Important-legal Compliances that every-start-up Should Know
Commencing a business start-up is an easy task, though sustaining the same is difficult. This is because the individuals/entrepreneursare unaware of the legal formalities of the business. Start-up compliances differ as compared to the existing business compliances.
In many cases, apart from unawareness, entrepreneurs are also ignorant about the repercussions of non-compliance.
Research indicates that every 2nd start-up gets Income-tax notice for tax demands or non-compliance and 7 out of 10 start-ups close their businesses within 3 years of their operations.
Hence, it’s pivotal that entrepreneurs are aware of the legal and tax compliances before planning for a start-up.
Selecting the Type of Business:
There are varied legal entities like a sole proprietorship, partnership firm, LLP (limited liability partnerships), Company etc. Each legal entity has its own set of pros, cons as well as compliances. The entrepreneur should choose the right legal entity as per their requirement and finances.
It’s worth hiring a professional consultant who can suggest the type of business entity, to circumvent the penalties caused due to ignorance of tax compliances.
Registering the Start-Up
Each start-up has different rules for registration, licensing, and taxation.
Example: It is not compulsory to register a sole proprietorship concern, but it’s mandatory to register LLPs and other private/public limited companies.
Varied permissions need to be taken from multiple authorities for operating the business. In case of incomplete or zero permissions or licenses, your business start-up may face the risk of unwanted lawsuits, business closure, or huge tax penalties. It may also hamper the business reputation.
It’s vital to register your start-up before commencing your business. The Government of India has launched “Startup India” for promoting more start-ups. They have also offered varied tax benefits which can be useful to entrepreneurs in their initial start-up stages.
Eligibility Criteria for Start-Up Recognition
-
Start-up should be integrated as a private limited company, a partnership firm, or an LLP.
-
The entity shall be eligible if its registration date is less than 10 years.
-
The turnover of the entity should not exceed 100 crores in any of the previous financial years.
-
The start-up should keep on innovating better products and services. It should also help in enhancing employment opportunities as well as finances.
Now that you have a clear idea about start-ups and their eligibility criteria, let’s check out the legal compliances and their importance in the business world.
Why does Legal Compliance matter?
The majority of start-up entrepreneurs keep on postponing the start-up formalities and other documentation for later and focus more on business growth. Little do they know that this may lead to business closure since they are ignorant about the importance of compliances.
If an entrepreneur fails in fulfilling the legal formalities of the start-up process, it may impact the business’s reputation, operations and profits.
Example: Bluegape was an online merchandise store that had recorded a revenue of Rs.1 crore. The same was shut down due to legal and copyright issues.
Important Start-Up Compliances
1: Compliance Under Labour Law
Labour Law compliances are the set of terms and conditions for employment. It includes varied compliances like minimum wages act, contract labour act, factories act, etc.
There are many labour laws that businesses need to abide by to steer off penalties and other legal actions.
The most pivotal compliance is the sexual harassment of females at the workplace which when missed out during the start-up phase may lead to huge penalties. Non-compliance with this law can cause license withdrawal or business closure by the government authority.
2: Compliance under Environmental Law:
Environmental compliance means abiding by environmental laws and regulations. In the current scenario, environmental laws and compliances have become more stringent due to the negative impacts caused by businesses on the environment.
Example: Costly fines need to be paid for clean-up of hazardous waste on factory sites.
3: Compliance Under Companies Act, 2013:
Lots of young entrepreneurs are trying their luck with company start-ups and this has led to a phenomenal rise in company registrations in India. Though such entrepreneurs are experts in their field, they do need guidance as well as assistance regarding company compliance.
Types of Compliances under Companies Act, 2013:
Compliances under the Companies Act, 2013 can be categorized intothe following types:
-
-
After incorporation of compliances under the Companies Act, 2013
-
Annual compliances under the Companies Act, 2013
-
Event-based compliances under the Companies Act, 2013
-
After Incorporation Compliances under Companies Act, 2013:
Compliances that need to be adhered to, after the registration of the start-up are:
-
-
Verification of Registered Office with the Registrar of Companies
-
Display of Company Information on all Official Documents and Websites
-
First Board Meeting within 30 days of Incorporation
-
Appointment of Auditorwithin 30 days of Incorporation
-
Share Certificate Issuance to the Respective Shareholders as stated
-
Disclosure of Interest by Directorswithin 30 days of Incorporation
-
Maintenance of Minutes of Meetings within 15 days of Conducting the Meeting and Finalizing the same within 30 days.
-
Maintenance of Statutory Registers as stated in the Company’s Act.
-
Annual Compliances under Companies Act, 2013
After the incorporation compliances are dealt with, it’s time to checkout the compliances which need to be completed on an annual basis. They are:
-
-
Board Meetings(minimum 4 meetings) to be Conducted Yearly
-
Annual General Meeting within 6 months from the end of the financial year.
-
Receipt of Form MBP-1 to disclose the interest of the Director
-
Receipt of Form DIR-2 for submission of disclosure of non-disqualification by the directors.
-
Preparation of Director’s Report to be submitted along with Form AOC-4
-
Preparation and Circulation of Financial Statements to shareholders
-
Appointment of Auditor in Annual General Meeting
-
Filing of E-Form MGT-7 to be filed and submitted within 60 days from the date of its annual general meeting
-
Filing of E-Form AOC-4 with the Registrar of Companies (ROC) within 30 days of the annual general meeting.
-
Event-Based Compliances Under the Company’s Act 2013:
These event-based compliances are non-negotiable and need to be carried out as per their due date. Any lapse in these compliances, i.e., any delay in filing the required forms may lead to heavy penalties.
-
Change in Directorship (board of directors) must be communicated to the registrar by filing DIR-12 within 30 days of the change.
-
Change in the Registered Location of the Company must be intimated to the ROC within the stipulated time.
-
An increase in Authorised Capital needs amendment in the MOA in the EGM.
-
Change in Company Name needs special passing by filing MGT-14 and approval from central government by filing INC-24.
-
Registration/Modification/Settlement of Charge needs filing of e-Form CHG-1.
4: Compliance Under Income Tax Act, 1961:
Tax Compliances should be adhered to by all Indian citizens since all the businesses are liable for paying taxes as per the Income Tax Act, 1961.
The Income Tax act defines that the taxes should be paid within a specified time frame to avoid tax penalties, investigations by the IT department, and other legal punishments. Even in case of no income, the company needs to file an IT return.
5: GST Compliance:
Small business start-ups having a turnover of less than Rs.40 lakhs (Rs. 20 lakhs in case of service sector) per annum are exempted from GST registration. If the turnover exceeds the stated amount, the business needs to be registered for GST.
This compliance will help in the growth of small businesses in their initial phase. Once these start-ups expand, they need to comply with the GST rules.
How to Fulfil Compliances?
It’s a tough call for start-up businesses to focus on fulfilling these compliances along with making profits on their business. Legal and tax compliances are pivotal wheels that keep your business rolling.
Though companies have their own legal and taxation team to look after fulfilling these compliances, start-ups need to opt for hiring experts who can guide them in such cases.
Hiring professional services fromthe best taxation companies like (Choksi Tax Services)may help you in your start-up phase. Not only do they help in timely compliance with the respective laws, but they also help in maintaining and completing records, and in filling the space created due to ignorance of legal knowledge.
Compliances are vital for successful business setup as well as their growth since they help in evading penalties and other punishments. Ensure that you adhere to them for the success of your business.