Top 3 Registration Mistakes that Hit Startups Hard

The top 3 registration mistakes that KILL startups are choosing wrong entity structure, non protection of intellectual property and negligence about applicable government registrations. Every year billions are being invested in new ideas, applications, and portals. While investment gives wings to a business plan, entrepreneurs need to be cautious at all times as even a small mistake can turn the heavy investments into dust.

One such mistake is ignoring the law of the land. Many times entrepreneurs overlook the legal formalities with respect to government registrations, protection of brand name, product design etc and end up paying heavy interest and penalties.

Registration Mistakes-Recipe for Disaster

• Choosing wrong legal structure for business 
• Non-protection of Intellectual Property
• Ignorance about applicable tax and other Government Registration

Choosing Wrong Legal Structure For Business

A business entity in India can be registered under different formats. You can start your business as a Private Limited Company (PLC), One Person Company (OPC), Limited Liability Partnership Firm (LLP), General Partnership Firm or  Sole Proprietorship Firm.

Each entity structure has its own set of pros and cons. The choice you make in terms of entity type can put restrictions with regard to the number of people who can join as owners, fresh capital infusion etc. and that is why you should acquaint yourself with salient features of each entity structure before taking the plunge.

Key Ingredients: Recipe for Disaster

Single Founder-One Man Army

If you are a founder and think that you can carry on the business on your own, it is time to RETHINK! As you grow you will need people to bring in expert knowledge, capital and enterprise skills. Choose an entity structure that allows multiple people join you as the business grows.

Note: In One Person Company, there can be only one member, however, there can be multiple directors.

Poor Incentives For Employees

Attracting talented individuals is crucial for business growth. Today entities are issuing ESOPs (Employee Stock Option Plan). This way employee gets ownership feel and aligns his efforts with business goals.

Note: All limited companies can issue ESOPs to attract talent.

Delay in launching business

If you have a business plan and it is actionable get it registered under a suitable framework and secure legal protection for your business and co-owners.

Note: The expenses like consultation fee, entertainment expenses etc incurred during the inception of business can be claimed as business expenses only after the company has been incorporated.

Poor Fund Requirement Analysis

Funds form the backbone of a business. Choose a structure that can accommodate capital infusion without many complexities.

Note: An OPC needs to compulsorily convert into a PLC when its capital contribution exceeds Rs. 50lakh.

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Non-protection of Intellectual Property

Have you heard stories about ideas being stolen? It is a hard reality but the product of your intellect can be used by others and cause loss of business opportunities and financial embarrassment.

During the lifespan of a business other than tangible assets like building, equipment etc, a  lot of intangible assets are also procured and created. It can be your domain name, unique product design, shape, label, company logo, a unique combination of ingredients that makes your product distinct from every other product in the market. These ideas, logos, designs etc are together called intellectual property.

Intellectual property is a legal term that refers to the ownership of creation of an artistic idea. It is an intangible asset of your business that you have created exclusively for your products or services. Companies should inventory their IP and seek legal protection by getting them registered under applicable protections available which are Patents, Copyrights, and Trademarks.

Ignorance About Applicable Tax & Other Government Registration

There are multiple Central and State level authorities that form policies and regulate business operations. The authorities require businesses to get registered under the legislation such as Shop and Establishments Act, Professional Tax Act etc.

Often entrepreneurs are ignorant about the applicability of particular registration and end up paying heavy fines and penalties for non-compliance.

Brief to various government registrations, like:

• Shop and Establishment Licence: You need to obtain separate shop license for each of your business locations such as registered office, branch office etc. 
• IEC:  Import and export transaction can be carried out only if you have Import And Export Code.
• GST Registration: It is mandatory for every person engaged in the supply of goods or services in India.
• Professional Tax: It is payable when a person is self-employed or is working for an employer. This tax is deducted and collected by employer and is applicable only in specific states(8)
• Employee Provident fund: All establishment employing more than 20 employees comes under the preview of EPF Act.

Avoid making these registration related mistakes and move ahead in your Startup journey with confidence. If you have any query or need an expert advice drop your query at enquiries@cleartax.in

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