This study focuses on legal barriers that prevent new small and medium entrepreneurs to enter the market and create jobs. In the context of developing countries informal dispute resolution mechanisms thrive parallely, and often come in the way of, formal court system. Such interactions have consequences for upholding contracts involved in starting a new business. This project has important policy implications in India where making the formal court system stronger is one of the focus area of governance related policies. Unilateral strengthening of the court system may bring some negative impact and therefore much caution is needed while designing these institutions.