Starting a business is one of the most exciting things you'll ever do, but it's also one of the hardest. If you want to be successful, you'll need to avoid making these common mistakes. This post will tell you the top 7 mistakes to avoid in your business so you can start off on the right foot.
1. Not being upfront with co-founders:
If you go into business with a co-founder, you should agree together about the fundamentals of your company early on. Take this time to hash out the details and make them decided in writing.
Doing so helps prevent potential legal problems down the road (a good example of this is the infamous Zuckerberg/Winklevoss Facebook litigation). Think of your co-founder agreement as a form of a marital prenuptial agreement.
Here are the benefits and other details regarding the co-founder’s agreement.
2. Not Starting the Business as a Registered Entity Type:
One of the very first decisions founders must make is in what legal form to operate their business. This will determine how taxes will be handled, what liabilities may arise, and other factors such as succession planning in the long-term future.
Not consulting a professional about best practices can lead to unintended tax burdens and even unnecessary business risks.
Here are the four most popular registered types of entities in India
3. Not Complying with Securities Laws When Issuing Stock to Angels, Family, or Friends:
The sale of shares to the founders and later investors will be subject to RBI and state securities regulations if the founders create a Private Limited Company or LLP. Unless the transactions are exempt, most securities laws require that such sales meet with particular disclosure, reporting, and form requirements.
For the founders and the startup firm, failure to comply with applicable securities rules can result in severe financial penalties. includes a demand that the firm buys all shares offered to all investors in the illegal offering at the original issuance price, even if the company has lost most, if not all, of the money obtained from the investors.
4. Important Tax Considerations Aren't Being Considered Enough:
Startups must be aware of some important tax problems that affect their operations. Founders and their startups may be held accountable for unexpected and unanticipated taxes, fines, and penalties if they do not prepare properly.
In India, there are two types of taxes Direct Tax and Indirect Tax. Direct taxes need to be deducted in terms of TDS and file with the government on a monthly and quarterly basis.
Indirect taxes need to be collected from the customers as a GST and the same needs to be filed with the government on a monthly and quarterly basis.
5. Not Having The Right Legal Counsel:
Startup firms frequently engage inexperienced legal counsel, including lawyers, Company Secretaries, and Chartered Accountants who are friends or family, or those who offer substantial price cuts, in an ill-advised attempt to save money.
By doing so, the founders are denying themselves access to skilled legal counsel, which might help them avoid a slew of legal issues. Founders should contact multiple attorneys or law firms to see if they are knowledgeable in some, if not all, of the following legal areas:
- Corporation, commercial, and securities law
- Contract law
- Employment law
- Executive compensation and benefits law
- Intellectual property law
- Real estate law
- Tax law
- Franchise law
- Data security, cyber, and privacy law
6. Not Maintaining Proper Corporate and HR Documentation:
Companies are often poor when it comes to keeping adequate corporate and employee/HR paperwork. When the firm seeks funding, engages in M&A activity, or is involved in claims or litigation with an employee or regulatory agency, this might become an issue.
Here's a list of the many types of paperwork that your company should keep track of:
- Minutes and resolutions of the board of directors and shareholders
- All the signed contracts
- Job applications and resumes
- Employee offer letters
- Employment agreements
- Anti-harassment and discrimination policy
- Records of any disciplinary proceedings taken, including documentation of oral warnings
- Confidentiality and invention assignment agreements
7. Not Knowing Which Permits, Licenses, or Registrations Your Company Will Require:
Depending on the nature and scale of the business, you may need various licenses and registrations for your business. Below are a few examples.
- Industry-specific permits for regulated businesses
- FSSAI License: Food processing and manufacturing business
- Shops and establishment license: For firms who have a physical set-up of office/warehouse/any commercial setup.
- ESI Registration: Required if the company has more than 9 employees
- PF Registration: Required if the company has more than 19 employees
- IEC Registration: Required if the company is dealing with import and export activities
Startups that avoid these legal snares and blunders have a better chance of succeeding than those that fail to anticipate and plan for them from the start. Invest now in preparing and seeking professional guidance to prevent significant issues later.