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.
Recipe for Disaster:
1) Choosing wrong legal structure for business
2) Non-protection of Intellectual Property
3) Ignorance about applicable tax and other Government Registration
1) 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 expertise 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: Only Private 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.
2) 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, 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.
3) 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 legislations such as State Value Added Tax Act (VAT), Central Excise, Customs, Professional Tax Act etc.
Often entrepreneurs are ignorant about the applicability of particular registration and end up paying heavy fines and penalties on non-compliance.
Brief to various government registrations
- Shop 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.
- Excise Registration: is mandatory for every person engaged in manufacture or production of excisable goods.
- Service tax: It is payable on all services except those covered in the negative list. The tax is payable when gross receipts exceed Rs. 10lakh but the registration is to be obtained within 30 days of crossing gross receipts of Rs. 9lakh.
- VAT Registration: It is mandatory on crossing the annual turnover of Rs. 10lakh on the sale of taxable goods. Dealers may go for voluntary registration to get the credit of tax paid on purchases.
- Professional Tax: It is payable when a person is self-employed or is working under an employer. This tax is deducted and collected by employer and is applicable only in specific states(8)
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 firstname.lastname@example.org