02 Legal Essentials for Startups: Registering a business & Protecting it

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“In law, not knowing it is not an excuse,” said Dinushka Medagoda – Founder of elawyers.lk to everyone. Everyone knows that running a business is no easy task. Taking the plunge to start a business is no easy task. And it doesn’t help that the legal aspects to all this can be a mystery for many startups.

And it is to demystify these legal aspects that we at ReadMe partnered with elawyers.lk to host a workshop on the topic at HomeTree Coworking. Here’s everything you need to know about legally registering your business and protect its name once you do.

An introduction to company law

Dinushka opened by sharing that the reason for a business to be registered is to obtain an identity. Think of it like getting your NIC. In Sri Lanka, your business needs to register as one of three types. These types are a sole proprietor (1 person), partnerships (2-20 people), and companies (1-50 shareholders).

Startups | Legal Essentials | Business
Dinushka Medagoda – Founder of elawyers.lk

But what’s the difference between the three? In partnerships or sole proprietorships, you will face unlimited liability. That means if your business has debt, then your personal finances and property can be seized to settle the debts of the business. Whereas companies enjoy limited liability.

That means your liability is limited to the amount you paid to buy shares. Thus, Dinushka stated that the ideal setup for startups or any kind of business in Sri Lanka is a private company. But as per Sri Lankan laws, a company can only have 50 shareholders.

A guide to registering your business

Dinushka then shared that sole proprietorship and partnerships can be registered with provincial authorities. In a partnership, you’ll also have a partnership deed that outlines the responsibilities of partners and other vital aspects of how the business functions. Finally, companies need to be registered at the Registrar of Companies.

The entire process can be done online. It starts by identifying if a unique name is available and approved. Afterward, you’ll need to submit four documents. Form 1 lists the shareholders and directors of the company. Form 18 is used to obtain consent from directors. Form 19 is to obtain consent from an individual to be a company secretary. Finally, the articles of association, which can be described as the constitution of the company.

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You can register your business online now

But when filling out Form 1, who is a director and who is a shareholder? In startups, founders typically play both roles. But in the eyes of the law, the shareholder is the business owner who then gives the director permission and is tasked with managing the business on their behalf.

Dinushka also shared that it should be noted in Form 01 how many shares each shareholder will get. But at the time of registration, it only needs to be mentioned. In the near future, the business will have to conduct an official share issue to allocate the shares listed in Form 01.

The relationship between shareholders and directors

When issuing shares, the value of the share is decided by the directors. Afterward, if the company wishes to raise more money by selling shares, they can do so equal to this value or higher. Additionally, if a shareholder wishes to exit, then there can be specific provisions that dictate how it’ll affect other shareholders as well.

Startups | Legal Essentials | Business
Companies need strong logically written shareholders agreements (Image credits: Velocity)

Dinushka shared that this is where many businesses face challenges later on. As such, he emphasized that such agreements must be made based purely on logic. “Once you issue shares, you can’t turn back,” he warned everyone. This is why for shareholder dealings a shareholders agreement is necessary.

Having explained this, Dinushka then moved onto the topic of responsibilities. As per law, the directors are responsible for the management of the business. There are different types of directors with different limits to their responsibilities. But all of them must ensure the business is run in an ethical manner. Failure to do so means they will be held responsible.

Startups | Legal Essentials | Business
Directors run the company on behalf of the shareholders

Shareholders on the other hand are people that invest in the business. In exchange, they recieve wealth in the form of dividends. As such, the law recognizes that they want to see the business grow and allows them to task the directors to do so.

Electronic signatures

The final topic Dinushka touched upon was electronic signatures and communications. He stated that Whatsapp messages, emails, and even text messages are admissible in Sri Lankan courts. So startups can form contracts over an email. But you must ensure that the wording is as simple and clear as possible. And ideally with your company email address.

How startups can protect their IP

Having learned how to register a business, the next session focused on protecting its name. This was conducted by Vishmi Fernando – Attorney at Law. Her session at the Legal Essentials workshop was focused on intellectual property laws. Today, these laws encompass literary and artistic works, inventions, designs, and any combination of symbols, names, and images used in commerce. 

Startups | Legal Essentials | Business
Vishmi Fernando – Attorney at law

Vishmi shared that many startups typically don’t think of seriously protecting their IP. The exception of course being academics or engineers that hunt for patents. Yet, as time passes and the company grows, this becomes essential. Why? Because large brands are instantly recognizable.

An introduction to copyrights

Copyrights cover literary and artistic works. However, Vishmi shared that in Sri Lanka we don’t have a method of registering copyrights. The exception being books as writers can get ISBN numbers. But with copyrights, she added that there are two rights.

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You can use a copyright to protect literary or artistic works (Image credits: Emaze)

The first being moral rights where the original creators are recognized. The second being economic rights where the creators can receive royalties for their lifetime and up to 70 years after their death.

Understanding patents and industrial designs

Patents are given for novel inventions used in industrial applications. Vishmi emphasized that companies with such inventions should register them as soon as possible. Once registered, the creators are protected for up to 20 years.

She added that software cannot be patented in Sri Lanka. The reason being they’re considered as literary work because the source code for software is written. Vishmi added that this presents a challenge for lawyers like herself. Yet, an algorithm can be patented if it’s a part of a machine being patented.

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You can’t patent a software because is considered a literary work (Image credits: TechCrunch)

Having explained patents, Vishmi went onto explain industrial designs. These are protections of unique designs of products. An example of this she shared was of a designer chair. While the chair itself is a common product, the unique design of a chair can be protected. There are two opportunities to renew industrial designs, which means they offer 15 years of protection in total.

The elephant in the room: Trademarks

The final topic Vishmi tackled under intellectual property law was trademarks. She opened by explaining that trademarks encompass all the unique elements of your brand. These can be a combination of words, logos, slogans, and packaging. Such trademarks are valid for 10 years and can be renewed indefinitely.

So what should you know before registering your trademark? Firstly, it should be unique like when registering your business name. Secondly, make sure it’s easy to understand. Afterward, make sure you don’t have any inappropriate elements. Finally, be sure to buy the domain you need immediately. 

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Trademarks evolve so it’s important to register any changes (Image credits: Brandfolder)

Once you’re done with the registration process, you have the right to use the mark, assign or transmit the registration of the mark, and to form contracts that decide how your IP is used. But it’s not essential to register it. And even without a trademark, Vishmi pointed out that it is possible for startups to protect their IP.

However, the chances are slim as you need to spend time and prove you built a unique brand in court. She added that trademark protections are also only applicable to Sri Lanka. And here there a variety of civil and criminal actions that can be taken to enforce these laws. However, if you think your trademark might get violated in another country then you should register in those countries.

And that’s a wrap

With the conclusion of Vishmi’s session, the first legal essentials workshop for the year came to an end. But this only the beginning! ReadMe and elawyers.lk will be organizing these legal essentials workshops for startups as a bi-monthly event. So keep an eye on our page and do let us know what legal questions you’d like us to cover in the future.

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