The Economic Times today quoted a senior official from the Corporate Affairs ministry saying, “The RBI had made it clear to us in our several correspondences that they have their reservations about the LLP Act. We have decided to tighten some crucial rules under the purview of the current Act to win confidence of investors and regulators”. He said the changes will make LLPs more competent and easier to monitor.

LLPs are becoming increasingly popular as the new form of business structure because of the loads of benefits they enjoy. Unlike a regular partnership, an LLP partner is not responsible or liable for another partner’s negligence. This particular feature of this new form of business has made the RBI awry. The LLP Act had been introduced so that small businesses and law and audit firms could benefit from it but today many corporate houses are increasingly using the LLP law to save significant amounts of tax and side step regulatory burden.

The changes in the rules have been welcomed by the industry experts.  It is obvious that clearer and more elaborate solvency and auditing norms will make LLP a more credible business structure. This will ultimately lead to better financial structure and will lead to the growth of this form of business as banks would also have added confidence in lending to the LLP.

The government has now asked the Institute of Chartered Accountants of India (ICAI) to draw out separate accounting standards for LLPs to avoid gray areas in functioning of such firms. We’ll now have to keep an eye out for what they come out with.

Related Read:

• What if things go south? How to shutdown Pvt Limited or a LLP Business in India
• LLP vs. Private Limited: How to Choose Company Incorporation

Discussion: LLP Vs Pvt Ltd from a tax efficiency perspective

» More Legal Resources for Startups

Trademark Search

Since this is a question we get asked very frequently, we thought we could simplify things for you a little bit by explaining, step-by-step, how to get your Trademark Registered in India.

Step 1: A trademark application has to be filed before the Registrar of Trade Marks. It should be filed at the office of the Trade Marks Registry corresponding to the principal place of business of the applicant. (In India, the Trademark registries are in Chennai, Delhi, Mumbai, Ahemdabad and Kolkata. So if your business is in Bengaluru, you have to apply before the Registry in Chennai).

Recommended Read: Explained: Why & How to Conduct a Trademark Search?

Step 2: An application can be filed by the proprietor of the business for use by the proprietor or his business. You can file either in the name of the proprietor or in the name of the business.

We often guide applicants to apply in their personal name if they are unsure about the prospects of the business but have a very catchy name. So for instance, if you have the name “Bangalore Bajji Balle Balle” (or any other funny and catchy name) but don’t know if your restaurant will succeed because of the competition, you should choose to apply in your own name. In case things do not work out, you can always use the name for your next venture. If the trademark is in the name of the Company, it usually dies with the Company.

Step 3: While applying for the Trade Mark Registration, the proprietor has to define the class under which he wants his product / service to be classified. The classification has to be done according to Schedule 4 of the Trade Marks Rules, 2002.

Step 4: Finally, once the work is done, you need to pay the fees associated with the Trademark. Today, as per the Trademark Rules, 2002, the application fees (similar to a tax) are Rs. 3500 per trademark.

Distinctive Features of a Trademark

The trademark to be registered should have distinctive features. Naturally, it cannot be blasphemous or obscene. It should also not make any reference to a living person without his consent or the consent of his representative, as the case may be.

So if you want to start an acting school called “Shah Rukh Khan Acting School” (although why anyone would do that is a wonder), you CANNOT unless you have his consent.

Recommended Read: Trademarks registration in India – The Entrepreneur’s Guide

What happens once I make the application?

The registrar will advertise the application, to find out whether the trademark has been in usage by any other person and to resolve any conflicts if they come to light.

Any person who wishes to oppose the trademark application has to give notice in writing to the Registrar within a period of 3 months after the advertisement has been published.

In an opposition, the applicant has to explain why the trademark should be granted to him. In case the applicant does not respond within two months after the opposition has been received, it will be assumed that he has abandoned the application.

If no opposition is filed or if the dispute is decided in favour of the applicant, the registrar issues a certificate of registration in favour of the applicant and the trademark is registered. Generally, the whole process of registration takes 18 – 24 months from the date of application.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

» More legal resources for startups.

And since I was answering only in forums I had to give answers in brief, so I could not quote on what basis I am giving my answers. Therefore I have decided to write an article and explain my views here

Adsense Adwords

Overview

Advertisers (ad words) list their ads through Google and pays to them on CPC basis. Google receives the money from advertisers and pays 68% of the money to publishers as commission.

Now what should be done as per legal provisions?

Let’s say total revenue was INR 100 and publishers received INR 68 through sale of space. Now legally, publishers are in the ambit of service tax (Sale of space or time for advertisement) and should pay Service Tax @10% on INR 68 which comes out to approx 7 rupees and Google India is also liable to pay service tax on the gross revenue by claiming input credit of 7 rupees which the ad sense publishers paid.

Net outflow of Service Tax from Google India – INR 3.3 (10.30 – 7).

Total revenue to government INR 10.3 (3.3 + 7)

But what is being done?

Google India pays service tax on the gross amount charged from advertisers.

Net outflow from Google – INR 10.30

And adsense publishers do not pay anything.

Total revenue to the govt. INR 10.30 (10.3 + 0)

Why is this being done?

If Google India has to claim service tax input, it should have an invoice and as of now no publisher is issuing invoices to them.

Some CA’s are of opinion that Google is paying service tax hence publishers don’t need to pay again but there is nothing like this mentioned in our law and therefore this theory is flawed.

Now wait! There is another angle to this

CBEC in Para 1 of Circular No. 332/35/2006-TRU dated 01-08-2006 has stated that if there is no service provider and service recipient relationship, question of providing taxable service to any person by any other person does not arise. These views are expressed by the department in case of construction services, but in my opinion this principle will apply to all services.

This requires another 2 page article ‘’When will it be said to have a service provider recipient relationship?” and I am not going into that.

So publishers who are not paying service tax on that 68% can take benefit of this circular but if tax people caught hold of them, then they will have to prove that there is no relationship of service provider and service receiver between them & Google India.

Some reasons which ‘might’ prove this are listed below:-

1. The advertisers are allowed to bid for the keywords for which there are variable rates. These are fixed by Google alone. The site owners have no say in this.

2. The advertisements are placed on the blog sites or other websites who are members of AdSense. But the placements software is made by Google according to conditions fixed by them.

3. Only Google knows the charges for advertisements paid by advertisers.

My expectations

Either a circular will be issued from the CBEC stating that ad sense publishers are required to pay service tax. If this happens, publishers who were not paying service tax will have to pay on retrospective basis along with 18% interest.

Or, an amendment will be made in law and under the mechanism of Reverse Charge Google India will be liable to pay service tax on the gross amount. If this happens publishers will not be liable because Google will pay on their behalf.

Conclusion

Peace of mind = 10.3% of your revenue.

Choice is yours.

Disclaimer: All the information provided above is for informative purposes only. You are advised to consult tax consultant before you act upon any of the above information. In spite of this, if any person acts upon this information and suffers any loss, we are not to be held liable.

[Guest article by CA Mayank Kharbanda. He can be reached at mayank.kharbanda@visionkpo.com.]

Many people take their Terms of Service lightly; so much so that a case was heard by the U.S. Court of Appeals of the 7^th Circuit, in ProCD v. Zeidenberg, where the question was: “Does a Terms of Service consented to by checking a check box create any liability for the person signing, and does the Company whose terms those are get actual protection?”

The United States Court of Appeals held that it indeed created legal rights and obligations for the parties; least of all that the Company did get legal protections, and the person signing did become legally responsible.

A common question that we are asked is: If my Terms of Service are extremely stringent, do I actually get protection for everything I claim to not be liable for?

The answer to that question is no. Even if you say that you are not liable for everything, you cannot escape the long arm of the law when the matter goes to Court. If you do something which in the eyes of the Court is unreasonable or grossly improper, you will still be liable even if your Terms of Service protect you.

Wordpress' Terms of Service is under CC license

So how do you design a Terms of Service that works?

Here are a few pointers which we feel might help:

a. Start with giving your complete Company name, address and other information

b. Provide information about the kind of product / service you offer

c. Outline all the situations where you might be found liable. For instance, if you are a Company selling software products, you might face liability in four cases (a) if the software does not work (b) if the product is corrupted or infected (c) if the product does not live up to the expectations of the client (d) if the product does not contain the features you promised it would contain

d. Next, say when you will not be liable. Be reasonable, but remember it is always better to strongly favour yourself. Confused? For example, you can say that you will not be liable if the software does not work or live up to expectations, but say that you may give a replacement on a case-by-case basis. That way, you are not being completely unfair, and yet protecting your interests.

e. Outline the situations where you are willing to accept liability. For example, if you have a cash-back offer, then you can mention that in your Terms of Service.

A nonchalant approach taken towards creating this document can cause a lot of problems, especially in the case of SaaS Companies where the number of users could be in millions. A weakly constructed Terms of Service and Privacy Policy could also disappoint investors who want to be assured that the business they are seeking to invest in is as guarded from risks as possible.

Some other things that you can add to your Terms of Service

A smartly drawn-up ToS could expressly mention where or how disputes will be settled; say by using an arbitration clause. We recommend that you have a clause that makes mediation mandatory, followed by compulsory arbitration.

In India, arbitration has failed to live up to expectations, and can be almost as expensive as going to Court. Mediation, provided the other party agrees, is a great and cost effective remedy.

So it is therefore always better to start with mediation and then proceed to arbitration.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

» More legal resources for startups.

Earlier in this series: Problem of Plenty– Choosing How to Startup [PART 2], LLP vs. Private Limited: How to Choose Company Incorporation]

Agneepth - An Entrepreneurial Journey

I am entering into a high risk, high return business. Although we have decided to start it, we are not sure about the right mode of business formation to use. We would like to form a private limited company, obviously, but I am concerned that a private limited company will be more difficult to wind up in case things go south. What do I do? Should I form an LLP?

It seems here that you are debating between a Company and an LLP, and your doubt is as regards which is easier to shut down in case things don’t work out the way you want them to.

To clear the air a little bit, find here a detailed procedure on how to wind up a Company and an LLP. A partnership or a sole proprietorship is much, much easier to shut down. An unregistered partnership or proprietorship can be shut down by merely closing the bank account of the partnership or proprietorship.

Procedure for Voluntary Winding up of a Company

Step 1: A special resolution has to be passed by the Board and the members

Step 2: Within fourteen days of the passing of the resolution, a notice of the resolution by advertisement in the Official Gazette, and also in some newspaper circulating in the district where the registered office of the company is situated. (If default is made in complying with this clause, the company and every officer of the company who is in default shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues.)

Step 3: The Business activities are to cease the day the resolution is passed.

Step 4: The directors have to make a declaration verified by an affidavit, that they have made a full inquiry into the affairs of the company, and that the company has no debts, or that it will be able to pay its debts in full within three years from the commencement of the winding up.

Step 5: The above declaration has to be made and submitted to the registrar within 5 weeks (35 days) of passing the resolution for winding up along with the auditor’s report for the most recent financial period.

Step 6: The members have to appoint a liquidator to distribute the assets and pay off the liabilities.

Step 7: The registrar has to be notified about the appointment (or resignation) of the liquidator in writing.

Step 8: If the dissolution takes more than a year, the liquidator is to hold a general meeting at the end of every year giving the report of the dissolution process and progress with accounts. The same is to be done even on the final meeting for dissolution.

Step 9: The minutes of these meetings should be submitted to the registrar as usual.

Voluntary Winding of an LLP

Step 1: Any LLP may be wound-up voluntarily if the LLP passes a resolution to wind up the LLP with approval of at least three-fourths of the total number of its partners.

Step 2: A copy of the resolution shall be filed with the Registrar within thirty days of passing of such resolution in Form No. 1 of the LLP Rules, 2010.

Step 3: The majority of its designated partners (being not less than two) shall make a declaration in Form No. 2 LLP Rules, 2010, in an affidavit saying that the LLP has no debt or that it will be able to pay its debts in full within one year from the commencement of the winding up.

Step 4: The above Form and affidavit are to be submitted to the registrar within 15 days of the resolution along with form 3 of the LLP Rules, 2010, a statement saying that such winding up is not being done to defraud anyone, form no .4 of the LLP Rules, 2010, and a report of the value of the assets of the LLP.

Step 5: Consent needs to be obtained from atleast 2/3^rds of the creditors in terms of value.

Step 6: The Creditors consent is to be filed with Form no.5 of the LLP rules, 2010.

Step 7: Within fourteen days of the receipt of creditors’ consent, give notice of the resolution by advertisement in a newspaper circulating in the district where the registered office or the principal office of the LLP is situated.

Step 8: The partners then have to appoint a liquidator within 30 days of receiving creditors consent.

Step 9: This liquidator is to file a declaration in form no.6 of the LLP rules, 2010.

Step 10: After all formalities are over, final accounts of the LLP are to be submitted with form no.9 of the LLP rules, 2010.

Conclusion: From the facts presented above, it does appear quite clear that there is not much of a difference with regard to ease of winding up between an LLP and a Private Limited Company.

A Private Limited Company brings certain other advantages, such as the ability to issue stock options, appoint independent directors, dilute stake to investors and valuable employees and a lot more. The law on Companies is also far more mature, since the Companies Act was passed almost 60 years ago.

So if ease of winding up is your major concern, form a Private Limited Company.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

» More legal resources for startups.

Part 1: LLP vs. Private Limited: How to Choose Company Incorporation

Case Study 3: We all come from a family business background, and are looking to branch out and do something ourselves. We want to invest heavily but want to keep the senior management team very small. What do we do?

Interesting question; we would recommend in this case that you start with either an LLP or a Private Limited Company, preferably a Private Limited Company.

Reasons in favour of choosing an LLP: An LLP is relatively simpler in its structure than a Company. It does not seem like you are looking to create a giant corporation; you want to create a small and profitable entity, and an LLP will suit your needs.

The other minor advantages of an LLP are that it is relatively easier to form, and marginally cheaper too. But since you mention that your investment is going to be high, that should not be too much of a concern.

Reasons for choosing a Private Limited Company: From the facts mentioned by you, it looks like you want to enter into a space where there is huge potential for future profits; hence the initial investment is high.

In such a scenario, a private limited company has the following advantages. The legal rules and regulations governing a private limited company are much more defined and crystallized when compared to the rules surrounding a LLP. So when you want to bring an investor in, to help boost the Company’s financial strength, you will be able to do so with more clarity.

On the point of investors, they prefer investing in Private Limited Companies for the reason mentioned above and also because it is much easier to take a stake in a Pvt. Ltd. Company than it is in an LLP. For instance, Facebook (an extreme example, admittedly, but a good one nevertheless), can attract investment of hundreds of millions of dollars by selling less than 1 per cent of the Company. That kind of flexibility is not available in the case of a LLP.

The other advantage of a private limited company is that you can attract a great advisory board by making the advisors directors in the company (independent or otherwise). This way, you can get the benefit of experience and expertise, even if you do not have it yourself.

Case Study 4: I am a single trader looking to expand my business, and I believe that you can form a single person company in India. Is this true? How can I get started?

To begin with, this is not true. There is a proposal to introduce OPCs in the recent Company Bill, 2011 but the fate of the bill remains uncertain. In the meanwhile, as a proprietor, you can start either an LLP with your wife / mother or a Company, with your wife or mother as the other director.

In the next part, we will be looking at more examples and helping you decide which one to choose. We shall specifically be looking at e-commerce companies and what structure would suit them best, in different situations.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

A classic dilemma which an entrepreneur faces today is whether to choose between a Pvt. Ltd. Company and an LLP. In addition to Partnerships and Proprietorships, these two have become popular options for people starting businesses. Since we get asked this question all the time, and have heard quite a few stories and helped entrepreneurs choose, we thought we would clear the air a little bit with a few case studies to help you choose between these options. Please note that none of these are real client case studies and no confidential information has been discussed.

Case study 1: We are four friends who have an idea for a social networking platform which enables bloggers to showcase their blogs to like-minded folk. How should we start?

Good question. The best option here would probably be a simple Partnership, because a Partnership comes without the regulatory shackles which a Company or LLP bring with them, and more importantly, is cheap to form. A strong revenue earning potential in this site will be realized only when it gains serious traction. And that may take a long time.

So avoid investing the money in incorporating a Company or an LLP right now, and get started with a simple Partnership. Invest the money you save in online advertising and promoting the product.

Case study 2: We are scientists working on an interesting product. But we do not have a business plan yet and are not clear about how to monetize it. The idea came from one of us initially, but we have now all worked on it and contributed. How do we get started now?

This is a tricky one. The best option here would probably be a Private Limited Company, for two reasons.

Reason 1 – Your most significant asset here is your intellectual property. The process of valuing your intellectual property and exploiting its commercial value is going to be the key to your financial success.

A Private Limited Company here will be the most beneficial in the long term. From a financial perspective, a Company offers unmatched options to value and account for intellectual property, and selling a very small share of a successful company can bring you the resources to keep the Company going.

Reason 2 – The second reason why we would recommend a Company over an LLP in this case is an extension of the previous reason. An LLP is a huge advancement over traditional modes of doing business like a Partnership, but is still a partnership-like association in the sense that the process of bringing in additional human resources into the core group of founders is not as easy and smooth as it is with a Private Limited Company.

With your Company, you are a group of scientists, but from the facts described, you do not have any background or experience in product building and marketing. Hence, bringing in someone with a strong marketing background and capable of converting your great idea into a great product (sort of like what Eric Schmidt did at Google) will make all the difference between where you are and where you eventually want to be.

This was the first part of a 4 part series. We will be looking at multiple scenarios in subsequent parts and trying to help you make the right choice for your business.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

Recommended Read:

• Limited Liability Partnership (LLP) in India – All you need to know about
• Sole Proprietary or Partnership? How to choose your company’s legal avatar?
• Dream Come True for Solopreneurs: “One Person Companies” Under the Companies Bill, 2011

Discussion: LLP Vs Pvt Ltd from a tax efficiency perspective

» More Legal Resources for Startups

[This is a 4-part series. If you have any questions, please leave them in the comment section.

Here comes the irony

In true irony, goods for export are exempt from tax, but it doesn’t exempt the company from paying taxes on these goods at first.

To explain this in simple words, when a company manufactures a product for export, it has to pay excise duty like all other goods. After the goods are actually exported, the company has to produce proof of such export to the Excise department. After satisfying this, the department will eventually refund the excise duty initially paid. This concept is called duty drawback.

Some exceptions: Export Oriented Units

Of course there have been efforts to remedy the situation. The Export Oriented Units (EOU) policy allows tax holidays for 100% export oriented units. Manufacture under Bond (MUB) allows companies to import machinery duty free to manufacture goods for export. Special Economic Zones (SEZ) function as parallel economies with their own tax regulations. But only select industries can enjoy the benefits of these zones and policies.

And for the rest of us…

Companies who cater to both the Indian as well as global market are severely handicapped by the provision of duty drawback. The restriction is so strict that companies having both normal as well as export units cannot even transfer goods or raw materials amongst themselves (inter-unit transfers). If they do transfer, they get taxed immediately and have to resort to duty drawback eventually.

This of course is one of the government’s many precautionary measures to check tax evasion under the pretext of tax exemption. However, the fiscal regime’s inability to come up with better corporate governance measures has burdened versatile companies with immense paperwork and procedure.

So what can you as an entrepreneur do?

The sad truth is that as a manufacturer of a product, there is not much you can do. However, you can consult experts to see how you can design your procedures such that tax liabilities are minimized.

As a service provider, you are exempt from paying Service tax in many cases as per the Export of Service rules. However, you need to check whether the rules apply to you completely and if they do not, then you can check how you can reduce the tax liability.

Some tips on reducing compliance costs

Before you start any production or manufacturing process, make sure that you have systems that do the computation for you, just by entering the basic values. Shockingly, many companies even today do not have computerized systems to compute duty and tax liability.

Have your process inspected once to check for ways in which you can avoid ‘duty leakage’.

If you are a service provider, liability arises only after revenue crosses Rs. 9 lakhs. If you are, say, a graphic designing and web development company, you can create two companies instead of one – this will help you show revenues in the name of two companies and increase your exemption limit. This intelligent tax ‘avoidance’ is perfectly legal.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

» More Legal Resources for Startups

Introducing Capital and Revenue Expenditure

In a recent decision, the income tax tribunal held that advertising expense was a “capital expenditure” since it brought an enduring benefit to the Company.

Just by way of an introduction, let us look at what “capital expenditure” and “revenue expenditure” are:

“Capital expenditure” is expenditure on capital assets, like buildings, machinery, training facilities for employees etc. It brings an “enduring benefit” to the Company.

“Revenue expenditure” on the other hand is expenditure that is incurred for recurring activities, like salaries, repair and maintenance.

So where does advertising fall?

The tribunal held that advertising was “capital expenditure” because it brought enduring benefit to the Company. However, the High Court of Delhi held, in the decision in CIT v. Monto Motors that the expenditure was a revenue expenditure and not a capital expenditure for the company.

Is the decision correct?

Yes, absolutely. There is no doubt that expenditure in advertising does not yield enduring returns in the same way that a machine might. Public memory today is so short that despite bringing in the biggest stars and investing hundreds of crores, large companies quickly vanish from the public memory when the going gets tough and they are unable to promote their products aggressively.

What does it mean for entrepreneurs?

In the case of Monto Motors, a now beleaguered moped manufacturer, the expenses on advertising were close to Rs. 1.5 crores. Such a heavy investment, if treated as a capital expenditure, can only be written off by means of depreciation.

On the other hand, revenue expenditure can be written off in the same year, while computing taxable income. So treating large expenditure as revenue expenditure would definitely be beneficial to the entrepreneur.

However, you have to make sure that the expenditure is incurred in that calendar year. If the expenditure pertains to some other calendar year, it will not be allowed as expenditure for that year.

What expenditure would fall under the category of “advertising expenditure”

This is tricky one. It depends on the business you are doing. For instance, if your business is a web based business or SaaS business, then the advertising would predominantly be online on LinkedIn, Facebook or Google. If you have advertised on any of these places, you will get a online receipt proving that you have spent the money on advertising.

If you are advertising in offline media, like books, magazines and newspapers, it is much more clear-cut and the expenditure can be straightaway written off as advertising expense.

What if you promote an event, or put up a stall at a fest? Here, you will be selling your product or service, and additionally, creating awareness about your product. In our opinion, that would count as marketing and advertising expenditure too.

What if the stall was a permanent / long term stall – say a 3 year contract to have your stall? That would probably fall under the category of capital expenditure + revenue expenditure. The expenditure incurred in setting up the stall would be treated as capital expenditure while the cost of manpower to man the stall as well as the brochures, banners and other printed material would be treated as revenue expenditure, since it is an advertising cost.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

» More Legal Resources for Startups

Also see: E-Commerce Startups: Here is what you need to know about VAT and Service Tax liability

shares all you need to do in order to incorporate your company in US.]

When we started Freshdesk,we decided to incorporate in the USA because that seemed to be best option for a SAAS company that wanted to handle recurring payments from international customers from day 1. Our preferred payment gateway will work only with US bank accounts and it is easier to get a US bank account if you are a USA corporation.We are based out of India and the options for accepting dollar payments with recurring billing were seriously limited and expensive.The only option seemed to be Paypal but again we were not sure if we could link Paypal with our Indian bank accounts for USA payments.

Since there were not many resources available on the web for incorporating a US corp from abroad I thought I will share our story for the benefit of future entrepreneurs.

Ofcourse there are many other ways to do this – but this is how we did it.

1. Incorporation – in the State of Delaware as a Delaware C Corp.

If you ask “Why Delaware” ? – We couldn’t find anything convincing for “Why not” ?

Total cost for incorporation – $1278

Break up

Lawyer Fees – $1005(Ryan Roberts at http://startuplawyer.com/) I would highly recommend Ryan. He was very professional and knowledgeable and very easy to work with thru email and skype. He charged us a flat fee for the full service startup incorporation package and this included

Memorandum of Association, Articles of Association, Restricted Stock Purchase agreements, Technology Transfer agreements, Proprietary Information agreements etc.

Incorporation fees – 148 (Delaware C Corp)

Registered Agent fees – $125 (This is a yearly fee) (Bloomberg Excelsior Business Services)

(A registered agent service is mandatory to incorporate a delaware corporation if you live outside Delaware)

2. Employer ID Number (EIN – TAX Number)

Every business in the US needs a EIN number. (also known as Tax ID number) After Incorporation docs are ready, fill form SS4 and call the IRS Philadelphia center directly at

(800) 829-4933. (This is the only office in the US that processes EIN for US business that are incorporated from foreign countries.

They will give you the EIN on the phone. It may be helpful if you have a fax nearby at the time of calling. (You can fax the filled SS4 form to them so that you don’t have to spell out all the details on the phone)

3. US Physical Address

You need a physical US address for receiving business documents .There are several mail service forwarding providers charging different rates.

My choice was Virtualpostmail.com – a web 2.0 company who seemed to be miles ahead of others in what seems to be a very traditional industry. I chose the $20 plan.

They scan mails and send an email, you can choose emails that needs to be opened and the contents scanned or just forward those mails to any other international address.

Before you can operate your account you need to submit a notarized form 1583 from USPS to authorize Virtual Post mail to open mails on your (and your companies behalf)

4. US Bank Account

You need a Business checking account with a US bank. If you already have a personal bank account with a US bank you can try calling them to open a business checking account. I think this is the best option. I tried calling Wells Fargo and the person on the phone told me that I cannot open a bank account with Wells Fargo and that I had to physically go toDelaware and try opening it from Wachovia. I am sure this person was wrong and I think it should be possible with Wells Fargo. I love the bank but somehow could not get my business account opened there.

If you do not have a US bank account but if you are visiting USA in the near future, you can just walk in to a bank with the incorporation documents of your company and open an account.

I posted a question regarding this in Quora and a very nice gentleman who was an advisor to many startups contacted me and referred me to Silicon Valley Bank  (who are considered very startup friendly) and I was able to open the account from India itself.

Initially I found it amusing when I was asked to pitch my business idea or send a presentation of my business plan in order to open a business checking account. But I guess Silicon Valley bank offers so many other services to startups but our needs were pretty simple. But SVB has been great till now in terms of responsive support.

5. Merchant Account

The most popular alternatives are Paypal and Authorize.net (they have many resellers) You can go to http://feefighters.com/ to compare providers and choose one that works for you. I skipped the options provided by feefighters and went directly with Braintree Payment solutions even though they were slightly more expensive compared to others as I had read good things about them and I did not understand all the hidden fees etc.

Braintree provides me a merchant account, a payment gateway, a PCI compliant vault to store customer Credit card data and can process recurring subscription billing.

We thought we will worry about the fees when we are making millions of dollars and losing considerable money on fees

6. Business Credit Card

I applied for a mastercard credit card through Silicon Valley Bank – the card is secured with a money market account – basically secured with cash in my bank account.

7. US Phone Numbers

We have a free Google Voice number and a Skype Out number which is $50 per year. The google voice number forwards the calls to our skype number.

We are considering 1-800 numbers from Grasshopper after we launch.

We also got an iPevo skype phone for receiving skype calls wirelessly, but the phone has stopped working and I am too busy to send it to the US and return it on Amazon.

That’s pretty much all you need to get the business side of things setup. The only other thing you need is a good product for which customers are willing to open their wallets and swipe their credit cards. (Oh. Ok. maybe for some of you that’s not a requirement for a successful startup! In either case – Good luck on your startup!

[Reproduced from Freshdesk blog]

Businesses springing up need to be aware of the tax liability they face, and this chiefly consists of two kinds of liabilities (apart from Income tax)

a. Service Tax liability

b. VAT

Let’s begin with Service Tax

As the name suggests, service tax is a tax on service. ‘Service’ includes practically everything today, although it is recommended that you study notifications to see if your service is covered. It is scarcely imaginable that in 1994 only 3 services were taxed but today, over 114 services including many in the e-commerce space are liable to taxation.

So many services are being added that the Government has decided to bring in a negative list, such that the items on the list are not subject to taxation (and other items are), but this change is likely to be seen only in the proposed Goods and Services Tax regime.

Moving over to VAT

VAT stands for Value Added Tax and applies only to the sale of ‘Goods’. The ‘Value’ refers to the modifications made to an input before it is sold to a consumer. For example, a company dealing in textiles adds value to the cotton yarn (input) by dyeing, modifying and stitching it before selling it as a t-shirt.

It will thus pay VAT on the difference between the cost of the cotton yarn and the sale value of the T-shirt.

Tricky issues when it comes to E-Commerce

While all this sounds straightforward, some pretty complex issues may arise. For instance, if you are selling groceries online, you would be liable to VAT.

Further, if you charge a delivery fee to deliver them to your clients, you are also providing a service, i.e. the delivery of fresh fruits and vegetables to the customer’s doorstep.

Now since both these are distinct, you may end up having to pay both VAT and service tax: VAT on the sale of the groceries and service tax on the delivery of the groceries to the doorstep of the customer.

So what do I do?

You need to analyze the composite offering and see how you can avoid paying both Service Tax and VAT. A useful way would be to offer free home delivery, and add a small mark-up to the sale price of the vegetables.

While you may have to pay more VAT as a result, you can can avoid filing returns under two heads.

If you have specific queries, leave them in the comment section.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

» More Legal Resources for Startups

The other issue relates to the signing of the agreement. Let us say for example that the other side is in Sydney and you are in Bangalore.

Signing the contract in such a case becomes difficult – after all, the value of the contract may not be high enough to justify travel to Sydney. (If it is, we strongly recommend that you go).

The law has two ways of getting around this – one way is to sign the contract by clicking on a checkbox online. The seller normally has a clause that states “By clicking on this box, you hereby accept and agree to abide by all contractual terms and conditions”.

This first route does not work for more complex, customized contracts which parties may sign. In such a case, there is only one solution: “counterparts”.

What is an agreement in counterparts?

An agreement in counterparts basically means that the agreement is not physically signed by both parties at once.

To make it clearer, let us look at what a counter parts clause reads like:

“Counterparts

This Agreement will be executed in counterparts, each of which so executed will be deemed to be an original, and such counterparts together will constitute one and the same agreement.”

Let us go back to the example of you being in Bangalore and the other party being in Sydney. You will print the agreement at your side in Koramangala and sign it.

3000 miles away, the other party will also print the agreement and sign it. When the two of you sign it at your respective ends, a valid contract has been formed between the two of you.

Do I need to scan my signed copy and send it to the other side and vice versa?

No. A common misconception is that you need to scan and send the document to the other side and they need to do the same.

The whole point of having “counterparts” is that the agreement is in parts, and each part is equally valid.

There is no need to scan your signed agreement and send it to the other side.

What if a dispute crops up? Will this agreement be valid?

Yes, this agreement will be perfectly valid and effective. As far as dispute resolution is concerned, the clause in the agreement will be the defining clause.

So for instance, if your agreement contains a clause which reads:

This Agreement is governed by the laws prevailing in the State of Karnataka, India. The parties agree that the entire cause of action in relation to this agreement (including all discussions, execution and part counseling and Services) has occurred in Bangalore, and hereby submit to the exclusive jurisdiction of the courts in the City of Bangalore only.

If your agreement contains a clause like this, no matter which parts of the world the parties are in, the dispute will be fought in the Courts in Bangalore city only. So if your contract contains a clause which states that disputes will be fought in some other country, think twice before signing – the clause can be enforced against you.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

» More Legal Resources for Startups

Moving away from traditional practice

As traditionally understood, a company is an association of persons. Every management textbook, legal treatise and financial document will tell you that – “a company is an association of persons, bound together by a common seal”.

So a “One Person Company” sounds like an oxymoron. But this was precisely the demand of thousands of entrepreneurs for very long – that they be allowed the protection, security and investor friendliness of a company without having the burden of finding a co-founder and complying with (literally) dozens of regulations.

This was given further impetus by the J.J. Irani Committee, which said that:

OPC may be provided with a simpler regime through exemptions so that the single entrepreneur is not compelled to fritter away his time, energy and resources on procedural matters.”

Thus, the concept of a One Person Company has been included in Clause 262 of the Companies Bill, 2011.

What is the procedure to form a One Person Company?

The person forming the Company has to give the following information:

a. The name of the OPC

b. The nature of activities of the OPC

c. A nominee to take the place of the single member (in case of death, disability, bankruptcy etc.)

One small rule is that like every private limited company has the suffix Pvt. Ltd., every One Person Company should have the suffix OPC in brackets.

Goodbye then to Proprietorships, Partnerships and LLPs?

Not quite. Countries which have introduced the One Person Company concept, like Pakistan, UK and Australia have not seen other forms of business organisation disappear.

People will continue to form proprietorships in India even when the concept of a One Person Company exists because despite the number of restrictions coming down, an OPC will never be as flexible as a proprietorship.

In terms of taxation and filing also, there will be mandatory financial statements to be prepared for OPCs and standards of accounting will have to be followed (not followed by most Proprietorships)

The number of partnerships, proprietorships and LLPs created will definitely come down, but anyone expecting these forms of business to go extinct is almost definitely mistaken.

Who is an OPC ideal for?

An OPC is ideal for a tech entrepreneur. An entrepreneur with a major new idea or innovation which he wants to deploy on the cloud may not need the burden of a co-founder. Likewise, freelancers, designers and developers who are one man armies will now form one man companies. It also brings the possibility of investors investing in promising young entrepreneurs going it alone.

Can the “One Person” in a OPC be a Company?

As per Singapore law, a Company can be the one person in a One Person Company. So, for example, if you have an existing Company where you are a director, you can form a One Person Company with your Company as the sole director.

For instance, you have a company called Rahul Textiles Pvt. Ltd. with you and your friend Hardik as directors. Now you also want to import textiles from Italy for sale in India and want to have a separate entity to do that (for accounting and taxation purposes).

As per Singapore law, you are entitled to form a One Person Company with Rahul Textiles Pvt. Ltd. as the sole person in the company.

The Indian Companies Bill, 2011 is so far unclear on whether a Company can be the single person in a One Person Company. Parliament should ensure that clarity is brought in on this aspect when it becomes law.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more).

Tax collection is one of the major tasks for the Government every year. In order to make its life easier, the government has devised several mechanisms. One of them is TDS (tax deduction at source). It helps to simplify procedures for the collection of tax. It also importantly increases the chances of compliance.

Another measure introduced by the Government which we shall be examining here is the concept of Advance Tax. As suggested by the phrase ‘advance tax’, it means that you have to pay a part of your annual tax liability in advance.

Pay-as-you-earn

Advance tax has to be paid in the year in which you earn in the income. Additionally, it has to be paid before the end of the assessment year. As a result, it also referred to as ‘pay-as-you-earn’ taxation.

Everyone does not have to pay advance tax. It is only applicable on sources of income other than your salary. This includes earnings through a house property or business, interest earnings on investments, income from a lottery and capital gains.

Illustration:

I work with a large company (say Infosys) and earn Rs. 50,000 per month as my salary. I also have a house in Bangalore from which I earn Rs. 20,000 per month as rental income. Do I have to pay advance tax?

Yes, you have to pay advance tax but not on the entire amount of Rs. 70000 per month. You only have to pay advance tax on Rs. 20, 000 which is your rental income (also known as income from house property).

For entrepreneurs and self-employed businesspersons, paying advance tax is a must. We as entrepreneurs do not earn a salary, unless you have a formal arrangement with your company by which you earn a salary from the company. As businesspeople, you have to file for advance tax.

Why is salary exempted? The major reason is that tax on salary is already deducted at source. The need to pay in advance does not arise because the Government (literally) gets its share before you do!

What is the procedure to file advance tax?

For individuals and entrepreneurs (except entrepreneurs having private limited companies), you have to file advance tax by the 15th of September, December and March. You have to pay 30 per cent of your total tax liability by the 15^th of September, another 30 per cent by the 15^th of December and the final 40 per cent by the 15^th of March.

For private limited companies, advance tax needs to be paid, in addition to the above dates, on the 15th of June as well.

To pay advance tax, you have to use the tax payment challan available at the bank branches empanelled with the Income Tax (I-T) department. Apart from the Reserve Bank of India, the State Bank of India, ICICI Bank, HDFC Bank and Indian Bank are some of the authorized banks. In all, there are almost 930 branches across India accept advance tax payments. Online payment is also possible on the Income Tax Department site or the National Securities Depository Site.

Please note: If your tax liability from sources other than your salary is more than Rs. 10000 and you have not paid advance tax, pay it immediately. The due date has already passed! If you do not pay your advance tax on time, you will be charged at the rate of 1% every month, or 12% per year.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more).]

As a matter of fact, most things cannot be patented. Most innovations today are in the tech space, and in the tech space, software rules.

Can I get a patent on software?

And as per Section 3 k of the Patent Act, software per se is not capable of being patented. Software per se means that the just software cannot be patented, however innovative it is. The software must be embedded on a system, and the composite unit must be innovative.

For instance, you build really innovative software that assists doctors in performing pediatric surgeries. Now, this software by itself is not capable of being patented.

However, this software embedded in a machine that is capable of deploying this software will make you eligible for a patent.

Why is it this way?

The exact wording of Section 3 k is:

(k) A mathematical or business method or a computer program per se

Therefore, the Section was drafted at a time when computer programs were not as complex and useful as they are today. It compares them to “mathematical methods” or “business methods”, which are merely theoretical propositions without direct practical application.

In today’s world where computer programs are commercially useful and directly applicable, this section is outdated.

Having said that, the rate of change in the industry and the pace at which algorithms are being churned out will make it impossible for the Patent office to keep up with the number of patent applications that will be filed if software patents were allowed!

What about for other inventions?

For those of you who are not in pure software development, there are three things you need to be aware of when it comes to patent application. An invention has to:

a. Be novel

b. Be capable of commercial application

c. Not be obvious

Novelty

Novelty, as the name suggests, means that in order for something to get a Patent, it should be “novel”.

Novelty means that something must be new, not discovered or even written about anywhere in the world. This is a very stringent provision – even if something has been written about in a Bulgarian journal in 1956, you will not be able to get a Patent for the invention today.

Remember: It need not have been commercially used anywhere else, one article or newsbyte somewhere is enough to affect your patent application.

So if you have an invention that you want to patent, do not write about it or discuss it with anyone else. Do not present it at fora or symposia.

If you must discuss your invention with business partners or close colleagues, make sure that you sign Non Disclosure Agreements with people wherever possible.

Capable of commercial application

The second requirement, and a rather obvious one, is that the invention must be capable of commercial application and exploitation.

In India, it takes 4 – 7 years and upto 2 lakh rupees to get a patent (depending on the complexity of your invention and whom you hire to help you). The amount of time and money invested in getting a patent is so high, especially in India, that no one would invest the energy otherwise.

But even if you were so inclined, your application would be rejected by the Patent office if it were not capable of commercial application.

Non-obvious

This is the third requirement, i.e. that the invention should not be obvious. What does being obvious mean? It means that the invention should not merely be a combination of many things which have already been invented.

If you stick a gun to a car and drive it around as a “personal assault vehicle” for example, it may get you stares (and land you in jail), but it will not qualify for a patent even though it is novel and new.

Why?

Because you have merely combined two things that already exist and brought them together. For a person who has seen a gun and seen a car separately, this combination is obvious, i.e. it is clear what the combination will look like and what it will do.

Conclusion

We have seen the three requirements of patentability – ‘novelty’, ‘non-obviousness’ and ‘capability of commercial application’. If these three requirements are met, you can successfully file for a patent. If these requirements are not met, you will not be able to file for a patent.

Additionally, core software code cannot be patented. It is only if it is embedded in a device to create a product that is innovative – that can get patent protection.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more).]

What you are actually doing when you click on the button “Buy” is to enter into a binding contract with the seller to purchase the mobile phone from him. He is now duty bound to sell the phone to you. If he does not do so, you can get your money back and if you are so inclined, also get compensation from him for the loss and inconvenience. So the net result is that today, millions of electronic contracts are being signed by people across India, with sellers across India.

Our contribution today will look at the nature of an online contract. Specifically, it will look at three things:

a. Is it as “legal” as a written contract?

b. How do I enforce it?

Is it as “legal” as a written contract?

International Model Law

In the field of the internet, and particularly of online commerce, the model law made by the United National Commission on International Trade Law (UNCITRAL) is the most influential force.

In the Information Technology Bill of 1998, prepared by the UNCITRAL, it is mentioned that a contract made by the exchange of “data messages” is valid. Therefore, it can be easily presumed that a contract made online, i.e. by the exchange of data, will be valid as well.

But what about the Indian law

The Indian law is quite liberal when it comes to the legality of contracts. It states that even an oral contract is valid, except in some cases.

Also, as per the Indian Evidence Act, e-mail communication and other electronic communication is recognized as valid evidence in a Court of law.

Putting the two together, we can confidently conclude that Indian law does recognize online contracts as valid. After all, an online contract is nothing but communication between two parties resulting in a transfer of goods / services.

And if the communication is recognized as valid as evidence, then it follows that the contract that follows the communication is valid too.

How do I enforce this contract?

This is a much trickier question. Let us say you have a contract between you and a web development company to build your product. It is signed online. Now the Company does not deliver. Can you take the same action as you could if it was, say, a supplier of metal bars?

Absolutely. Even if the contract is not a brick and mortar contract, it can be enforced in the same way as any other contract.

You can either file a civil suit for damages (before the Civil Court / High Court in your city), or if the contract permits it, seek an arbitration. In every case, it is best to send a legal notice first and if the legal notice brings no results, then only take legal action.

Anything in particular that I should include in my online contract?

If it is not a standard form contract and you are preparing it, make sure you include a “liquidated damages” clause. This essentially means that you clearly state the compensation in advance.

Why?

In the brick and mortar world, calculating loss is much easier. In the digital world, however, it is next to impossible. What if the web development company does not build your website and you cannot even launch the product?

That product might have been the next facebook or it might have been a non-starter. You cannot go to Court and explain your business plan. So you make life easier by writing a clause that looks like this:

“If XYZ Company does not build a website matching the requirements set out in Annexure A by the 15^th of January, 2011”, I shall be entitled to 100% of the website development fee as compensation.”

We recommend such a clause because it brings clarity to the relationship. Naturally, some give and take might be necessary before you sign on the dotted line or click the “I Accept” button. An online contract after all marks the beginning of a relationship.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider.]

So in this article, we are going to briefly discuss what these three are, how they are different, and how you should not confuse one for the other. Let’s start with the MoU.

MoU

An MoU essentially, as the name suggests, is an expression of understanding reached between parties.

It is not an agreement, although people confuse the two all the time. In fact, this mistake is so common that even Courts have begun to treat MoUs and Agreements alike!

But the fact is that they are not.

When two parties begin a relationship, they often enter into an MoU first to express their desire to work together. Here, they talk about what the goals of their relationship are, what role each party will play and broadly plan the road ahead.

Strictly speaking, an MoU does not create a binding contract, and does not compel the parties to enter into a relationship. Parties to an MoU can walk away from the MoU if they feel that it is not meeting their requirements, at any time. Sometimes, an MoU can even be used during the probation period, where the parties judge what it is like to work together.

NDA

As the name suggests, an NDA is to protect sensitive information. It is a promise not to disclose any sensitive information to a third party.

An NDA is normally entered into before parties enter into a formal agreement, or just after they enter into a formal agreement.

Unlike an MoU, an NDA is a binding contract between the parties, with consequences if you do not comply.

The case of Mr. Sharma and Mr. Sinha

Why do parties enter into an NDA? Well, the reasons are many. Let us take an illustration:

Mr. Sharma runs a garment manufacturing company. He employs Mr. Sinha as the managing director to run the business for him. Now, Mr. Sharma, who looks like the typical Indian businessman, has a few tricks up his sleeve. He actually has an optimized manufacturing process and a very efficient way of handling customer requests.

He naturally does not want the sharp and clever Mr. Sinha to take away all his valuable processes and go next door to the shop of Mr. Varma, Mr. Sharma’s arch rival for decades.

So he makes Mr. Sinha promise that whatever information and knowledge he earns from his employment will not be shared with anyone. That information will be contained in a Non DIsclosure Agreement. 

Normally, a “Non-Compete” clause is also included to guard against Mr. Varma poaching Mr. Sinha

In the NDA, Mr. Sharma will add a clause called the “Non Compete” clause. The Non Compete clause will say that Mr. Sinha cannot work with Mr. Varma for a certain period of time (say 2-3 years) after he has worked with Mr. Sharma.

Mr. Sinha, once he signs the Non Compete clause, cannot begin to work with Mr. Varma. If he does, Mr. Sharma can approach a Court of law and get an injunction against Mr. Sinha and prevent him from making the jump. 

Employment Agreement

Finally coming to the third creature in this equation, the Employment Agreement. 

An employment agreement is almost never a stand alone agreement. It is almost always prepared in conjunction with the other two agreements. 

Let us take the example of Mr. Sharma and Mr. Sinha once again. They have already entered into an NDA, and Mr. Sharma has decided that he wants to hire Mr. Sinha. Mr. Sharma will now enter into an employment contract with Mr. Sinha. 

The employment contract will contain the terms of the employment. It will contain details like the salary, bonus, period of employment and importantly, the notice period in case the parties want to terminate the agreement. 

So, can you summarize this for me?

We would like you to have two takeaways from this. First, an MoU is different from a contract. It is merely an expression of understanding reached between the parties before they enter into a formal agreement. 

Secondly, for any business, remember that while entering into a relationship, you should enter into specific agreements for specific purposes. Many businesses enter into one catch-all agreement. While one hopes that you never face any complications in your relationship, if you do, having tailor-made agreements for different purposes will help greatly. 

» More Legal/Law Related Resources For Startups.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more). Sourced from the vakilsearch.com legal knowledge base.]

One of the aspects that is being used increasingly over the past few years is patents. Using patents in marketing helps in sending across a wide range of messages.

We recently conducted a survey to understand consumer perception when they recognize that a product is protected by a patent, be it through an advertisement or through information provided with the product itself.

Largely, consumers seem to derive the below listed perceptions when they recognize that a product is protected by a patent:

1. When a message about a product being protected by a patent is conveyed, the company as a whole is perceived to be innovative

2. The patented product is perceived to be superior

3. The patented product is perceived to be unique, as no one else can copy the patented product

I agree with the first perception to a large extent. The fact that a company has a patent granted, illustrates that the company has, at least to some extent, invested in innovation. Further, the company has long term (it generally take around 3.5 to 4 years to have a patent granted) vision in protecting their innovation. Hence, a perception that a company is innovative can be agreed upon.

Further, as pointed out earlier, consumers perceive that a patented product is superior; this perception appears to be rather strong. However, while some patented products may be superior compared to other products in the market, it may not always be true. In over simplified terms, one can say that a patent was granted to a product or a process because the product has a feature or the process has a step that was not known to the public, prior to inventing the product or the process. However, it does not necessarily mean that the new feature or the process step is superior than the existing features or processes. Hence, a sweeping statement that a patented product is superior may not be accurate.

While I have some objections with the second perception, I completely agree with the third perception. The patented product would be unique, at least to some extent, as compared to other products in the market. However, having an opinion that a patented product has some breakthrough innovation in it, may not be correct, considering that most innovations are incremental in nature and not breakthrough. The innovation in the product, be it incremental or breakthrough, the fact remains that the product is unique, as the product cannot be copied, since the product is protected by a patent. The common understanding among consumers that a patented product cannot be copied by other, and hence the product remains unique, appears to be greatly abused by marketers.

Consumers to a large extent are not aware that patents are jurisdiction specific. In other words, a patent granted in US and not in India, cannot be enforced in India. Which means, if a patent for a product is not granted in India, and is granted only in the US, then anyone in India can copy the patented product without being liable for infringing on the rights of the US patent holder.

To sum it up, using patents as a marketing tool has a lot of positive effects on consumers. Hence, while marketers might use this strategy, ethical or not, to their advantage, consumers should absorb such messages with a pinch of salt.

I hope this article helps in increasing knowledge about the patent system among consumers in general, and marketers in specific.

[About the author: Kartik Puttaiah is the Co-founder of Bangalore based patent services company, InvnTree IP Services Pvt. Ltd.]

Though pricing of the goods or services and service quality still remain the mantra for success of an e-commerce business, few secondary factors also play a pivotal role. One such factor is the name under which the e-commerce business operates, i.e., its domain name. As you many of us know domain names are a human friendly form of internet addresses and are used to find web sites on the internet. For an e-commerce business having the right domain name is paramount for achieving ultimate success. Usually, e-commerce businesses endeavor to find a domain name that is trendy, catchy and easy to remember for the online users. Online companies spend a lot of efforts researching a suitable domain name, and most of the times, land up coining a unique one. In the history of Internet, domain names such as ebay.com, makemytrip.com, naukri.com, amazon.com, shaadi.com, quickr.com, zomato.com, and the like, have proved to be very successful for their owners.

However, as it always goes, great success always attracts the threats from exploiters. Most of the exploitation of domain names arises from the practice of cyber squatting, which involves the pre-emptive registration/usage of trade names as domain names by third parties. Cyber squatters exploit the first-come first-serve nature of the domain name registration system to register or use same or similar trade names of businesses. Cyber squatters also usually register or use names of famous people or businesses as domain names. Usually, these cyber squatters do not have any relationship with these businesses or people, and solely register or use the domain name with the intention of fleecing money from their fair proprietors or leverage the brand value of the business. Therefore, the pertinent question is that how can e-commerce businesses ensure the sanctity of their domain names and protect them from exploitation?

It is apparent from discussions above that a domain name accrues the characteristics of a trade name over a period of time. In e-commerce businesses this phenomena is much more common, where one company owns many portals, and the identity and the image of the company is associated with the domain name of their portals. For example, Info Edge (India) Ltd., a major in the online space, owns multiple portals, such as Naukri.com, Shiksha.com, 99acres.com, Jeevansathi.com, and the like. So the pertinent question that arises is that can somehow domain name get the benefit under Trademark laws and can be registered as distinct trademarks there-under? If yes, can the protection offered under the Trademark laws be extended to domain names, and can unauthorized use of domain names, which are deceptively similar to your domain name, be considered as violation of any such registered trademark?

This question was discussed in a landmark case, Satyam Infoway Ltd. vs Sifynet Solutions Pvt. Ltd. In this case, Sifynet Solutions, an Ahmedabad based company registered several domain names, such as www.sify.net, www.sifymall.com, and www.sifyrealestate.com, with Internet Corporation Assigned Names and Number (ICANN). In opposition to this, it was opined by Satyam that the word ‘Sify’ is a coined word and has been used using its corporate name. Also it was averred by Satyam that the word has claimed a wide reputation and goodwill.

The Supreme Court in this case held that the original role of a domain name was to provide an address for computers on the internet. Further, the Supreme Court noted that with the increase of commercial activity on the internet, a domain name is actually been used as a business identifier, and therefore, acts as a trademark. On the question of whether the principles of trademark law and in particular those relating to passing off apply to domain name and infringement (in case the domain name is registered), the court held in affirmative. The court believed that it is an action not only to preserve the reputation of the plaintiff but also to safeguard the public.

Therefore, the logical conclusion derived is that the domain names can be registered as trademarks, and in this way you can certainly add trademark registered domain names in to your Intellectual Property (IP) assets. Benefits of registration of domain name as trademark stem from the concept that if somebody uses a domain name deceptively similar to your trademark registered domain name, a remedy in the form of trademark infringement action, which is swifter and well defined as compared to existing domain name exploitation redressal mechanisms, can be brought against the alleged violator. However, it should be understood that the rights vested with an owner of a trademark by registration thereof are limited in the geographies where the trademarks are registered. Therefore, in context of the above discussion, the aforementioned remedies can only be availed only in the courts of India.

In light of the aforementioned decision of the Supreme Court, the Trademark Registrar, the administrative body overlooking registration of trademarks in this country, has been allowing trademark registration for domain names. We have fetched the following examples for ready references:

1. The Reliance owned, www.bigflix.com, has been provided a trademark registration domain name.
2. www.flipkart.com, which is owned by Flipkart Online Services (P) Ltd., has also been provided a trademark registration to the domain name.
3. Likewise is the case with Info edge (India) Ltd., which owns www.99acres.com and www.naukri.com .

Finally, for the entrepreneurs who would be interested in obtaining a trademark on their domain name, the procedure for Trademark registration in India is elucidated in brief with the help of the following flowchart.

	Process of Trademark Registration

[Guest article by Kshitij Malhotra, Founder & Director, Inohelp IP. He can be contacted at kshitij.malhotra@inohelp.com]

Patenting trends of a company is derived by crunching patent information corresponding to a company. Various macro and micro level trends can be derived by crunching patent information. Such trend analysis has been found useful in determining the market entry strategies, product strategies, R&D efforts, key innovators of a company and collaborations, among other competitive intelligence information.

This study attempts to determine macro level patenting trends of Google. The report provides the following macro level trends as part of this study:

• Year wise patent filing trend
• Country wise patent filing trend
• Year wise patent filing trend in top 10 countries
• Top 20 IPC classes
• Year wise patent filing trend for top 20 IPC classes
• Top 20 successful inventors

Year wise patent filing trend

This trend indicates that there was a substantial increase in patent application filings in the year 2003, when compared with number of patent applications filed in 2002. The subsequent year, 2004, also witnessed a substantial increase in the number of patent applications being filed. Thereafter, the number of patent applications being filed has remained fairly consistent.
The graph tends to indicate that the number of patent applications being filed in 2009 and 2010 has decreased. However, it shall be noted that it generally takes 18 months from the filing data (priority date to be precise) for the applications to get published. Hence, some of the patent applications filed in 2009 and 2010 might be awaiting publication. Therefore, the number of patent applications filed in 2009 and 2010 might be substantially greater than what is indicated in the graph.

Country wise patent filing trend

As one might anticipate, US, WIPO (World Intellectual Property Organization) and EPO (European Patent Office) are the top three jurisdictions in terms of number of patent applications being filed. However, interestingly, 5 countries, China, Korea, India, Brazil and Japan, which are primarily Non-English speaking countries, find a spot in the top 10 patenting destinations of Google. Additionally, 3 developing countries, China, India and Brazil have found a spot in the top 10 patenting destinations of Google.

Year wise patent filing trend in top 10 countries

From this trend, it appears that, since the year 2003, Google has started to diversify their patent portfolio by filing patent applications in multiple jurisdictions. Among such jurisdictions, Brazil appears to have witnessed a decrease in the number of patent applications being filed, while most other jurisdictions have witnessed an increase in the number of patent applications being filed.
Top 20 IPC classes:

Year wise patent filing trend for top 20 IPC classes

From this graph, as one might guess, it appears that significant portion of the patent portfolio attempts to protect techniques related to information retrieval (which can be interpreted as search – IPC code G06F 17/30). Further, a significant portion of the portfolio attempts to protect techniques related to e-commerce (IPC code – G06Q30/00).
Please note that one patent/application per patent family (A patent family is a set of patents/patent applications filed in various countries to protect a single invention – same set of inventors) is considered for the above two graphs.

Top 20 successful inventors at Google

Interesting point to be noted in this graph is the absence of Google’s founders’ names among the top 20 inventors for Google, considering the fact that any inventor with 6 granted patents (patent families) would have found a spot in this graph.

To summarize:
In addition to the above macro level trends, various other macro and micro level trends can be derived to serve various analytical objectives. I hope entrepreneurs in India use patent date intelligently in their decision making process.

What’s your take?

» More Legal Resources

[About the author: Kartik Puttaiah is the Co-founder of patent services company, InvnTree IP Services Pvt. Ltd., based in Bangalore.]

Patenting involves competitive strategies in today’s business world. To build a successful company through protecting its patents, one needs to develop a patent-filing strategy as well as manage their IP assets in a way that would bring revenue to the company. But above all, one should be aware of the pitfalls of the patenting system and learn to combat them efficiently by devising a wholesome, customized patent strategy.

Abraham Lincoln’s words ring true when he said that the patent system is “the fuel of interest to the fire of genius.”

The concept of patenting inventions can be traced back to the 14^th century. The system was introduced to encourage the inventors by awarding them exclusive rights to their inventions for a specific period of time in exchange of public disclosure of the invention once the period of protection was over. During this specific period, the inventor could reap the benefits of his hard-work by exploiting his patent in any number of ways. After such period was over, the knowledge of the invention is dissipated to the public, so that the public can utilize this knowledge.

Patenting, in today’s world, is of a different ball game altogether. Though the basics of patenting remain the same, i.e. exclusive protection for a specific period; today, patents are used to give companies’ leverage against its competitors. Patents can be used to enhance the competitiveness of a business. Patents are used as weapons of defense: to be ahead of others as well as to stop others from overtaking one’s progress. Companies stringently protect their IPs and have IP management portfolio because they realize that a single, novel patent can be the only difference between one’s company leap over others. A single example to exemplify this can be the technology of xerography developed by the Xerox Corporation that created a new industry in itself.

When such a product is invented which is a leap over the existing technologies available, then it is prudent on part of the company to protect such invention. Protection is sought to keep the company ahead of others- so that none can use the patented product/ process. Usually, in a company, the employee(s) who invents the product is the Inventor(s) and the Inventor(s) assign the rights to the company. Patent rules and rights are different in different countries, but in most countries, it includes a right of exclusive use of the patents for a limited period of 20 years.

Rights of the Patentee/ Company

During this 20 years period, the patentee gets the exclusive rights to

• Enjoy monopoly rights over his invention
• Cease others from making, using, selling, importing, offering for sale or distributing the patented invention without his permission
• Monetize his patent by selling or licensing

From the standpoint of business enterprises, these rights mean that its competitors cannot create similar products that infringe the patent; and if it does so, the patentee company can sue them. Incase the competitors want to use the patented product/ process; it would need to get a license from the patentee company. During this period of 20 years, the R&D team can further improvise on the patent.

Points to be taken care of while patenting:

Though there are definite gains in patenting, yet a company should have a patent strategy in place. One should not patent every invention available. This is because patenting is an expensive procedure and some patents are not worth patenting. Also, as against general notion, patent protection is not international; it is a national process and one should understand the risks involved while choosing jurisdictions. One should also be aware of other’s IP and respect the same to safeguard oneself from unnecessary litigation or royalty payment.

[Recommended Read: What Can Be Patented And What Cannot Be Patented?]

Expensive Procedure and How to combat it:

Although patenting is necessary to create a unique position in the market, often the costs of patenting deter companies from patenting their inventions. In US, as well as in most other countries, attorney fees are charged by the hour and it can be anywhere between $250- $500 per hour. To combat the cost, most foreign companies employ Indian IP firms to cut costs of patenting while maintaining the quality of their patent applications. Another strategy is to evaluate the inventions and separate the important inventions from the non-important ones and patent the former category only. Also, one should evaluate in which countries the future of the product lies and then file patents accordingly. Filing patents on a whole-wide basis is simply a waste of money.

[Recommended Read: How much does it cost to get a patent in India?]

When should a product/ process be patented:

Though there is fierce competition to patent inventions and gain exclusive rights, one should not patent each and every invention. Sometimes, the product is not worth the money to be invested in order to protect it. To estimate whether your product is worth patenting, the question to be asked is- whether the product would be successful enough that competitors would want to obtain the product. If the product would generate a meager amount of profits, it is not worth patenting. If it would be successful enough to justify legal expenses in defending the product, then you can consider patenting it. You can also consider patenting it if the product is successful enough to create revenues for your company by licensing it to others.

Once you have decided to patent it, there are very many ways of gaining revenue from it. You can license it, mortgage it or market the patent yourself.

[Recommended Read: Why and what should you patent?]

Patent Procedure and in which countries should a patent be obtained:

Patents are territorial. As against general notion, a patent is protected nationally and not internationally. There is nothing called International Patent Protection. The only way of protection patents on a global basis is to file patent in each country separately. Many have heard about the PCT (Patent Co-operation Treaty) and have a wrong notion that PCT applications are protected internationally. PCT Applications are preferred only because it gives extra time to the Applicant in deciding in which countries he wants to file national patent application. Deciding the jurisdictions in which to file patent is an important decision. The procedure for obtaining patent is expensive and jurisdictions must be chosen with utmost care. Mostly, in such decisions, countries where the product will not be launched should not be chosen. Countries where the company will be doing business should be chosen. One should realize where the future of the patented invention lies.

[Recommended Read: How Long Does it Take to Get a Patent? [A Comparative Study] | What Are The Different Patent Filing Options?]

Be aware of other’s IP rights

If your product becomes successful, there might be companies holding patents that can drag you into unnecessary litigation or ask you to pay royalties to the tune of lakhs of rupees. There are companies who patent inventions but do not utilize them. They wait for other companies to develop similar products, and once these products become successful, the patentee companies start suing them or asking for royalties. These companies are Patent Trolls.

The Blackberry case made everyone aware of the perils of patent troll actions. NTP never made or sold anything but strived on licensing its patents to other companies. In early 1990s, it purchased patents relating to wireless e-mails. When Blackberry maker, RIM, started providing wireless e-mail services, NTP sued RIM for infringing its patents. What ensued was a legal battle that resulted in RIM paying NTP a one-time payment of $612.5 million.

To avoid messy situations like the one illustrated above, one should be sure that the product of a company does not infringe any patent. To this end, patent search for freedom to operate can be conducted to confirm that no similar product using the same technology exists. “It is actually better to do a preliminary patent search before delving into the R&D or product developments to avoid investing money in unnecessary avenues”, says Senthil Kumar, Patent Consultant/CEO of Intepat IP Services Pvt Ltd, Bangalore.

[Recommended Read: Is My Product Infringing On Others Patents? | How to Use Patents to Improve Competitiveness]

Patenting and Success

Notwithstanding the risks involved, there is a definite correlation between patenting and business success. Companies with patents are four times likely to be successful. The reasons for success, besides the exclusive rights are as follows-

1. IP Valuation- How it can be helpful in making your business a success

Knowledge is now considered to be an asset and protected vigorously by companies in the form of IP protection. Corporate strategy includes the management and protection of IP assets. The first and foremost step in the strategy is the correct valuation of your company’s IP.

Valuation is important for both licensing and investment options. Moreover, valuation is important for mergers and acquisitions (M&A). For obvious reasons, companies with technological overlap in their patents are more likely to form mergers than ones where there is no overlapping.

Companies perform IP valuation of their assets and usually, segregate the IP assets into three categories:

1. Very valuable patents that are worth defending
2. Moderately valuable patents or patents that are not used or planned to be used, yet are valuable to others, and
3. Patents unlikely to be used and not of value

Dow Chemicals, which had 29,000 patents, classified its patents in the above three classes and the first class was segregated for business growth purposes, the second offered for licensing and the third class was donated or abandoned.

2. Patents and Investment- How to rope in investors:

Patents can bring in investment to the company. When investing in a company, an investor would want to be assured that his investment would be protected and that he would gain some returns for his investment. When patents are a part of the IP assets of a company, they form an assurance to the investors that the company would gain a unique position in the market due to its protected inventions and there is a possibility of financial gains from the same. Analysts have also found that companies with great patents, i.e., those cited by others in their patent applications, are likely to be a better investment than those holding patents that are never cited ["Follow the Patents," BusinessWeek, 8 January 2007]

While investing, several questions may arise in the mind of the investors- some being- When will the validity for the patent expire? Can the patent be reverse engineered or worked around to make similar inventions? Can it be proved invalid?

These uncertainties in the minds of the investor can be removed by making a patent portfolio wherein a patent search of similar products is done to evaluate your leverage against the current available/ patented products. The patent search report would consist of inventions consisting of similar products and would also cite how your product is different and advantageous from the ones available in prior art.

3. Patents and Licenses- How it brings revenues

After a patent is granted, the same can be licensed to others in order to create revenue for the company. Some businesses exist solely to collect revenues from the patents they license to others. Licenses can be exclusive- where there is a sole licensee who can use the patent- or non-exclusive- where there are several licensees who can exploit the patent.

The power of licensing to others may be used as a weapon to obtain royalties in cases where there is infringement of your patent. In such infringement scenarios, the patentee company usually sends cease and desist letters and obtains injunctions against the competitor who infringes their patented product. However, if a company is not willing to defend its patents through the expensive and time-consuming process of litigation, specially when they are of the opinion that the patent is not that successful/ worth as to invest money in litigation, it can bargain with the competitor and obtain royalties for the infringing operations of the competitor. More often than not, the infringing party is willing to pay royalties than get tangled in litigation procedures.

Conclusion

Patent strategy when applied in the right way can make your business leap light years ahead of others. For this, a patent-filing strategy and an IP management strategy should be customized according to the needs of the company. If properly executed, these strategies could lead your company to unprecedented success.

What’s your opinion?

Recommended Read: Are Patents Always The Best Way To Protect Inventions? [The Dark Side]

Also see: Indian Government Announces National Awards For Commercial Patent Holders

Criteria

The applications for “National Awards to Commercializable Patents” are invited from Indian nationals, who have patented {Indian patent granted in the name of the individual(s)} technological innovation(s) having high commercial potential and have developed at least a working prototype of the technology/product/process etc. of the innovative technology.

Eligibility Conditions

• Applicant (s) must be an Indian National.
• Indian patent must have been granted for the technology/product / process in the name of individual(s), who is / are applying for the award and the applicant(s) should be the absolute owner(s) of the patented technology/product/process till the date of submission of the application. The patent should not be in the name of the institution / organization / association / company etc.
• The year of grant of patent should not be before the year 2005.
• The technology /product/process etc. should have good commercial application / value in the present scenario.
• The working model / prototype of the technology / product / process etc. should be ready and in fine working condition.
• The innovative technology / product / process etc. for which patent is granted should not have already been transferred / licensed / commercialized in any manner.

The award will carry a sum of Rs. 5.00 Lakhs and a certificate. In addition, selected innovations may be provided a commercialization incentive of Rs. 5.00 Lakhs on commercialization of the awarded patents.

[more details here]

[Thanks Meenakshi for the tip.]

Trying to market a poor trademark which is similar to another registered mark may entangle you in legal disputes Therefore, before registration of a trademark it is essential to know the marks which are prohibited under the trademark law.

What can be registered?

Surnames, proper names and words describing goods and services can be registered as a trademark. For example Birla Corporation Limited uses their surname Birla as their trademark. A trademark can be registered if it is able to distinguish its product in the market and it is not used to deceive or confuse the customer.

What cannot be registered?

Registration of the following marks is prohibited under the trademark law:

• Trademarks Devoid of distinctive character: A mark which do not distinguish the goods and services from others or which describes the nature and quality of goods and services or has become customary in respect of the relevant goods or services cannot be registered. For example, Otis’s trademark “Escalator” for moving staircases became a generic word and therefore, the Trademark Office concluded that Otis cannot use its trademark since the mark has become customary in respect of moving stairs.

• Marks that Deceive or confuse the customer: A mark which is an imitation of a well known trademark for same or similar goods and can deceive consumers cannot be registered as a trademark. For example- Using a mark “Colmate” with similar get up of “Colgate” for toothpaste would not be registered as a trademark.

• Scandalous marks: Marks that can hurt religious sentiments or contains obscene matter cannot be registered. For example, the mark “Hallelujah” for clothing was not given registration.

• Prohibited marks: A mark where the application for registration is in bad faith; or seal/flag of the Republic or of other countries, or a mark which is prohibited under law cannot be registered. For example- National flag of a country.

• Shape of goods: If the shape of the good results in nature of the goods or gives technical results and substantial value, such a mark cannot be registered. This is because it would limit the development of industries which manufacture it. For example- shape of Vienetta ice cream that resulted from the nature of the product itself was held not registrable.

• Earlier trademark: Any mark which is similar to an earlier trade mark in identity and similarity in goods and services cannot be registered. For example- another “Kodak” for camera or “Fair and lovely” for cosmetics would not be registered as a trademark.

• Geographical Names: Geographical names cannot be used when a particular place is famous for a particular good/ service. For example, “Nilgiris” cannot be used for tea since Nilgiri is famous for its tea. However, if there is no connection between a particular place and product, it can still be registered, for example “North Pole” for ice-creams can be registered, since North Pole is not connected to ice-creams in any way.

These simple rules should be kept in mind while selecting a good trade name. Keeping these rules in mind, one can select a strong trademark which would be distinctive and would be legally enforceable as well as easily registrable.

[Guest article by Pankhi Dutta, IP Analyst at Intepat IP Services Pvt Ltd, Bangalore.]

Recommended Read:

• Explained: Why & How to Conduct a Trademark Search?
• Are Patents Always The Best Way To Protect Inventions? [The Dark Side]
• What Are The Different Patent Filing Options?

What is a trademark search?

A trademark search is a search made in the database of the Trademark Registry. The search determines whether a proposed trademark is available for use in connection with certain goods or services. In the search, similar word marks as well as phonetically similar names in a specific class is comprehensively searched.

Advantages of trademark search:

Firstly, and most importantly, a trademark search will tell whether someone else have already adopted your proposed trademark or adopted a highly similar one.  If you adopt a trademark that is already in use by someone else, you may be inviting a trademark infringement lawsuit. Infringement suits involve a huge amount of money and, losing or settling the suit means either paying monetary damages or discontinuing the use of your trademark or both.

Secondly, a trademark search will clearly list any prior trademark registrations or pending applications that are likely to prevent you from registering your trademark with the Trademark Registry in future.  This will save time and money of filing an application to register a trademark that has little chance of actually getting registered.

Thirdly, a trademark search will help you assess the relative strength of your mark by showing you how many other similar trademarks are already there in the marketplace.

How to conduct a trademark search?

An online trademark search in the Trademark Registry can be done free of charge at the link [Interface] : http://124.124.193.236/tmrpublicsearch/tmsearch.aspx

Search Interface is divided into three category

a) Wordmark- For similar representation of names

b) Device Mark-For similar artistic representation

c) Phonetic-For phonetically similar words.

Search Parameters

First select the search criteria from the options given- the options are Wordmark, Device mark, Phonetic.

For example, to perform a Wordmark search, select “Wordmark” from the Categories and insert the keywords of your proposed trademark in the box corresponding to Wordmark. From the Prefix drop-down menu select either “Starts With” or “Contains”.

In “Starts With” option, any trademark starting with the entered keyword will be searched; whereas in the “Contains” option, any trademark containing the entered keyword as part of the name would be searched.

From the condition dropdown you can select prefixes either ‘AND’ or ‘OR’ Category. The class related your services or product belongs to your proposed trademark is entered in the box corresponding to ‘CLASS’. There are 45 classes of trademark registration. Classes’ 1-34 deals with various goods and Classes 35-45 deals with services.

After the required fields are thus entered, click on ‘Start Search’ button to view your search result. The details of each of the trademark applications would be shown in the result and to create a report, you can select the applications you want to view in further detail by marking them in the boxes available and clicking “Report”

After doing the trademark search if it is found that there are no similar trademarks on record then you can proceed for the trademark registration by applying it at the Trademark Office.

[Guest article contributed by Pankhi Dutta, an IP Analyst at Intepat IP Services Pvt Ltd, Bangalore]

Also see: Trademarks registration in India – The Entrepreneur’s Guide

LLP Act, 2008 was notified in April 2009.  However, FDI was not permitted into the LLP up until now.

This approval however comes with some restriction and will be initiated in the “open sector” where no monitoring is required. However, here too certain conditions have been laid. The following is a brief on the restrictions and conditions.

1. Sector and Activities: FDI in an LLP will be permitted only in those sectors/ activities where 100% FDI is permitted through automatic route.  Accordingly, FDI is not permitted in sectors prohibited for FDI (like, agriculture, plantation, print media, real estate); sectors having a cap (like telecom); sectors falling under approval route (DIPP approval); or where FDI under automatic route with conditions.
2. Downstream Investment by LLP:  LLPs with FDI will not be eligible for making any downstream investment. However an Indian company, having FDI, will be permitted to make downstream investment in LLPs only if both the company as well as the LLP, are operating in sectors where 100% FDI is allowed, through the automatic route.
3. External Commercial Borrowings:  LLPs will not be permitted to avail external commercial borrowings.
4. Capital Participation:  Foreign Capital participation in the capital structure of the LLPs will be allowed only by way of cash considerations, received by inward remittance, through normal banking channels, or by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank. Foreign Institutional Investors (Flls) and Foreign Venture Capital Investors (FVCIs) will notbe permitted to invest in LLPs
5. Taxation:  In 2009, the tax rate for LLP is done at 30% + cess.  An LLP is not subject to dividend distribution tax.  A minimum alternate tax (MAT) of 18.5% is applicable.
6. Ownership and management:  The designated partners in respect of LLPs with FDI, has to be a “resident in India”  and such person should fulfill the requirement for this term as set out in Foreign Exchange Management Act, 1999.  Designated partners will be responsible for all compliances of the LLP, including compliances under FDI.
7. Conversion of a company with FDI to LLP:  Prior approval of the FIPB/ Government is required for a Company with FDI to convert into an LLP.

Disclaimer:  This article is for informational purposes only and is intended but not promised or guaranteed to be correct, complete and up-to-date. This is not a legal advice or opinion.

[The article is contributed by guest author Sharda Balaji, founder of Novojuris, a legal consulting firm.]

We recommend startups opt the administration of ESOP by its Board of Directors rather than creation of a Trust (per Indian Trusts Act).  A startup recently approached us for cleaning up the mess they had created in their ESOP grants and wounds they had self-inflicted in creation of their ESOP Trust, which triggered this post.

A Trust for ESOP works as follows:

1. A Trust is formed under the Indian Trusts Act, and the Trust Deed is registered with the jurisdictional Sub-Registrar. 
2. The ESOP Trust receives stock either from company by way of fresh allotment or by purchasing from existing shareholders in open market or the owner of the company may sell shares of his holding to the ESOP Trust. 
3. The ESOP Trust usually obtains its funds through a loan either from a financial institution or from the seller or a combination of institutions and seller. A company can extend loan to the Trust for purchasing the Shares. There is a specific provision in the Companies Act, which permits such loan. (Sec. 77(2) (b) and (c)

The ESOP Trust then allots shares to employees on exercise of their right in exchange of cash and repays its loans.

Additional Information, if the company is a listed entity:

SEBI guidelines do not mention ESOP Trust and thus creation of trust to administer the ESOP scheme is optional. SEBI guidelines also do not specify any accounting principles to be followed in case of grant of options through a trust. A committee appointed by SEBI had recommended that since this is a consolidation issue rather than an ESOP issue, the ESOP trust should be consolidated with the company under AS 21 and the existing ESOP guidelines should be applied by the consolidated entity.

TRUST SET BY THE COMPANY FOR THE BENEFIT OF EMPLOYEES:

ESOP Trust (a Private Trust formed as a separate entity, but not being a charitable Trust) can be formed under the Indian Trust Act, 1882.

1. Shares of the company can be held by the Trustees is held as beneficial owners. Hence Form 22-B declaring beneficial ownership has to be filed with ROC. (Sec 153 of Companies Act).
2. Board of Trustees is controlled by the Company (indirectly by being nominated as trustees).
3. Company may give loan to the trust to buy shares (earmarked for ESOP) (U/s 77 of Companies Act).
4. Trust uses the funds to buy shares of the Company.
5. Employees of the Company are granted Options by the company.  Decision to grant Options is controlled by the Compensation Committee of the Company.
6. On exercise of the Options, the trust transfers shares (held by it) to the employee.
7. While transferring the shares to the employees by the trust, the Share Transfer Form (Form 7B) has to be executed by the Trust and the employee.
8. The share transfer form has to be approved in the Board Meeting (BM) of the company and then the employee becomes a shareholder of the company. After which they are issued share certificates and the Register of Members is updated accordingly by the Company.
9. If the options lapse due to separation, the options remain with the Trust and Trust can issue fresh grant letters for the remaining options (based on the decision of the Compensation Committee).
10. The cash received on exercise (by the employee) is used to repay loan taken by the Trust.
11. Compensation cost to be recorded as if the Options were granted directly by the Company.

Startups are you hearing us?

Disclaimer:  This article is for informational purposes only. This is not a legal advice or opinion.

[Guest article by Sharda Balaji, founder of Novojuris, a Bangalore based legal consulting firm. The article has been reproduced from Novojuris’ blog]

Before we discuss the other reasons, let us first look at what rights do the term “exclusive right” of the inventor encompasses. Exclusive rights means the inventor wields monopoly rights over his invention, such that he can stop others from using his invention without his permission. This, interpreted in another sense, would mean he can gain royalties from persons who use his invention. Royalties is one reason why many inventors/ companies want to patent.

Besides this privilege of exclusivity, many companies use the patent system as a weapon of defense also, i.e. they patent to stay ahead of others besides being able to stop others from overtaking their progress.

Sometimes, a single novel invention is all it takes for a company to leap light years ahead of others. In extreme cases, a single patent had started up entire industries- like the xerography technology started by the company, Xerox Corporation.

As a start-up company, having a patent brings an advantage of the company’s ability to rope in investors. Investors would always look for signs of growth, of knowing that his investment would be protected in a company and he would get some returns out of it. Companies with strong patents would always have a unique position in the market. This would in turn rope in investments to your company.

Nowadays, most companies understand the importance of IP valuation and have IP portfolios to manage their IP assets. Valuation is important for investment- to show the investors the strength of the company’s IP; and also for licensing and Mergers & Acquisition- to realize the full potential of the patents.

As seen, there are compelling reasons why you should patent your inventions but the next important question is: Should one try to patent any invention that one comes across? In other words, what should be patented?

The one major hurdle in the patent procedure is that patenting is an expensive affair. It becomes an even more expensive affair when you want to patent in several countries; since, unlike the general notion, patents are territorial and are not protected internationally.

Hence, one should identify in which inventions to invest money and which to forsake. To estimate whether one should go for patenting or not, the question to be asked is- how successful will the patented product be? If it is successful enough to be wanted by the competitors, then it is worth protecting. If it can give a reasonable profit by licensing it to others, then also it is worth protecting. However, if it gives a very meager amount of profits, then there is no point in investing money trying to patent it.

Though patenting might give your company very many advantages, yet before going forth, you should fully realize the value of your patent, the equation of your investment to the value you will receive from your patent; and once sure of the value of your patent, go forth investing in it.

[Guest article by Priyanka Gogoi, IP Attorney at Intepat IP Services Pvt Ltd [http://www.intepat.com], Bangalore]

Step 1: Trademark Search

Many entrepreneurs do not comprehend the importance of a trademark search. Having a unique brand name in mind is not good enough reason to avoid a trademark search. Trademark search helps you to know if there are similar trademarks available and it gives you a fair picture of where your trademark stands- sometimes, it also gives you a forewarning of the possibility of trademark litigation. Why waste your money in time-consuming trademark litigation later when you can choose to avoid it in the first place?

Step 2: Filing Trademark Application

After you are sure that your chosen brand name is not listed in the Trademark Registry, you can opt for registering the same. The first step is to file a trademark application at the Registry. Now-a-days, filing is mostly done online. Once the application is filed, an official receipt is immediately issued for future reference.

Step 3: Examination

After a trademark application is filed, it is examined by the Examiner for any discrepancies. The examination might take around 12-18months. The Examiner might accept the trademark absolutely, conditionally or object.

If accepted unconditionally, the Trademark gets published in the Trademark Journal. If not accepted unconditionally, the conditions to be fulfilled or the objections would be mentioned in the Report and a month’s time would be given to fulfill the conditions or response to the objections.

Once such Response is accepted, the Trademark is published in the Trademark Journal. If the Response is not accepted, one can request for a hearing. If in the hearing, the Examiner feels that the trademark should be allowed registration, it proceeds for publication in the Trademark Journal.

Step 4: Publication

The step of publication is incorporated in the Trademark procedure so that anyone who objects to the registering of the trademark has the opportunity to oppose the same. If, after 3months from publication there is no opposition, the trademark proceeds for registration. Incase there is opposition; there is a fair hearing and decision is given by the Registrar.

Step 5: Registration Certificate

Once the trademark proceeds for registration, following publication, a registration certificate under the seal of the Trademark Office is handed over to the Trademark owner.

Step 6: Renewal

The trademark can be renewed perpetually after every 10 years. Hence, your brand name can be protected perpetually.

As seen from the above, trademark procedure does not require much effort. It is a simple procedure but one which is nonetheless very important in order to protect your brand name. There are various IP firms that can help you with the entire process of registration without you worrying about deadlines and responses. Hence, understand the power of your brand name and take steps in protecting it today.

[Guest article contributed by Priyanka Gogoi, Trademark Attorney at Intepat IP Services Pvt Ltd, [http://www.intepat.com], Bangalore.]

Also see:

• Working On Your Startup In Stealth-mode While Being Employed? Know the Legal Side of It.
• Is My Product Infringing On Others Patents?
• How To Hire A Corporate Lawyer [7 Tips]
• How Long Does it Take to Get a Patent? [A Comparative Study]
• What Can Be Patented And What Cannot Be Patented? [Legal Resource for Startups]

» More Legal Resources For Startups.