Compliances that Every Startup Must Follow During its Early Stages This is why startups should consider the following to ensure legal hygiene
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The new business can get overwhelming with a lot of stuff to do in hand. While operational and managerial nitty-gritty is one thing, startups often get deluged by the legalities.
Like it gets frustrating to decide whether to register a private company, to choose an LLP, or go for other structures.
This is why startups should consider the following to ensure legal hygiene.
1. Opting for a Business Structure
While it seems easy at a first glance, there's a lot to ponder over this one. From roughly 10 types of business structure to choose from, opting for a perfect one for your startup can give you some sweet headache.
To choose the best suitable option, first, you need to identify the nature of your business, tax efficiency, and compliance requirement for each structure and its formation cost. The recent startup scenario in India is witnessing a surge in registering a private limited company as it creates a great opportunity to raise funds initially.
2. Get the licensing right
Businesses need to be cautious when it comes to licensing requirement. Not doing so can jeopardize the business with legal suits. This even lowers the chances of gaining funds. Investors may lose faith and may eventually lead the business to shut.
Therefore, licensing is one of the basic hygiene an early stage startup should go for. It requires a verified business incorporation certificate when applying for your business specific license.
3. Adhering to Auditing and Taxation Compliances
One of the major annual legal compliances for a business is taxation and accounting. Indian businesses should be no alien to the concept of GST as it is applicable for different goods and services classified under multiple tax slabs.
Another aspect is the books of accounting. For early-stage startups, maintaining books of accounting is a sign of ideal startup hygiene which involves auditing on a regular basis.
Slight negligence in this may lead to some serious accounting incongruity that may create inconvenience in annual compliances. Go with one internal auditor and then hiring any 3rd party auditor to fulfil annual audits requirements. Startups should declare tax liabilities during the time of incorporation to avoid hassles.
4. Financial Sources and its Management
The everyday, operational requirement of a startup will require some capital and other funds. This requires startups to introduce working capital that will have multiple ways for bringing in finance. The best is to keep a close watch of your finances-on-paper to acknowledge the legal stand it holds.
So an early stage startup would typically require looking at various sources of finances.
- Getting Shared Capital on Board
A typical company scenario will involve approval of other members for acquiring share capital on a longer run. During its incorporation, startup pays for a required fee towards stamp duty that mentions the amount of share capital it can raise. The same amount is stated in the MOA of the company.
- Raising Further Capital
There are other ways apart from shared capital that a freshly incorporated startup can raise capital when registered as a private limited company. One of the options involves offering shares to the employees via an ESOP program. Equity stakes extended to the existing company members and Private Placement is also another way to do so. The bigger route is, of course, getting it through an IPO for a Public Limited Company.
- Raising From VCs
The venture capitalists and even and term loan providers invest for a timely return from the startup. The money is invested with a long term commitment. For this to happen, startups may well consider stating their financial planning beforehand in a precise manner. This, in turn, will help you gain the trust of investors and VCs from an early stage.
5. Undertaking Agreements
The operational requirements will require startups to enter into agreements. This will require working policies in place for the parties involved.
The recent startup trends also prefer shareholders' agreement and co-founders' agreement. Such agreements specifically demarcate the roles and responsibility of the involved co-founders.
Also, the new startups will have the A-Team covered in the contract as well. Employee contract will have details about salary, stock options, and even the scope of employees' work. Having such detailed clarity from the start of business will mitigate the risks and help a startup to scale up effectively.
Even vendors will require effective contract management though it is not a part of compliance. It helps to secure your business transactions with symbiotic contracts with third parties.
Starting a new business will require compliances to be in place to function smoothly. This should be focused on the provisions defined for governing the respective dealings, procedures, and business actions. The importance of legal requirements and procedures shouldn't be overlooked that essentially protects the business.