Setting up your startup involves a lot of work and effort. Many things need attention, including developing a proof of concept, finding product/market fit, and hiring the first set of employees. With these many things to be handled, slips are bound to happen. One of the most common areas where most startups make the wrong choice is establishing a solid legal foundation.
Choosing The Wrong Legal Entity
Choosing the right legal entity right at the outset is important. Some structures to choose from include a private limited company, one person company, Limited Liability Partnership, sole proprietorship, and partnership. One can end up with attracting liability, multiple compliances and costs by choosing the wrong business structure.
Not Tracking Its Expenses
Another mistake commonly made by startups in India is not keeping track of their expenses throughout the year. Many startups wait and gather all receipts only when tax returns have to be filed. This leaves the business subject to untraced expenses.
Lack Of Proper Documentation
A startup must keep its interactions and transactions in properly drafted and vetted legal vetting documents. It is important to have all documents in order at all times. Legal due diligence can make or break an investment deal in a startup.
Not Having A Co-founders’ Agreement
It is important for a startup to have a solid cofounders agreement in place that lays down the rights and liabilities of its founders. The co-founders’ agreement must be properly drafted and contain all essential clauses such as ownership, vesting rights, and the roles and responsibilities of each founder, including salaries and terms of employment.
Mixing Capital And Revenue Expenses
Startups are not aware of the expenses are considered assets or capital expenditure and which ones are called revenue expenses deductible in the Profit and Loss Account. The IT department can hold the startup guilty of mixing its expenses and can subject the business to heavy penalties.
Mixing Personal and Business Expenses
The startup must have a separate financial account right from the beginning to keep its business expenses separate from the personal expenses of the founders. This helps the business in claiming the tax credit on business expenses.
Not Getting IPR Registration
Intellectual property (IP) is a startup’s most valuable asset. Trademark, Patent, and Copyright are the most commonly registered IPR in India. IPR Registration prevents others from using, copying, selling, or distributing the startup’s IP without permission. Most startups ignore this and find their IP copied by imitators at an early stage.
Non-Compliance With Securities Laws
Startup founders commonly issue stocks to angel investors, family, and friends. However, stocks issued without complying with specific disclosure and filing requirements under securities law can lead to serious legal issues at a later stage.
Not Filing Tax Returns
Businesses are required to pay taxes in advance. This means they need to determine their taxes for the year in advance and pay as prescribed installments. They can get into trouble for not paying the taxes on time. It is therefore important to take regular stock of the profit/loss statement at each quarter and pay the advance taxes.
Not Asking For Professional Help
A startup must appoint a business consultant to ensure all business regulations are followed. This will also give the business more time to focus on growing the company, forming strategic relationships, and other things. A business consultant in India can help in managing the legal, financial and taxation aspect of the business.
At LetsComply, startups can find all the right solutions for their requirements under one roof and avoid making these mistakes. To know more, call us at +91-9717070500 or send us an email at firstname.lastname@example.org.