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It's all too common for startups to undergo the struggle of sorts. The focus invariably is on one’s product and marketing it. However, the nagging startup laws are a hindrance. There are so many things to consider including employment contracts, shares, terms, and conditions, so on and so forth that one can be easily overwhelmed. The question is how does one ensure that things are perfect for one’s startup? It does not necessarily have to be that difficult at all. As a matter of fact, with proper advice through start-up legal services, it is seamless. Hence the legal tips from experts for startups. 1. Get startup legal help from professionals  In an effort to cut costs gone haywire start-ups often engage start-up legal services with very little experience. Instead of hiring a competent and experienced corporate lawyer in India, often founders tend to hire legal counsel from within their friends’ circle, relations or someone else who may be offering a discount on a hefty fee. In so doing, the founders are unable to avail the expertise of experienced lawyers who can advise the owners on avoiding legal issues. It's advisable that founders interview among corporate lawyer in India or a law firm and ascertain as to whether or not they have the acumen in at least some of the legal areas as follows:Corporation, commercial, and securities lawContract lawEmployment lawIntellectual property lawsReal estate lawsTax lawsFranchise lawsWhile it's not necessarily the case that the independent lawyer or start-up legal services that the founder may have retained are experienced in the foregoing areas of corporate litigations every lawyer have a few areas of specialization. Therefore certain client issues are “farmed out” to a corporate lawyer in India or a law firm with the expertise in those specific areas. Oftentimes it has proven beneficial for startups if the founders engage a law firm or a lawyer with the expertise of handling a few of the foregoing areas of startup law ensuring the founders and their advocates are connected at all times.2. Obtain a founder’s agreementAs and when a venture is rolled out a clear founder’s agreement outlining the founding team’s roles and responsibilities, equity and vesting ownership, and IP ownership assignments ought to be ascertained and the importance of it cannot be emphasized enough. If securing the viability of one’s new venture is vital then it's critical that the key issues are defined. Frequently, this agreement is overlooked by entrepreneurs while partnering with friends to start a venture. Entrepreneurs tend to have the mindset that a founder’s agreement’ is not required or is unnecessary but actually a founder's agreement is absolutely essential. A clear agreement between friends ensures further cementing of the friendship regardless of whether there are disagreements resulting in the dissolution of the venture. Should everything go without a hitch, one need not refer to the founder’s agreement at all. On the flip side though, if things go haywire, one would require the founder's agreement to ensure that there is no crack in the friendship even if the venture hits a dead end.3. Choose the business structure Choosing one's business structure or business model is probably one of the most vital decisions one would make and in the future, it may have significant legal consequences.  If one is serious about one’s Startup then registering the business as either a corporation or a limited company would be the way to go as any corporate lawyer in India would advise. Typically businesses start out as sole proprietorship but sole proprietorship in the case of a startup, it isn’t a brilliant idea at all. If a startup is registered as a corporation or a limited company then the personal assets of the owner would be protected and moreover, in the event of consumer disputes, legal protection available would be far greater. 4. Ensure the licenses are prim and proper One ought to ensure that one has the proper license and isn’t violating any law in matters of corporate litigations. The upshot of the faltering in-house legal team is far-reaching and expensive. A startup for mobile commerce was penalized a staggering hefty amount for carrying on their operations sans a license for transmitting funds. What's worse than being fined, though, is the damage that one has to endure as one’s reputation in handling customers is tarnished. The dire need for keeping up with competition and diversifying into newer markets may seem overwhelming, but if cutting corners results in losing brand equity or if one is liable to be put behind bars then it's definitely not worth it. Working with a trustworthy legal advisor in the initial stages would be reassuring that one is operating legally. 5. Take care of your term sheet One ought to ensure that one is not too giving with incentives offered to customers as that may backfire by clients in increasing numbers expecting more. As the returns diminish, people generally tend to expect more. If at the outset people get friendly terms because of friendship as is often the case; the vast majority of investors early on tend to be friends and family that will eventually cause further damage. What's right for the company isn’t right for the investor and therefore both are mutually exclusive and hence both have to be separated so that a fair and a reasonable return structure is formed. 6. Relying on standard online agreements is a no-no  Cost-cutting in the startup phase is achievable by relying on online documents or on the previous engagements of the founder. Nevertheless, if this happens to be the chosen route then one ought to proceed with caution. For background research in regards, the competitor’s published terms and conditions, the internet is the go-to for online research. Standard agreements of companies found online should not be copied and pasted on one’s website as they ought to be unique for each website. Simply replacement of name and address may result in issues wherein one may unintentionally adopt verbiage that either cannot be applied to one’s own business or one may overlook a critical aspect of one’s own business. Ensuring employment and consulting agreements fits the needs of one’s business is vital. Although the vast majority are essentially similar, they are not generic. 7. Don’t let go of your co-founders It’s highly likely that co-founders would be entitled to a timescale for investing their shares; in other words, co-founders are the supposed owners of the shares but either they don’t necessarily get them or they get them but the company reserves the right of recalling the shares until specific milestones or timelines are reached or crossed. Ideally, there is a one-year cliff involved as well as a vesting period of four years. A cliff essentially means the Co-founder is not entitled to get shares until a first major milestone has been reached. Vesting period essentially means that the shares leftover would be proportionately apportioned for the remaining three years.Cliffs and vesting periods are helpful in aligning interest for a certain timescale. Once vesting is over one would most likely know where the company is headed. From time to time a certain portion of the equity is aligned or mapped to certain milestones like achieving a goal. Companies may consider doling ‘refresher’ shares to valued employees reaching the end of vesting timescale as an incentive for staying on.   8. Get intellectual property rights established.It’s absolutely vital that founders and investors are confident that the company is the owner of intellectual property rights for founders and investors to be able to operate. The valuation of a company is often based on its IPR. To secure funding or to sell one’s company IPR is crucial as well. If employees develop IPR on agreeable terms, then making sure the company is the owner is rather simple. However, if key technology is developed by founders or anyone else prior to the formation of the company or if contractors and consultants without proper engagement terms create IPR, then IPR is questionable which would put the valuation of the company at risk. It’s absolutely vital and indeed the requirement is that anyone developing IPR on behalf of the company ensure that the IPR is transferred.to the company. There are relevant documents doing this, like a deed of assignment, or a similar document. This is an issue that is vital as well when dealing in trademarks and patents and a much wider array of IPR considerations.9. Register and trademark the company name and logo The comprehensive definition of trademark includes a word, phrase, logo, or any other graphic symbol that a company may use to make its product or service distinct from others. A unique word isn’t necessarily required for validation of a trademark. Identification is the key to serving the purpose of the trademark. With the registration of the trademark, others cannot copy the trademark.  Registration of trademarks can be done prior to using them and doing this is beneficial 1) so that someone else can be prevented from getting the trademark registered 2) preventing any inadvertent infringement on the trademark of another entity and 3) make one’s position stronger if in case an issue of infringement of trademark arises.10. Routinely housekeepMaintaining an in-house filing system, ensuring official registers and bookkeeping are up-to-date and accurate, and archiving board meetings minutes may be comparatively menial tasks but no less important and ought to get high ranking in one’s priority list.  However, the execution of these tasks would result in compliance and adherence with one’s statutory obligations. Prospective investors would expect all pertinent records to be collated and compiled.11. Legal cost allocation – surplus or deficitLegal costs ought to be integrated into one’s budget. There’s a good chance of all legal expenses of start-up companies either being within one’s legal budget or exceeding the budget. What causes this scenario is the fact that the owners underestimate their legal requirements or are unable to fathom how complex their businesses actually are. Therefore, to avoid unpleasant surprises optimal allocation towards attorney fee even if unanticipated would be prudent. Besides budgeting for engaging a corporate lawyer in India, one ought to bear in mind insurance costs, licensing and bonds. Although on the face of it this may appear to be a minor matter, one would be amazed knowing the sheer number of businesses that find themselves in hot water as they neglected to plan for costs of this nature. In other words, they did not see it coming.  12 Carefully hire Independent ContractorsPeople working for a company are usually classified as employees. A select few of those who qualify as independent contractors are the ones passing challenging and demanding legal exams. The general requirement is that the independent contractor ought to own an independent and established business, freedom of working for anyone, not be paid on a salary or hourly basis, work unsupervised without the employer controlling, use their own tools and workspace, so on and so forth. If the person pursuing or aspiring to be an independent contractor fails to qualify then by default the person would be an employee with legal validation. As an employee, the person would qualify for benefits, overtime, worker’s comp, and the works. This type of error on the part of the company may prove to be very costly.  13. Employment contracts CEOs and founders of startups ought to ensure that there is clarity on employment contracts and offer letters. Both the contract and the offer letter ought to be unambiguous without any vagueness; all in all the contract ought to be transparent. The legal documents are key to ensuring employees are aware of what they need to deliver according to expectations. 14. Take care of user-generated content If third-party copyright material including music, video or text is used without a valid license, one would be at risk of copyright infringement. Whether its website or an app, user-generated content can give a good look and feel as well as user experience. However, there are quite a few related risks including third party copyright matter, be illegal or downright defamatory and last but not the least as someone using the website or the app one could be liable for copyright infringement even though one may not be responsible for posting the content. Prior to permitting the posting of user-generated content, there, ought to be terms and conditions prohibiting uploading content that may be infringing, illegal or defamatory and it ought to be clearly conveyed in no uncertain terms that one reserves the right and indeed it's one’s discretion to delete inappropriate content. There ought to be a procedure in place whereby anyone objecting to content may request its deletion. 15. The clarity in terms and conditionsIf the terms and conditions are drafted well by a corporate lawyer in India or by corporate legal services then it can be likened to a procedure manual or a cookery book or a guide to running a business with total clarity on how one should react in any given circumstances. They ought to spell out what terms have been agreed upon between parties and of greater importance is what might happen should things go haywire or a party discontinues. Terms and conditions are a money saver as all issues are addressed in the beginning. Therefore disputes related to the agreement can be avoided later on.For further consultation, there are registered lawyers with whom you can connect with at Vidhikarya.

The transparent veil of companies: Principle of Lifting the Corporate VeilINTRODUCTIONA company cannot act for itself without its constituent members acting on behalf of it. However, a company is considered a person in the eyes of law. It is not given the status of a real person but of a juristic person. The identity of a company is separate from its constituent members but is of a different nature. The relation between the identity of a company and the identities of its members, is the added protection which the former imparts to the latter. The company acts as a veil behind which the members of a company can hide their faces, this leads to the perpetuation of fraudulent and illegal activities by the members of a company under the name of a company, thereby firing while putting one’s gun on someone else’s shoulder. To prevent such undesirable situations, eventually, the Doctrine of Lifting the Corporate Veil was devised. This doctrine and its various facets are discussed below at length.  WHAT IS A ‘COMPANY’?Before discussing the principle of lifting the corporate veil, it is important for us to understand the concept of a company, as the application of this principle is exclusive to the corporate world. The term ‘company’ is derived from the Latin term ‘companis’. If we break this term into its constituents, we get ‘com’ meaning ‘together’ and ‘panis’ meaning ‘bread’. Hence, it was used to denote a number of persons who dine together. This being the approach in the ancient times, has now been rendered irrelevant with times advancing. The said definition held good when human prospects were limited to filling their bellies. In the modern times, ‘company’ is recognized as a group of people working collectively for the fulfilment of a commercial activity.STATUTORY DEFINITIONThe term ‘Company’ is defined under Section 2 (20) of The Companies Act, 2013, wherein it is defined as, a “company incorporated under this Act or under any previous company law.” This definition is not exhaustive, but it is deliberately given an open-ended language to ensure its inclusivity. A company has a personality of its own, notwithstanding the board of directors which manage any company. The feature of a company being a distinct legal entity on its own, separate from the identities of the members constituting it, was established by the Hon’ble Supreme Court of India in case of Rustom Cavasjee Cooper vs. Union of India.WHAT IS THE PRINCIPLE OF ‘LIFTING THE CORPORATE VEIL’?It is now established that a company has a distinct identity from its constituent members. Problems arise when this position of the company is misused, it is in such cases where the line between a company and its members, has to be blurred. It is logical to say that though a company has a separate legal identity, it cannot act on its own. There have to be certain human agencies performing the functions of a company. When such human agencies, while working under the name of a company, actuate fraudulent or illegal transactions, or activities outside the purview of the company’s prospects, the respective persons cannot seek exemption from legal action against them, in the garb of working under the image of a company.EXAMPLE OF ‘LIFTING THE CORPORATE VEIL’Suppose directors or any others in charge of the company, start committing frauds, illegal activities, or undertaking prospects outside the purview of the objective/articles of the company, the distinction between the identities of the members of a company and a company; is blurred and the principle of lifting the corporate veil is implemented. The people engaging in such activities are held liable in their respective personal capacities. The identity of a company is disregarded in such situations to find out the real culprit of any offence committed under the name of a company. ORIGIN OF THIS DOCTRINEThe origin of this doctrine is in England. The English Law recognised the legal personality of a company in 1867, but it was in 1897 that the same was firmly established in the case of Saloman vs. Saloman & Co. Ltd.•   In the said case, Salomon was a shoe manufacturer. His business was in running in profits wherein he enjoyed substantial surplus over liabilities. He constituted a company named Saloman & Co. Ltd for the purpose of taking over his business and carrying it on. •   The seven subscribers to the Memorandum were Saloman himself, his daughter, his wife and four sons and they were the only members of the company thus constituted. •   Saloman, along with two of his sons, constituted the Board of Directors of the company. The business was transferred to the company for £ 40000. As payment, Saloman kept 20000 shares, valuing £ 1 each and debentures worth £ 10,000. These debentures were a proof that the company owed Salomon £ 10000 and created a charge on the company's assets. •   A share each was given to all the remaining member of his family. The said company witnessed liquidation within a year. The company’s assets amounting to £ 6,000 were insufficient to pay off the debentures, as a result of which, the ordinary investors did not receive anything•   The liquidator insisted to get the debentures cancelled, for the reason that the company was merely an agent of Salomon. •   The unsecured creditors contended that solely because the company was incorporated under the Act, it cannot be denied that it had no individual existence, separate from Salmon’s identity, as Salmon being the sole person behind the veil of the company, he was the managing director, the other directors too were his sons and thus, were under his control.•   It was decided by the House of Lords that the company was merely one man show and its existence was contrary to the spirit of what a company is to have as per Company Laws. Thus, the colourable exercise of rights by Salomon, lead the House of Lords to devise the concept of the ‘Doctrine of Lifting the Corporate Veil’.POSITION IN INDIAN LAWA glaring majority of Indian company law has been borrowed from English law, it qualifies to be called a replica of English Law, in the context of Company Law. The Salomon's case which has been discussed above; has been considered an authority in India, since the advent of the Doctrine of Lifting Corporate Veil in India.The Hon’ble Supreme Court of India in Tata Engineering Locomotive Co. Ltd. v. State of Bihar and others, stated that "the corporation in law stands equal to a natural person and is a legal entity on its own. The identity of a corporation is entirely separate from that of its shareholders; similarly, the creditors have no claim to assert over the assets of a company.In LIC of India v. Escorts Ltd, Justice Chinnappa Reddy had emphasised on the corporate veil being lifted where the associated companies are inextricably intertwined. After the Bhopal Gas tragedy case, the implementation of the doctrine lifting of the corporate veil has been escalated. The Doctrine of Lifting the Corporate Veil is not mentioned expressly in the text of Indian Company Law, but could be inferred from a number of provisions thereof. The doctrine has now become of precedential value, after being stated in a number of decisions by numerous courts of law in India. WHEN CAN THE CORPORATE VEIL BE LIFTED? I.                 STATUTORY PROVISIONSThe Companies Act 1956, provides for the circumstances wherein the corporate veil will be lifted and the constituent members or directors will be accounted liable for certain transactions. 1) Reduction of Membership (Section 45)ReferralSection 45 of the Act holds the members of a company individually liable for the payment of debts of the company if the number of members of the company is decreased below the statutory requirements i.e. two members for a private company and seven members for a public company. It is to be noted that section 45 does not destroy the separate identity of the company, it still remains a distinct legal entity. However, this provision applies only to those members who remain as members of the company continuously for a period more than 6 months after the membership falls below the defined statutory limits. 2) Failure to Deliver Share Certificate (Section 113)Subsection (2) of Section 113 states that if a company fails to deliver the share/debenture certificate within a period of 3 months from allotment and/or within 2 months of application for transfer, the concerned company as well as every officer of such company, who is at fault, shall be liable for punishment with fine up to Rs. 5000 per day till such fault continues.3) Holding and Subsidiary Company (Section 212)Section 212 of the Companies Act, 1956, states that in relation to financial disclosure; a true and fair view of the overall status of the group is to be put forth. Hence, the parent company should present its own individual financial statement and financial statements of its subsidiaries as well. It is to prevent the company from presenting a misleading picture depicting the financial statements of the company alone. The Companies (Amendment) Act, 2013The amendment to The Companies Act, 2013, too, brought in a number of provisions wherein the Doctrine of Lifting the Corporate Veil could be applied. 1). Misrepresentation in prospectus (Section 34 and 35)When there is misrepresentation in a prospectus, every promoter, director and any other such person who authorizes the issuance of a prospectus with misrepresentation, incurs a liability towards the ones who subscribed for shares, believing on statements which turned out to be untrue. 2). Failure to return application money (Section 39)In the case of issuance of shares by a company, if minimum subscription as mentioned in the prospectus has not been received, then the directors shall be personally liable to return the money with requisite interest if the application money is not repaid within a prescribed time period. 3). Fraudulent Conduct (Section 339)In the case of winding-up of a company, when it appears that any business of the company has been done with an intent to defraud the creditors of the company or any other person, or for any other fraudulent objective, persons who are knowingly the parties to such conduct of business activities may, if the Tribunal thinks it just to do so, be made personally liable, in their respective individual capabilities, devoid of any limitation as to any liability of the company.II)JUDICIAL INTERPRETATION: Under this subhead, the corporate veil is lifted by the courts in pursuance of 3 objectives. 1)Determination of characterThe corporate veil has been lifted by courts of law in the past to decipher the enemy character of a company. A company acquires an enemy character if it is controlled by enemy aliens. Thus, courts will lift the veil to find out the actual persons conducting the affairs of a company.  2)Determination of Residence for tax purposeCourts hold the authority to disregard corporate entity if it is used to evade tax obligations. The is the case landmark example of this situation is seen in the case of Dinshaw Maneckjee Petit, where the assessee was a rich man enjoying high dividend and interest income. He created four private companies and agreed with each of them to hold a share of investment as an agent for it. The income so received was credited in the bank accounts of the company but the company handed over the money to the bank as a pretended loan, to evade tax liability.3)FraudThe corporate existence of a company cannot be permitted to perpetrate fraud. In cases where the corporate existence is used for fraudulent purposes, to defraud creditors or to avoid legal liabilities, the courts shall lift the corporate veil to determine the realities behind it and strike down such transactions.  NEED FOR THE DOCTRINE OF ‘LIFTING THE CORPORATE VEIL’The doctrine of lifting the corporate veil becomes inevitable when dishonest people start using the corporate veil as aid or instrument to conceal illegalities and frauds in a company's activities. Thus, it then becomes compulsory for the legislature and courts to evolve by disregarding the conventional distinction between the identity of a company and its constituent members and pinpoint people who cause such illegalities behind the veil of a company.THE IDEOLOGY BEHIND THIS DOCTRINE The concept of the corporate veil is a building block of Company Law. This principle extends protection to those who exist and function from behind the veil of a company. Pickering stated that there exist two main reasons as to why there are exceptions to the separate identity doctrine.•   Firstly, he said that a company cannot be treated as an ordinary independent person in all circumstances, e.g. a company by itself cannot have a mens rea and therefore is not capable of committing any crime.•   Secondly, if there would have been no exceptions to the separate entity rule, the board of directors and members would be allowed to hide behind the shield of the company’s identity, which could potentially lead to perversions of justice. Thus, the doctrine of lifting the corporate veil is established and actuated in times of need as a flexible tool to ensure justice.CONCLUSIONThe doctrine is a potent weapon at the disposal of the Judiciary to pinpoint the defaulters seeking refuge behind the veil of a company’s identity. Defaulting members of a company do not anymore have the option of blaming the company for fraudulent and illegal transactions carried out by them. Legislatures of various countries have formulated punishments for such fraudulent and illegal activities, further helping in increasing the efficacy of this doctrine. It is thus safe to say that this doctrine has come to the rescue of transparency in businesses and has upscaled work ethics among corporates.