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Legalities involved in starting your own E-commerce Business

E-commerce has seen a huge growth in the Indian consumer market, and with the advent of smart phones and tablets, an E-store is way more accessible to a consumer in comparison to a brick and mortar store. At the touch of a finger you can buy and sell products and in case of E-commerce portals involving dating, marriage or networking facility, one is connected with a single click. However, what most people entering this domain are unaware of is the legal compliances that are required under law and that can prevent litigation against them in the future and at best put them on a good footing in the litigation matters. Below is a list of legalities an E-commerce start-up must keep in mind:

1.Structuring your E-commerce business

This is the first stage of your business activity and you need to have a clear picture of where you see your business going in the next 6 years. A Partnership or Limited Liability Partnership sounds a very good option, but it is not attractive to Investors who prefer a Private Limited Company. So if you plan to generate funds through Venture Capitalists in near future then it is advisable to structure your business in the suitable way right now, otherwise you would have to restructure your business later before approaching investors.

2.Business Model

In my practice I come across many E-commerce start-ups whom I advice and I am on a retainer with, and the first thing I notice and point out when they approach me is the lack of a properly formulated business model. Most founders have an idea and they make points with respect to taking that idea forward and its implementation, but a well-researched professionally made business model is a must! It is the blue print of your business. I invariably advice clients to get a good consultant on board and get a proper business model made. The terms and conditions, vendor agreements and other legal documents that we draft are made keeping in mind this blue print. For example, today your portal is offering services for free but you do contemplate that maybe sometime in future you may want to charge a registration fees, then the blue print should have this data and the User agreement will be drafted specifying that the user agrees to any future registration charges on being intimated of the same by the E-commerce portal.

3.Domain Name

I have seen most clients register a domain name and they feel that their intellectual property right with respect to the domain name is protected. This is a myth! The domain name has to be separately trademark protected. A domain name registration has to be renewed and a lapse in the same can cause you to lose the rights to use that name, however, a trademark registration gives you the exclusive right to use that domain name for your business.

4.Privacy Policy

This is a must for every E-commerce Portal. You need to have a well drafted privacy policy to prevent you from being sued under Section 43A of the Information Technology Act, 2000 where the penalty that can be awarded against an E-commerce portal is upto 5 Crores.

5.Terms and Conditions

These are the clauses that bind the E-commerce company and the User. A well drafted terms and conditions agreement should cover all the user covenants and company covenants along with restricting the liability of the E-commerce company in every way possible.

6.Vendor Agreement

This is the Magna Carta of the Vendor–Portal relationship in a Market place E-commerce model. It should have well-defined clauses to deal with default, delivery, quality, termination and commission among the many other major provisions which have to be included keeping in mind the business model of the E-commerce venture.

7.User Agreement

A user agreement has to be drafted in a manner to ensure that a User’s rights are preserved and also, the liability of the E-commerce portal is restricted due to its status of being an intermediary. An important clause that should always be there is that the Portal can update and change the terms of the User agreement and the user is responsible to keep himself updated with the same by reading through the User agreement before every transaction.

8.Data Security

I have seen most E-commerce start-ups deciding not to invest in cyber security in the beginning of their venture, however, data security is a sensitive issue and failure to do so can render an E-commerce portal liable to pay penalty upto Rs. 5 Crores.

9.Taxation

Depending on the business model, the founders of an E-commerce venture should focus on the taxation aspect too. Though, this is still a developing area of law in India, but still there are certain taxation compliances that apply to E-commerce ventures and non-compliance renders them liable.

The next article will focus on the main litigation issues faced by E-commerce companies and ways by which E-commerce companies can be on a better footing to deal with them.

Oct 06, 2015

Author By Puneet Bhasin