Common mistakes startups make during company formation (and how to avoid them)
A new business is a thrilling experience, although the process of forming a company can be strenuous, particularly when it is being done by a first-time founder. Most of the startups in the USA do not take into consideration the legality and financial aspects and they are in a hurry to do the registration process. Even minor errors that occur during incorporation may cause future law suits, tax fines or even closure of the business.
This article defines the most popular errors that have been made when establishing a company, the reasons they occur, and how they can be prevented easily.
1. Making the Wrong Business Structure
What it entails: Before going to the place of registration, a lot of founders get themselves registered without knowing whether to form a Private Limited Company, or LLP, Partnership, or even OPC.
Why it is a bad idea: The inappropriate framework may raise the taxation, decrease the possibilities of investments, or make the compliance process more complicated.
How to prevent: Seek the advice of a business consultant or CA. A Private Limited Company is most appropriate where the tech startups want investors.
2. Failure to define Founders roles and shareholding
Interpretation: Co-founders usually do not have written agreements and trust each other orally.
Reasons it becomes wrong: Partnerships can be ruined by disagreements over ownership, responsibilities or equity.
How to prevent: Prepare a Founders Agreement that is very precise on shareholding, right to decision making and exit provisions.
3. Violation of Legal Compliance Once Registered
The meaning behind it: A lot of startups believe that company formation is the last thing to do and it is not once.
Reasons why it is a bad idea: Lack of annual filings, tax returns or ROC compliance may result in penalties or strike-off.
How to prevent it: Maintain a compliance calendar or use a professional service to deal with filings.
4. Business Transactions with Personal Bank Accounts
What it entails: There are start-ups where personal accounts are used as opposed to the opening of a business current account.
Reasons why it is a bad idea: It brings about confusion and accounting problems in the form of taxes.
How to avoid: Open a separate current account as soon as it is registered to separate business finances.
5. Failure to Secure Brand Name and Logo
What it means: Founders do not bother with trademark registration when they believe that nobody is going to copy their logo.
Why it is a mistake: If there is no trademark then anybody can use your name or even register it ahead of you.
How to prevent: Have a Trademark Registration, immediately after securing company incorporation.
6. Failure to take the necessary licensing or GST
What it entails: There are numerous businesses that are run without required registration such as GST, MSME and Shop and Establishment license.
Reasons why it is wrong: Non-compliance may attract fines or government benefits denial.
How to prevent: Find out all the licenses which apply to your type of business at the start.
7. Lack of Accounting and Record Keeping
What it is: There are startups that postpone the recording of their accounts to the end of the year.
Reasons why it is a mistake: It causes financial mismanagement and wrong reports.
How to prevent: Keep monthly accounts and pay a CA or use accounting software at the very beginning.
8. Selecting an Inappropriate State or City to Register
What it is: Sometimes, businesses are registered in a poor location without paying attention to the taxation or the operations.
Reasons why it is not a good idea: It may add compliance cost or render banking a nightmare.
How to avoid: Register where you are carrying out your major business operations.
9. Failure to plan for Future Investors
What it entails: There are those startups that are formed as an LLP or proprietorship but in future they require investors.
The reason why it is a mistake: Privately limited companies are favored by investors, as they allow shareholders flexibility.
How to prevent: Be long-term oriented and adopt a structure that is fundraising supporting.
10. Lack of Professional Help
Meaning: Attempting to register the company without the help of professionals.
The reason it is a mistake: Will result in documentation error or refusal by MCA (Ministry of Corporate Affairs).
How to prevent it: Use a professional incorporation service provider to deal with all the legal and effective work.
Top 5 Company Formation Service Providers in India.
- E-Startup India – Provides startups with cheap and quick company registration, GST, and compliance service.
- LegalRaasta – Services small businesses with incorporation, GST, and tax registration.
- MyOnlineCA – It offers online company registration and business compliance services to MSMEs.
- StartupYo – Provides startup entrepreneurs with incorporation and startup documentation.
- Registerkaro – Company formation and legal compliance agency of Indian startups.
Additional Tips
- Never register without first checking the availability of the company name.
- Develop a financial forecast of the business and a business plan to be used by future investors.
- Always have electronic versions of all legal documents to have easy access.
- Check your company compliance after every 6 months.
Conclusion
In brief, startups are known to commit errors such as wrong structure, lack of compliance, or mixing personal and business funds. These mistakes can be time and money consuming in the future. With proper planning, documenting all aspects and professional assistance offered by reputable sites such as E-Startup India, you will easily register your business and create a good legal basis to develop.
