startup compliance 101

Startup Compliance 101

Chennai Open Coffee Club Session at The Startup CentreSaturday, 5th April 2014

Jaydeep S. Halbe

A Business Idea

Once you’ve gotten an idea that has gone past the initial validation stage, only then it’s required to think of setting it up as a business.

Not every idea becomes a business. Some ideas are really cool but not technically or financially feasible.

Only those ideas that are business / technically and financially feasible and scalable should be called a business. Till then it’s just an idea.

Business Organisation

Every idea that passes the scalability and feasibility test should be called a business.

Once it’s a business, it needs a form of business organisation. There are various forms of business organisations available:

Sole Proprietary Concern Partnership Firm Private Limited Company LLP

You must understand the merits of each and choose one form based on the nature of business.

Reference: http://www.slideshare.net/JaydeepHalbe/how-to-choose-the-right-form-of-business-organisation

http://www.slideshare.net/JaydeepHalbe/how-to-choose-the-right-form-of-business-organisation

http://www.slideshare.net/JaydeepHalbe/how-to-choose-the-right-form-of-business-organisation

LiabilityThis is something worth considering. LLP and Pvt. Ltd. Companies have limited liability while a propritary concern and Firm have unlimited liability.

When there is a liability / claim in the form of a law-suit or demand, if there is limited liability, then it means only your business assets are considered for repaying the liability / claim.

In case of unlimited liability, if the business assets are not sufficient to cover the liability / claim, then personal assets are also considered.

Limited Liability is the reason Donald Trump has a private jet inspite of 4 of his companies declaring bankruptcy.

Same case with Vijay Mallya. Personal assets can’t be touched.

Identity

In all forms of business organisation except the Sole Proprietary concern, the business has a separate legal identity and the founder has a separate legal entity.

The PAN of a firm / LLP / Pvt. Ltd. Company is different from that of an individual. IT returns are to be filed for the company as well as the individual and they are entirely separate.

If you’re a guy who has 1 firm, 2 LLPS and 2 Pvt. Ltd. Companies, you will have 5 PANs (1 for you and 4 for your businesses) and you will have to file 5 Income Tax returns every year.

Pre IncorporationNow that you have all the information you need to make an informed decision, you decide to start a private limited company.

You’ve already incurred some expenditure to bring the idea to it’s current shape and form. You must have spent on:

Domain Name Programming / Design / Development Charges Employee Salary

These are incurred by you before your company is born. These are called Pre-Incorporation Expenses.

Keep a record of these safely with you and provide it to your accountant. These expenditures are of use and can be considered for your company.

Post IncorporationNow that you set up a Private Limited Company, let’s understand what needs to be done after that.

Once the company is set up, ensure you apply for and get the PAN and TAN. The TAN can be applied for only after the PAN comes. TAN is required for TDS.

Open a Bank Account for the company ASAP. You’ll need the PAN for this.

Ensure that you appoint an auditor within 1 month of incorporation.

Ensure share certificates are issued to the shareholders. Talk to your company secretary / company incorporation service provider for this.

ExpenditureNow that your company incorporation procedures and formalities are over, you start incurring expenditure for the new venture. The mode of expenditure could be through:

The company’s bank account Personal Debit / Credit card of the founders. Personal cash of the founders.

As far as possible, ensure you make payments through company account. Ask your banker for a debit card for your business account. Swipe it wherever required and use it to pay online.

Most bankers (HDFC, HSBC, ICICI, Axis Bank) give debit card for current (business) accounts.

It’s advisable to do so because it ensures trackability.

Expenditure by FoundersNow let’s assume you forgot to swipe your company’s debit card or you didn’t get one. In that case, you are paying for some expenses using your personal debit / credit card or cash.

No reason to stress. There’s a way out. Do either of the following:

Once you receive your credit card statement, identify the official payments made and cut a cheque for the official payments using your current account directly to the credit card company.

Prepare an expense claim at the end of the month detailing all the expenditure you incurred for the company and submit the expense claim. Take a reimbursement for it from the company account.

It’s irrelevant when you actually take the reimbursement. But it’s important you keep these expense claims safely. This goes for other employees who spend on behalf of the company as well.

BillsI am often asked, “I don’t have bills, is it okay?”. Well there is no fixed answer. To answer the question, I’ll explain how the tax department works.

The Income Tax Department has a software that runs an algorithm that selects the people / businesses for whom a scrutiny is to be done.

For those selected, the Income Tax Officer (ITO) will ensure that your computation of profit is accurate and then will ask for evidence for some of the expenditure incurred.

If you don’t have bills, the ITO will feel suspicious and hence will disallow the expenditure. This means your expenditure will reduce and profit will go up thereby increasing your tax.

The more the cases of missing bills, the more deeply the ITO is bound to look at your IT return.

Income Tax ReturnNow that we’re on the topic of Income Tax, I’ll quickly explain the Income Tax Return filing deadlines. Period for IT Return is April – Mar.

For an Individual, due date is 31st July 2014

For a firm with income < 1 Crore, due date is 31st July 2014.

For a firm with income > 1 crore, LLP, Pvt. Ltd. Company, due date is 30th September 2014.

Repercussions of not filing return on time – Loss can’t be carried forward.

IT allows you to carry forward the Loss. If expenditure in a year is > income, then it’s a loss. Carrying forward the loss means adjusting this years loss with next years profit. This can be carried forward for 8 years.

This can be done only if return is filed on time.

TDS / Service Tax / VATParticulars Tax Payment Return Filing

TDSPayment – MonthlyReturn - Quarterly

7th of the subsequent month


Service TaxPayment – MonthlyReturn – Half Yearly



VATPayment – MonthlyReturn - Monthly



Reference: http://www.slideshare.net/JaydeepHalbe/tds-101

http://www.slideshare.net/JaydeepHalbe/tds-101

http://www.slideshare.net/JaydeepHalbe/tds-101

Invoices for IncomeRaise invoices for the income that you have (sale of product / service) as and when the work is completed or based on terms agreed with the client.

Raising Invoice is an activity that is totally independent from receiving money for the same.

Don’t raise an invoice just before the money is yet to come. Raise an invoice when product / service is delivered or based on agreed terms.

The invoice must have certain details like name of the company, PAN, Service Tax Number, Address, etc. Maintain the serial numbers of the invoices accurately.

Even if your client / customer doesn’t need an invoice, generate an invoice and keep it for record keeping purposes.

Books of AccountNow that we’ve discussed expenditure and Income, it’s time to talk about the books of account.

Get a professional accountant to maintain books of accounts for you or get a software so that you can do it yourself.

In any case, maintaining books of account are very important. Ensure your service provider or you yourself have used the following documents to pass entries:

1) Bank Statement2) Sale Invoices3) Expenditure Invoices / Expense Claims4) Other bills (purchase of fixed assets)5) Cash Vouchers

These are essentially the documents that your service provider will ask you.

Accountant vs. Auditor

People often mix and confuse between an accountant and an auditor. No, they’re not the same.

An accountant is the person who prepares your books of account by recording your business transactions.

An Auditor is a person who verifies the books of account and ensure that they reflect a true and fair view of the business.

So it’s a maker / checker concept.

Often, the auditor ends up doing the accounting as well because the business owner doesn’t do it!

Company SecretaryStartups don’t need to hire a company secretary (CS) full time because the work to be done is very sparse.

The CS will file your board minutes. As per law, you’re supposed to have 4 board meetings per year and the gap between each should not be more than 3 months.

The CS will file things with the government like resolution for appointment of managing director, increase in share capital, change of objects clause etc.

They will also file your year end audited financials and the IT return.

Engage a CS on a retainer or fee for service. They will remind you about the compliance and ensure it’s done.

THANK YOU FOR YOUR PATIENCE

The objective of this is not to make you guys experts in Compliance procedures. There are

professionals who are there for that.

At the end of the day, it’s your startup and you need to be aware of what needs to be done.

ContactE-mail: [email protected]

Twitter: @JayHalbe

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