So many aspiring entrepreneurs and startup founders assume that setting up a company is the only legal step they have to make before starting a business. You should consider other considerations and issues, especially with your cofounder (if you have one) before starting a company. Here is a list of several legal steps, including some tips you should know before setting up a company.
1. Get a good company secretary to help you form a company
It is common for bootstrapped founders to find creative ways to save money by forming the entity themselves. In practice, unless you know what you’re doing it may be best to let the professional like a company secretarial firm deal with this initial stage.
For instance, anyone can start a company in Malaysia by signing up to the online submission by filling up the necessary details and information in the submission. The challenge is if the submission gets into any queries. For instance, the registrar may reject your proposed company name so you’ll need to know how to respond against the rejection notice so that your name gets approved.
Additionally, even if you’ve succeeded in forming a new company, the companies law requires you to appoint a company secretary within 30 days after the incorporation. In other words, you still have to onboard a company secretary anyway.
A good company secretary will know how to react when there’s an unexpected query or even rejection or other complications that may arise. You can avoid unnecessary delay in forming your company and save time. Make sure you find a good and neutral company secretary, and it may not be a good idea to use your angel investor’s company secretary. And I’ve written a lot about why you should get a company secretary.
Get professional help and advice on the entity formation. The usual plain vanilla is to form a private limited company or a Sendirian Berhad (Sdn Bhd).
2. Stick to the usual private limited company as a legal structure
The best legal structure for a startup is the plain vanilla private limited company (or usually known as a’ Sendirian Berhad’ or ‘Sdn Bhd).
It is common to come across founders that formed their legal structure as a limited liability partnership (usually known as LLP) instead. LLP is a hybrid of a traditional partnership and private limited company structure. In the LLP, the partners are the LLP legal owners. The partners are the ‘owners’ of the LLP. There is no legal distinction between a ‘director’ or a ‘shareholder’ in an LLP. Still, the partners agree on a ‘managing partner’ as set out in a limited liability partnership agreement. LLP is different from a standard company where the ‘director’ makes the company’s decision. The ‘shareholder’ owns the company (though in practice both director and shareholder can be the same person like a founder of a startup).
LLP’s only similarity with a standard company is the separate legal personality status provided to both an LLP and a regular company. In other words, if the partnership gets sued, the partners will only be liable to the amount of contribution to the partnership. In other words, you’ll have the same legal shield or protection akin to a standard company.
Unfortunately, a limited liability partnership is usually more suitable for service or professional firms like accountants, lawyers, or management consulting firms formed by a few partners in the practice. Additionally, these firms do not conduct usually raise funds from third parties. And investors do not invest in an LLP structure.
It is also untrue that you can “convert” an LLP to an Sdn Bhd (or the other way round) because both legal structures are under different laws. So stick to the basic and get a standard private limited company formed instead.
3. Agree on the equity and shares percentages for the company upfront
Before you even form a company, it may be most appropriate to agree on upfront on who gets what in the company if you have other cofounders involved. My suggestion is not to complicate things and just issue nominal shares like 1000 shares at RM1 each where you agree on the number of equity and percentages based on the ownership structure you’ve decided with other co-founders.
Usually, to formalise the arrangements this may be an excellent time to bring in a corporate and startup lawyer to help you discuss the “tough” issues so that they can get sorted before you even launch your business.
4. Sign a cofounders agreement or term sheet to formalise things
Once you’ve agreed on the equity split and percentages, this also where it may be best to engage a corporate and startup lawyer to help you prepare a founders agreement or even a simple binding term sheet to capture this agreement by the founders. I’ve seen founders dispute as early as a few weeks after a company gets formed. I mean, if you can’t even agree on the shareholding split, it may not be a good idea for you to start a company together!
5. Check if your business falls within a regulated industry
Additionally, you should check carefully if any government authority regulates your business. For instance, if you’re involved in fintech business, you may or may not be handled either by the Securities Commission of Malaysia or the Central Bank of Malaysia (depending on your business model). Having a good and trusted legal counsel can help you avoid legal pitfalls down the line when you start your business.
6. If you hire anyone, get it in writing and be clear on the engagement type
If you want to onboard or hire anyone for company, please get the engagement in writing. For example, you should know the legal differences if you get someone to work as a full time or part-time employee or even an independent contractor (like a freelance or gig worker).
If you hire someone as an employee, as an employer, aside from the usual monthly salaries, you also need to deduct and pay the expected statutory payments. The legal obligations as an employer include deducting payments for the Employees Provident Fund (EPF), Social Security Organization (SOCSO), Employee Insurance System (EIS) Scheme of your employees according to the regulations. Thankfully, they are many payroll agents and online platforms these days that you can outsource or use to make sure they get done, but you need to confirm the engagement type before you onboard anyone to the company.
An employee-employer engagement is different from an independent contractor, a freelance worker or a consultant that you engage by a service agreement. The payments can be monthly fees based on milestones or even a combination of cash and sweat equity issued by the company.
7. Anyone that contributes to the company needs to sign a non-disclosure agreement and assignment agreement
Everyone from cofounder to staff to even third-party developer who contributes work to the company needs to sign a non-disclosure agreement and assignment agreement. A good non-disclosure agreement helps to make sure that the confidential information disclosed will be protected when you tell essential details about your business model, customers data, source code for your SaaS platform and so on. The same confidentiality clause should be inside your engagement when dealing with potential customers, partners, vendors etc.
8. Get a good team of advisers and professionals
Once you have formed a company, you should get a good team of advisers and professionals as you can. Ask around from other seasoned entrepreneurs or accelerators to your local ecosystem enablers. I am confident they’ll come up with some referrals. Get into a call consultation for a high-level summary of issues that may arise.
Before engaging any service provider or professional like a startup lawyer or even an accountant, ask for a ‘startup package’ rates. Most service providers nowadays want to get involved in the startup space as well.