eFiling Portal Team Thursday, December 22, 2015
In order to prevent mistakes having legal background is not important. All you will require is a little bit of awareness about legal aspects of running a business that will keep you away from paying heavy cost in future. Let us look at some legal mistakes usually made by startups.
Choosing the right legal entity right at the outset is important. Some structures to choose from include a registered company(public/private), LLP, Proprietorship and partnership. Choose LLP or limited if you do not want personal liability for the losses of your startup. Choose the right form of legal entity to avoid any legal hassles and payment of higher taxes.
NOT TRACKING EXPENSES
Another mistake commonly made by startups is not keeping track of their expenses, however big or small it maybe, throughout the year. The receipts are not maintained and hence, run into trouble at the time of filing tax returns. Hence the non documented money is left in open. For lesser volumes of record maintenance of expenses many other options are also available.
LACK OF DOCUMENTATION
Each and every interaction, be it meeting minutes or anything else, must be on the record. It is important to have all documents in order at all times. Legal due diligence can make or break an investment deal.
MISSING FOUNDER’S AGREEMENT
Every startup may or may not run or be essentially successful. It is therefore important to have a solid founders’ agreement in place, because it is worthy thinking about how you and your co-founders might deal with failure. The founders’ agreement should 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
One of the major confusions for first time business fillers is about expenses. What expenses are considered assets/capital expenditure and which ones are called revenue expenses deductible in the P& L A/C. Higher value items that will last significantly longer than one year are called Capital Expenditure/Assets/Equipment. The capital expenditure are not allowed to be charged in profit and loss account. If capital expenditure is accidentally charged in profit and loss account, the tax department after determining the improper Characterization of the expense will disallow the deduction. Hence, caution should be exercised while accounting all such expenses.
MIXING PERSONAL AND BUSINESS EXPENSES
Time and money are the biggest investments in a startup, and often the personal and business expenses become indistinguishable. This can be a source of confusion when taxes are being disallowed on an ad- hoc basis by the revenue authorities. Hence, it becomes critical to maintain separate records for business and personal expenses.
NOT PROTECTING INTELLECTUAL PROPERTY
Intellectual property is a startup’s most valuable asset. IP’s essential components include Trademarks, patents, copyrights and designs. In order to protect the creations of your mind pertaining to your business especially, it is important to claim your intellectual property rights legally from a professional IP service provider. Startups have a tendency to neglect the protection of IP that makes them suffer later.
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.
MISSING REGULAR TAX PAYMENTS
Businesses, irrespective of their forms and size are required to pay taxes in advance which means that they need to determine their taxes in advance for the year and pay as prescribed installments. Not paying taxes on time can get them into trouble. Hence, it is imperative to take regular account of the profit/loss statement at each quarter and pay the advance taxes.
NOT ENSURING PROFESSIONAL HELP FOR TAX-RELATED ISSUES
In order to ensure tax related compliances, a startup must appoint a professional tax consultant. This has many benefits like you can focus on building and growing your company, forming strategic relationships and much more. Taxes are also not something that a company should revisit only once in a year.
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