Startups often tend to overlook the importance of compliance because they are unaware of the laws and regulations. This lack of knowledge is widespread across the startup ecosystem with businesses having little knowledge of statutory and regulatory compliance. Dealing with compliance for startups can be an unpleasant experience. It is particularly difficult for startups as they have to wade through large amounts of data and legal jargon only to find out that they have missed the deadline for most compliance requirements.
Compliance laws have become increasingly stringent throughout the world. For Example – In India non-compliance of Sec. 186 of Companies Act 2013 relating to loans and investments attracts a fine of Rs. 25000 – Rs. 200000 and a jail term of 2 years. This penalty is especially harsh as this is the same penalty for a person who has committed manslaughter. The law is obviously ludicrous as it awards the same penalty for accidentally killing a person and reporting discrepancies in loans and investments but it highlights the importance of compliance.
It is essential that startups invest time and money in finding and complying with all the necessary statutory/regulatory compliance. Failing to do which, the progress of the company could be hindered along with several other consequences. Some consequences that startups could face are imprisonment, disqualification, intrusive action by regulatory agencies, loss of reputation and credibility, etc.
Ignorance of compliance by startups can also have an impact on potential or existing investors as it affects the viability and attractiveness of a business. For example, the Economic Times reported that venture capitalists are “getting experts to check businesses they have invested in to catch any oversights or discrepancies”. The action taken by venture capitalists points to the necessity of being compliant to the law of the land. Such persistence and premonition would profit both the organization and the investors. It would benefit the stakeholders by basically assuring potential investors that the startup they are investing in is in safe hands thereby gaining the trust of the investors
There are several compliance that firms may not require to fulfill. Some of the compliance that fall under the purview of management are :-
Operational Compliance – General meetings, board meetings, and special meetings.
Fundraising Compliance – These compliance include FEMA (Foreign Exchange Management Act) regulations for foreign investors, RBI (Reserve Bank of India) regulations, issue of securities and valuation for tax purposes.
Finance Related – Filing of timely returns for various government departments
Intellectual property related – The management needs to ensure they apply for trademarks, protect their intellectual property, royalties and attribution.
Top 3 Compliance
Apart from the above mentioned compliance there are 3 main bodies of compliance that are integral :-
Companies Act 2013 – It is essential that startups follow the provisions of this act as it is the main act that governs all companies. However, complying with this can be daunting as there are several sections and subsections in numerous compliance.
Income Tax 1961 – All authorities strictly govern income tax with stringent checks and harsh penalties imposed upon defaulters.
Indirect Taxes – Several indirect taxes such as VAT, sales tax and service tax will be subsumed by GST.
Startups don’t take compliance lightly, but they don’t have much information to meet statutory and regulatory compliance. Therefore, startups should invest in a compliance management system or get advice from Chartered Accountants and lawyers. Technology is the best way to help in manage compliance as the right solution with fail safe measures and checks will help prevent any accidental non filing of compliance.Add to favorites