miss to make one for themselves with the company. But contract with all the employees including founders is very much required to clearly lay down the terms of employment and the compensation for the employment.

 

  1. Authorized capital

For every company to issue any shares, first the company should have the authorization from the Government to issue so many number of shares. The number of shares the company is authorized to issue is called authorized shares. Usually while incorporating the company, authorized capital is always blindly kept at a minimum of one lakh which would have been fully subscribed. But it would be prudent to have more authorized capital (depending upon the expected capital requirement) in advance and the authorization to issue both preference and equity shares should be made. If the company do not have authorized shares, at the time of investment discussions itself, its better to initiate the process of increasing the authorized equity as well as preference shares. This process will usually take around a week to be completed.

 

  1. ESOPs

Once the company starts its operations and the founders try to get some key employees in the organization, always ESOP promises are made. But actual paper work for legally creating and issuing the ESOPs to employees would have never been done by the company. This should be taken care well in advance before investment talks begin.

 

  1. Shops & Establishment License

In most of the states in India, a license called Shops & Establishment license needs to be obtained under the labor regulations. Usually most of the start-ups ignore this license and minimum of 1 to 2 weeks is required to obtain this license. This can really make you frustrated if at the final moment of investment you run for this license.

 

  1. Minutes of the meeting

Every company is supposed to hold a minimum of four Board meetings in every financial year and minutes of Board meetings should be kept signed by the Chairman. Since in most of the private limited companies, these meeting will never be formally held or even if it is held, no formal written minutes are kept. There are certain statutory agenda’s to be dealt in these Board meetings and consequently same should get reflect in minutes of the Board meetings. All these documents should be properly maintained in advance well before you receive a term sheet as these are some of the rudimentary documents for a company.

 

  1. Trade Mark registration

Most of the companies will be using one or more trademarks or trade words. However would have never made a formal application for registration of these trademarks. These trade names are very crucial for the business and trade mark registration should be applied for. To obtain a trade mark registration certificate, usually more than a year’s time is required. However, trade mark application acknowledgment will serve the purpose for due diligence.

 

Above are some of the very basic legal documentations without which no investor can invest in any company. To get all these documents prepared from scratch, a minimum of two weeks of time is required and if you start the process after investment deal is through, you should be unnecessarily making the investor wait for transferring the money which in some cases even jeopardize the whole deal itself. None of these documentations will cost much. With better prudence and advance planning, company can sail though the investment process seamlessly.

 

 

-Shreevathsa

Company Secretary

 

[The author is a legal and financial expert for start-ups and SMEs. He consults through his firm G.P.S & Co. (www.gpsconsulting.in) and can be reached at shree@gpsconsulting.in]

Starting my own business- Legal Aspects

When you are starting your own business, whatever the nature of your business, there are certain licenses, registrations etc to be taken under various Gov. Regulations.

This Article tries to explain what are the legal requirements for a small business to be setup in India.

 Choosing the form of your business

First you need to decide what kind of legal entity you are going to set up. Following are the options:

  1. Sole proprietorship concern: Suitable when capital required for the company is not much and entire capital contribution is going to be made by the entrepreneur himself/herself without any external funding. This form of business organization is suitable as long as your scale of operations are quite small, that is to say less than 1 crore rupees per anum. This is more risky as there is no differentiation between your business liabilities and the personal one’s.

 

  1. Partnership firm: Suitable when the scale of operations are same as explained in point no. a above and you have one or more partners who are also jumping in along with you. Not suitable if you are looking for external funding. More risky as there is no differentiation between your business liabilities and the personal one’s.
  2. Limited Liability Partnership (LLP): Suitable for the same conditions as explained in Point No. a and b above. But less risky as your business liabilities and personal one’s are differentiated (so the word ‘’Limited Liability’’). Minimum two partners are required.
  3. One Person Company: Similar to private limited company. But only one Director is sufficient to start OPC. OPC can be opened only by Resident Indians and OPC needs to be compulsorily converted in to Private limited company after crossing specific threshold limit of capital or turnover.
  4. Private Limited Company: More widely used form of business. Suitable when you are looking for external funding (either as loan or equity) and even funds can be raised from foreign investors. You will have shares to be issued against capital contributions. Board of Directors shall be constituted and will enjoy more credibility in the business. Minimum two Directors required.
  5. Public Limited company: Not an option to go with initially for setting up your business. Suitable when you are business reaches very large scale operations.

 

Choosing a professional to do paperwork and for proper advice.

In India Chartered Accountants, Company Secretaries or Cost Accounts are the best suited professionals to go with for your business setup. Better to approach a professional known within your business circle or within your city whom you can visit personally at least once. Doing completely everything online is not recommendable even though it may look cheaper option.

 

What Documents you need?

  For sole proprietorship:

  1. Your PAN
  2. Address proof (Voter ID/ Driving license/ Passport/ Adhar card)
  3. Latest month Bank statement
  4. A rent agreement for the premises where your business is to be setup
  5. Electricity bill for the premises
  6. 10 passport size photographs

For Partnership:

  1. PAN of all the partners
  2. Address proof of all the partners (Voter ID/ Driving license/ Passport/ Adhar card)
  3. Latest month Bank statement of all the partners
  4. A rent agreement for the premises where your business is to be setup
  5. Electricity bill for the premises
  6. 10 passport size photographs

 For LLP:

  1. PAN of all the partners
  2. Address proof of all the partners (Voter ID/ Driving license/ Passport/ Adhar card)
  3. Latest month Bank statement of all the partners
  4. A rent agreement for the premises where your business is to be setup
  5. Electricity bill for the premises and NoC from the premise owner for registered office
  6. Passport Size Photographs (10)

For Pvt. Ltd:

  1. PAN of all the Directors
  2. Address proof of all the Directors(Voter ID/ Driving license/ Passport/ Adhar card)
  3. Latest month Bank statement of all the Directors
  4. A rent agreement for the premises where your business is to be setup
  5. Electricity bill for the premises and NoC from the premise owner for registered office
  6. 10 passport size photographs of all the directors

 

(There may be many other documents required depending on the requirements like foreign directorships, establishment of subsidiary companies etc)

 

How much time it will take?

 It will usually take 15 to 20 days to setup any form of business. There may additional licenses and tax registrations you may have to take that may require more than 15 to 20 days. But all such registrations can be parallely taken while you start running you business.

Whats next?

 

Open a current account with the Bank of your choice and start your regular business transactions through Bank account.

 

Licenses Required for your Business:

 

  1. PAN: For Partnership, LLP or OPC or Pvt. Ltd or Public Ltd, one has to take a separate PAN for the business. For Sole proprietorship Concern no Separate PAN for business is required.
  2. TAN: Compulsorily taken for all businesses.
  3. Shops & Establishment Registration: Required in most of the states. Required for all businesses
  4. Professional Tax Registration: Required in most of the states and required for all businesses
  5. VAT (TIN No.): Required if you are trading in any goods
  6. Service Tax Registration: Required if you are providing services and your turnover (in the financial year) is 10 Lakhs or more.
  7. Import Export Code: Required for import or exports
  8. Central Excise Registration: Required if you are engaged in Manufacturing
  9. Provident Fund: Required if you are employing 20 or more employees in your establishment
  10. ESI Registration Required if you are employing more than 10 employees in your establishment.

How do I incorporate a Company much faster even in India!!!

Amid all this hue and cry about difficulties faced by the entrepreneurs to incorporate company in India,   let me go little more in detail to examine what are the exact pain points and explain how with a better planning  you can get the things done much faster:

  1. For all the Directors and shareholders of the company, following documents should be in place:
  2. PAN
  3. Adhar/ Voter ID/ Passport/ Driving License (any of the one)
  4. Bank statement/ Post paid mobile bill / electricity bill as proof of current residential address.
  5. Photographs

Keep the documents handy while you visit your CA.

2. Try to start with minimum number of Directors (i.e 2 for pvt. Ltd. 3 for public ltd) and shareholders

 

You can always add any person as Director or give any person shares at any time after incorporation. These processes after incorporation are much easier. Having more and more persons right at the time of incorporation makes documentations lengthy and causes delay.

3. If you have any person not residing in India as Director/ Shareholder, do not bring them on Board at the time of incorporation

Companies with nonresident shareholder/ Director are much difficult and time consuming to incorporate (in India) than with resident shareholders and Directors.  You can start the process of taking DSC, DIN etc for non resident Director parallely while company incorporation is in process (with resident Directors) and after incorporation adding a nonresident Director will save you lot of time.

4. Don’t be very specific about the name of the company and always try to find a very unique name.

With unique names, you can go for single application process for incorporation which is much faster when compared to normal 2 stage process of first obtaining the approval for the name and then filing for incorporation.

You can always have your trade name different from your company name.

5. If you have Adhar Card try to take DSC (Digital Signature) from e-mudra (e mudra is a DSC agency, if you ask your CA, he/she will be knowing about it). E-mudra takes just 2 to 3 hours to issue a DSC if you have adhar and you are available to give your thumb impression on the application form.

6. Ask your CA to keep ready MoA ,AoA and all other incorporation documents immediately once you have applied for DSC.

 

Once your DSC is in place, you can immediately file the documents for incorporation under single application process without any delay if you have the documents ready.

7.Finally spend at least 1 hour incarefully going through the documents prepared by your CA. Though he/she might be a good professional, there are high degree of chances that some of the information may be missing. Most of the documents and information you provide at the time of incorporation are related to your personal credential like your name, address, phone number etcfor which you are a better person to verify and correct if there is any mistake.

[If you have no idea of DIN, DSC etc, you are advised to read our Article on ‘’Incorporation Process in India” together with this post]