Important tips for Start-ups

What does a start-up mean?

“A ‘startup’ is a company that is confused about – 1. What its product is? 2. Who its customers are? 3. How to make money?” — said Dave McClure, Co-founder of 500 Startups. Basically, it is a newborn baby in the respective industry of business. As one has to nurture and groom a baby well, to ensure healthy growth, the new business/start-ups also need proper planning and effective execution to ensure success.

Here are some legal and administrative tips one should keep in mind:

1. Failing to Plan is planning to fail- It is very important to plan systematically, going step by step, having a checklist of tasks is very important; otherwise there will be perplexity of what one should do first. Deciding about a product is not the only major task, researching about the same, knowing the market of that product, understanding the competitors’ strategies, pricing policies is also very important.

2. Selecting correct legal status for Startups- One may think what is the big deal in selecting the legal status; it can be a Proprietorship, Partnership, LLP, Private Limited or a Limited company. Proprietorship business enjoys lower Income-tax and lesser legal compliances, whereas a Company, Partnership or LLP has to pay more taxes and a more complex set of compliances are required for their incorporation as well as operations. The complexity increases in the case of the company.

The decision should also be based on the number of promoters involved in the startup. If more than one person is involved, then the status could be a partnership firm.  If one wants to limit business liabilities based on roles and responsibilities of the business, then instead of a Partnership firm one may choose Limited LiabilityPartnership. One may choose legal status as Company if the promoters are keen to elaborate financial structuring of the business in the form of different types of equity/preference shares.

The correct legal status is also vital for the funding requirements of the business. If the business needs third party funding, one must know that a proprietorship business/ partnership business tends to find less favour with Banking institutions as well as Private Venture funds/Angel funds in comparison to Corporate forms of businesses.

One must look into other factors like procedures for closing/winding up of business, which is complex in the case of corporate businesses.

3. Registration under various Statutory Acts- Many a time, founders of startups are not aware of all the compliances and the various Acts applicable to their business. The start-up may need to register under the Excise Act, Service Tax, VAT, Shop Act, Factory Act, Profession Tax, MSMED Act etc. depending upon the nature of business activities as well as Business turnover. Experts may be consulted to decide which Acts are applicable. The timely legal registrations are important to avoid sudden taxes and penalties under various laws, which may impact the cash flows of start-ups.

4. Record-keeping for Start-ups- Record keeping ensures the good financial health of the business. One should be disciplined to keep records of transactions in a systematic way. Bills and receipts of all the expenses incurred should be well preserved, failing which, one may not be able to claim expenses for the same from your Income-tax return. Record of Bank Statements, Slipbook, Chequebook, Shop Act License, Registration Certificates under various Acts, Tax payment Challans, Returns under various Acts should be kept. Copy of Agreements with business associates, etc. must be maintained. One should also keep a record of cash transactions, especially cash expenses. Payment vouchers for every cash payment must be preserved.

5. Benefits in the form of tax incentives/subsidies from the Government- The startups must be alert to various tax incentives/ subsidies provided by Union as well as State Government to promote Industrialization. These tax incentives/ subsidies are mainly related to the setup of businesses in specific areas, generation of employment opportunities, Research and Development activities, new technologies, renewable energy sources, infrastructure facilities and agricultural products etc.

6. Common mistakes of Start-ups- Some common mistakes of start-up business can be summarized as follows:-

a. Inefficient Working capital Management:- Usually working capital requirement is the money required for the day to day operations. The payment to suppliers, salary to employees and payment of indirect taxes are some of the examples of such payments. One must know the working capital requirements, its payment cycle and sources to meet it.

b. Ageing of Receivables leading to cash crunch:- While focusing on business growth, enough importance should also be given to recovering amounts from clients/customers. Delayed recovery leads to tightening of cash position, which may cause a lot of stress in managing a business. This can be avoided by keeping proper records of receivables and following up with clients/customers based on the ageing of receivables.

c. Statutory and tax Compliances:- Due dates of compliance should be strictly followed so as to avoid Notices, Penalties and litigation. A good consultant with a good backup team, who can provide support and guidance for various legal compliances should be appointed for correct advice.

d. Back up/Contingency Plan:- One must have a Backup (Plan B) plan for managing the business.

e. Other: The Entrepreneur should be mindful of the market trends, customer feedback, hiring a correct set of people, not to over-invest in business, avoiding huge amounts of loans, learning from other start-ups, maintaining relationships with mentors and customers.

It is important to keep the above points in mind since it is not always sufficient to just have a great business idea.