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Key legal issues to consider when launching business in Nepal

Founders of new ventures generally tend to devote a lot of time and focus on developing and marketing their product/service. New ventures are also constantly caught up with cost concerns arising from their shoe-string budget including the charges payable to lawyers and other business advisors. This may prevent them from availing adequate professional advice for pertinent matters, which may in some cases, lead to costly consequential problems.

Below are some key issues that entrepreneurs should consider to start their business on the right note.

Legal Structure: There are three types of legal structures that may be adopted for setting up a profit distributing business in Nepal, namely: private firm, partnership firm and company. Private firm is suitable for a business run by a sole entrepreneur. Business owned by two or more entrepreneurs can be run as a partnership firm. A company can be formed by either one or more entrepreneurs. The founders need to consider the size, complexities, long-term plans of the business, tax efficiency, etc while selecting their business model. To illustrate: If the founder wants to operate a small home-based bakery with no expansion plans, a private firm model (which is easy to set up with less reporting obligations) maybe more appropriate. Likewise, if an entrepreneur has multiple businesses and wants to keep them separate so that the loss of one doesn’t affect the other business, then a company structure that provides such ring fencing maybe more suitable.
Shareholder Agreement (in case of company): A lot of people start businesses in collaboration with friends and family, and are often hesitant when advised to enter into a shareholders’ agreement.

Business owners can agree on an array of matters including how they will manage the company, their rights and obligations, privileges and protections, etc in such an agreement. When staring a company with co-founders, it becomes very important to outline the business relationship, agree on the various duties and expectations of the co-founders, and how they will respond to future uncertainties. Some of the ‘what if situations’ that can be dealt with in the shareholders’ agreement are: what if a co-owner wants to start a similar business, or wants to leave the company, what if there are disagreements or a deadlock in the decision-making process? Contractually addressing these situations can often lead to difficult conversations among the business owners. However, the procedures, rules, rights and obligations agreed as a result of the discussions will not only create ease and mutual trust but will also equip the owners to navigate various business challenges.

Compliance and Organisation: The other very essential thing that business founders need to consider is to have their business house in order. Every entrepreneur should know what business permits, licences and laws are applicable to their business and then they must accordingly obtain, renew and ensure that the business is always legally compliant. To illustrate: A food production business needs to obtain a licence from the Department of Food Technology and Quality Control, likewise labelling requirements prescribed by the laws need to be met if the business is selling packaged goods. Similarly, a system for organising and storing all corporate and human resources documents is a must-have from the very start of business operations. These documents can include board and shareholder resolutions and minutes, business contracts, offer letters, employment contracts, etc. Companies are often sloppy in maintaining and documenting events which can become problematic when they pursue financing, future investments, or when they are involved in claims or litigation with employees or regulatory agencies.

Employment Matters: Before the introduction of the prevailing Labour Act in 2017, businesses employing less than 10 employees were exempt from labour law provisions. Currently, companies with even one employee must comply with the requirements of the labour laws. Prior to 2017, there was no concept of hire and fire which means that once an employee was hired, they were there to stay. However, the current labour law provides businesses with a lot of flexibility regarding the type of employees they can hire. For example, an employee can be hired on a time-bound basis or for rendering a specific work. Therefore, depending on the business nature and requirements, entrepreneurs need to consider what category of employees they would want to employ. New businesses are also prone to cash crunch which might hold them back from suitably compensating their employees. This can further lead to the problem of employee retention. However, in order to incentivise and retain the employees, the company can enable a structure that will give shares to the employees if they stay with the company for a certain time period.

Intellectual Property: If entrepreneurs are developing a unique product, service or technology, it is very essential for them to take appropriate steps to protect their intellectual property.

Entrepreneurs should get their intellectual property like patents, copyrights, trademarks, designs, trade secrets, etc registered with the relevant authorities as soon as possible. Registration of intellectual property is essential to protect the entrepreneurs/business against the risk of someone else infringing upon their intellectual property. Similarly, entrepreneurs should ensure that employees hired by the business agree to keep all proprietary information of the business confidential during and after their employment term. Further, employees should also be contractually bound to assign inventions to the company. This would ensure that any ideas, products, or services developed by the employee during their employment will belong to the company.

In order to successfully launch a business and to avoid any delays and missteps, entrepreneurs should carefully consider and plan about the aforementioned legal issues before starting their business.

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Pratikshya Dahal is a corporate lawyer and holds an LLM in International Commercial Law from the University of Reading, UK. She currently works as a Senior Associate at Pioneer Law Associates.

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