If you were a start-up founder, what do you think are the most necessary things to build your start-up? If your answers are an idea, a good team, capital and investors, I definitely agree with you. Now, if I rephrase my question, what do you think are the most necessary things to build a successful start-up? If your answer remains the same, this is where our answers will begin to differ. While a viable idea is the backbone of every start-up, a good team is as good as its oxygen supply and most definitely no start-up would survive without the right amount of capital, the mark of a successful start-up also lies in how legally compliant the start-up is.
What is compliance?
Compliance, in simple words, is all the laws, rules, regulations and ethical practices a business has to follow in a commercial ecosystem. Although compliance requirements are often mandatory, many start-ups remain unaware of them. Now if anyone is thinking why does a business need to be compliant, the most direct answer would be because it is a mandatory obligation on the business and businesses often pay the price of non-compliance in the form of hefty fines and cumbersome legal procedures. However, believe it or not, compliance has its upside too. While most start-up founders look at legal and statutory compliance as an added cost and find it difficult to strike a balance, compliance are a very essential tool for building the reputation and image for a start-up.
Why Should A Start-up Founder Focus on Compliance?
- Helps Gain Investors’ Trust:
Start-ups with a displayed history of compliance culture and ethical practices find it relatively easier to win the trust of investors. For example, a start-up that gets its books audited annually will find that its investors find it more comfortable to rely on the numbers presented. A start-up looking for an investor should keep in mind that an investor would never want to see his money being spent of fines and penalties arising out of non compliances.
- Sourcing Funds:
Capital is one of the key requirements of any business. A start-up wanting to raise funds in the form of a bank loan needs to provide copies of previously filed Income Tax Returns and Financial Statements as a part of documental requirements of the bank.
- Image & Reputation:
Every business functions in a network of stakeholders. Your reputation in this network can have significant impact on your business. A start-up that is aware and compliant is much easier to be in business with than one which isn’t, as is known by most market participants.
For example, did you know there are consequences that arise while claiming deduction for GST paid to a supplier if that supplier has not filed his GST returns?
- Reduce Legal Risks:
Not complying with mandatory requirements of law, like not filing GST and income tax returns, not complying with TDS requirement, etc. will have your doorbell ringing constantly with Notices from the Government. With these notices come hefty fines, penalties and a lawyer’s bill.
Not knowing the requirements and nuances of your business’ legal environment can be detrimental, sometimes even fatal for start-ups. Knowing which laws your business needs to abide by or which licenses you need for operating your business is essential for smooth functioning of a start-up.
- To Take Advantage of Government Initiatives:
The government has come up with multiple schemes and initiatives such as Start-up India, tax holidays, etc. to help start-ups grow and flourish. It is important that start-ups be compliant with various government requirements to take full advantage of these initiatives.
For example, did you know if you file Income Tax Return for your business in the year it has incurred a loss, you can reduce that loss against profits generated over next 8 years while computing your Income Tax liability?
- Building a Culture:
Compliance is not restricted to legal and statutory compliance. A start-up can build a strong and ethical work culture by formulating and complying with internal policies. How compliant an organization is with its own policies sets the tone to its work ethics and culture.