The legal essentials you need to build a startup in Sri Lanka

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Agreements with shareholders. Trademark and employee regulation. Taxes and so many other things. It’s common knowledge that building a startup is hard. Finding customers, building the right team, obtaining funding, the list goes on and on. But one of the challenges that startups in Sri Lanka face that not spoke of about often is the legal essentials. This is what elawyers.lk hoped to address with one of their most recent workshops.

How to draft an agreement with shareholders

Kicking things off was Dinushka Medagoda – Founder of elawyers.lk. He began by describing the different types of businesses that can be registered. Afterward, he went onto explain what exactly a shareholders agreement is. In a nutshell, this is a legal contract that defines the relationships between the shareholders of a company.

Dinushka Medagoda - Founder of elawyers.lk speaking at the legal essentials workshops for startups
Dinushka Medagoda – Founder of elawyers.lk speaking at the legal essentials workshops for startups

One of the first things the shareholder’s agreement would cover the issue and transfer of shares. But how does one set the price for shares with regards to this? It has to be set at a price, which will not make future shareholders feel cheated. And it has to be done by the Board of Directors of a company. Additionally, the shareholder’s agreement must also prevent dilution and loss of control.

Dinushka then went onto explain the concept of reserved matters. These are specific matters defined in the shareholder’s agreement, that all shareholders must agree on before a decision can be approved. When drafting the agreement, Dinushka pointed out that founders should very attentive as to what these matters are.

Dinushka Medagoda explaining shareholders agreements
Dinushka Medagoda explaining concepts regarding shareholders agreements to a member of the audience

This is because reserved matters offer avenues for founders to protect their vision for the company. And if that vision involves an exit down the road, then the shareholder’s agreement should address it. Furthermore, when it comes to arbitration to solve disputes, it should be expressly mentioned, which country’s laws apply.

Having listed other important clauses a shareholders agreement should cover, Dinushka gave everyone attending an important reminder. “Friends can do verbal agreements. But it’s very critical to have written agreements,” he said. This is why documents such as shareholders agreements are essential for any startup.

Understanding trademarks for startups

Following an introduction to shareholders agreements, we saw Kalana Kotelawala – Senior Legal Consultant at the National Intellectual Property Office. He opened by defining that a trademark is a distinctive identifier of goods and services by a business. It is what’s used to distinguish the products from a company from that of its competitors.

Kalana Kotelawala speaking on trademarks at the elawyers legal essentials workshop for startups
Kalana Kotelawala speaking on trademarks at the elawyers legal essentials workshop for startups

In Sri Lanka, trademarks once registered will need to be renewed every 10 years. However, from the date an application is submitted, it can take 5 years for the trademark to be granted. And it’s essential that the trademark is unique. This means you shouldn’t have a trademark that references historic figures. Similarly, you can’t use globally known trademarks, even if they’re not registered in Sri Lanka.

Kalana also added that your trademarks should be transferable to other forms of media. It should also ideally be short and have a visual impact. He also mentioned that a startup should not to use trademarks that have only made minor alterations to known trademarks. While this can be appealed, it’s still very likely that a startup that does so will face a lawsuit.

Laws surrounding the rights of employees

Afterward, we saw Damitha Karunaratna – a member of elawyers.lk share what a startup should know in terms of labor laws. He opened by sharing that the labor laws in Sri Lanka strongly lean toward employees. In fact, the labor courts of Sri Lanka have the power to read beyond what’s stated in an employment contract.

As such, it’s imperative that employers are knowledgeable when it comes to the law. This is because if employers are required to attend court, then they must show well-documented proof to make their case.  Thus, Damitha told the attendees, “Don’t employ people purely for the sake of employing them.” Having explained this, he listed some basic rights of employees as per the law.

Damitha Karunaratna speaking at the elawyers.lk legal essentials workshop for startups
Damitha Karunaratna speaking at the elawyers.lk legal essentials workshop for startups

These rights include being paid for EPF & ETF for temporary workers, interns, apprentices, and trainees. Damitha stated that there’s no minimum number of employees required for a company to pay EPF & ETF to its employees. The only exceptions are in the cases of family businesses for spouses and children. However, siblings are still entitled to it.

Damitha concluded his session by covering termination. He mentioned that this should be a last resort for any employer. And while there are no legal requirements, it’s best for employers to hold an inquiry prior to taking such actions. This he said so reminding the audience that the labor courts are powerful and the laws are structured in a way that favors employees.

The terrifying taxes for a business in Sri Lanka

The final speaker at the elawyers.lk workshop was Sivagurunathan Veerappan – Principal Consultant at Consultants Consortium. He opened his session by listing the different taxes a company has to pay. Afterward, he delved into some of the taxes to explain them in more detail. These first of these was income tax, which employers have to pay on behalf of their employees on a quarterly basis.

Sivagurunathan Veerappan speaking on taxes at the elawyers legal essentials workshop for startups
Sivagurunathan Veerappan speaking on taxes at the elawyers legal essentials workshop for startups

Afterward, Sivagurunathan explained the Withholding Tax. This is an upfront payment of income tax by the recipient at the time he receives his income. Having explained these taxes, he explained the process a business could go through in order to appeal any potential tax penalties or offenses.

That being said he encouraged businesses and startups to avoid going through this process. He concluded his session by explaining how the VAT and NBT taxes were calculated and applied. And with that, the elawyers.lk legal essentials workshop for startups came to an end.

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