Business Basics. Grooming startups

These days, there is so much buzz about startups. But it is not very easy to start a new business and groom it into a successful venture.

Selecting the correct legal status — proprietorship, partnership, LLP or company — is important. One must know that the proprietorship business enjoys lower income tax and lesser legal compliances, whereas a company, firm or LLP has to pay taxes at a higher slab rate. A whole lot of compliances are required for their incorporation and operations, if it is a company.

Legal structure The decision should also be based on the number of promoters involved in the start-up. If more than one person is involved, then the status could be a partnership firm. If one wants to limit business liabilities based on roles and responsibilities of the business, then instead of a partnership firm, one can choose Limited Liability Partnership or LLP. One may choose the legal status as ‘company’, if the promoters are keen to broaden the financial structure of the venture, such as equity/preference shares.

The correct legal status is also vital for funding. A proprietorship business/ partnership business tends to find less favour with banking institutions as well as private venture funds/angel funds in comparison to corporate forms of businesses.

Often, founders of start-ups are not aware of the acts applicable to them. The start-up may need to register under the Excise Act, Service Tax, VAT, Shop Act, Factory Act, Profession Tax, MSMED Act, etc, depending on the nature of the business and turnover.

Record keeping

Timely legal registrations are important to avoid sudden taxes and penalties under various laws, which may impact cash flows of start-ups.

One should also be disciplined and keep a record of transactions. One should preserve the bills and receipts of all the expenses incurred, failing which one may not be able to claim expenses for the same in the income tax return.

Always keep a record of registration certificates under various acts, tax payment challans and returns under various Acts.

The record of cash transactions, especially cash expenses, is vital. This can be ensured by maintaining payment vouchers for every cash payment. It also helps to be aware of various tax incentives/subsidies provided by the Centre as well as State Governments to promote industrialisation.

The writer is Head of Tax, myITreturn