10 Legal Mistakes that Usually Cost a Startup
10 Legal Mistakes that Usually Cost a Startup Are you a startup that does not want to get caught up between legal matters resulting in costing your time, mental peace and money? Does the lack of awareness keeps you away from being an entrepreneur? These concerns are shared by a multitude of aspiring entrepreneurs. There is a lot that goes into starting up a business. Hence, it will not be wise to not learn from others’ mistakes who have already walked this path and were not proactive enough to keep themselves aware about the legal issues that could become nightmare for them later. Hence, a solid legal foundation is imperative for the establishment, protection and growth of any business.
In order to avert these mistakes having a legal background is not important. All you will require is a little bit of awareness about different legal aspects of running a business that will keep you away from paying heavy cost in future. Let us look at the 10 common legal mistakes usually made by startups:
1. Choosing the wrong form of business
Choosing the right form of business is critical at the stage of inception itself. Some of the choices available are LLP, proprietorship, partnership, Public Limited and Private Limited Company. The more widely accepted form of company registration especially for any deals with foreign clients is Private or Public Limited Company. Choose a form of legal entity keeping in view the legal issues and payment of higher taxes that you don’t want to encounter in future.
2. Lack of Documentation
During a legal due diligence each and every recorded interaction such as minutes of meeting can make or break an investment deal. Hence, it is very critical and important to keep all documents in order at all times.
3. Missing founders’ agreement
As it is very aptly said to think of the best and prepare for the worst, hence, one should always be prepared for failure with a solid founders’ agreement in place. It is OK to think that you might fail in your trials hence, you and your co-founders should think out the ways as how to deal with failure. All essential clauses such as ownership rights, vesting rights, and the roles and responsibilities of each founder, including salaries and terms of employment should be contained in the founders’ agreement.
4. Not protecting intellectual property
Intellectual property (IP) 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 like setindiabiz. You can use Non-disclosure agreements to ensure this. Startups have a tendency to neglect the protection of IP that makes them suffer later.
5. Non-compliance with securities laws
Stocks to angel investors, family and friends are generally issued by startup founders. They run into serious legal issues at a later stage if the stocks are issued without complying with specific disclosure and filing requirements under securities law.
6. Not tracking expenses
Another common mistake made by startups is not to keep track of their expenses, throughout the year irrespective of the amount.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. You can hire an accountant to manage the expenses record in case the volumes of these records are high. For lesser volumes of record maintenance of expenses many other options are also available.
Setindiabiz provides expert CA, CS and Advocate(s) services under one roof. To avail different types of accounting and taxation services for your legal entity you may visit setindiabiz.com.
7. Mixing capital and revenue expenses
“One of the major confusions for first-time business filers is about expenses. What expenses are considered assets /capital expenditure and which ones are called revenue expenses deductible in the P&L A/c.”Revenue expenditure includes things that are consumed over the course of a year whereas higher-value items that lasts 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.
8. Mixing personal and business expenses
It usually happens that during the starting phase of a business the personal and business expenses are mixed up and hence, become indistinguishable. This creates a confusion while filing of the taxes which in some cases results in payment of higher taxes as deductions are put on hold on ad-hoc basis by the revenue authorities. Hence, it becomes critical to maintain separate records for business and personal expenses.
9. 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.
10. 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. In order to avail professional help for tax-related issues you can visit setindiabiz.com.