Running a Company 101 — Navigating Legal, Compliance and Corporate Governance for Early Stage Startups.

Here are a few insights I got from the first session by Deena Jacob, CFO and Co- Founder of Open Financial Technologies Pvt. Ltd about Navigating Legal, compliance and corporate governance of Early stage startups at WE Start , a 3 month Pre-incubation program organized by Kerala Startup Mission.

The session covered what all to look while running a company and here are the below details :

Let’s take a walk through each of them

1. Understanding Legal Frameworks:

Choosing the Right Entity:

Selecting the appropriate legal framework for your startup is a crucial choice that may have long-term effects. Each type of entity—whether it's a company, partnership, or sole proprietorship—has its own set of legal and tax considerations. Consulting with a legal professional can help you determine the most suitable entity for your business based on factors such as liability protection, tax implications, and operational flexibility.

Initial Registrations and Compliance:

Here is the checklist for essential registrations - Udyam registration,Startup India Registration and others specific to your industry. Understanding compliance requirements from the outset is crucial to avoid future penalties.

2. Setting the Foundation:

Engaging Legal Professionals:

Seek guidance from experienced lawyers, Chartered Accountants (CAs), or Company Secretaries (CSs) specialized in startup laws. Ensure they comprehend your vision and needs.

Corporate Governance Protocols:

Establish a clear framework for decision-making, including the composition of the board, shareholder agreements, and defining roles and responsibilities.

3. Vital Steps for Startups:

Starting Strong:

The first steps involve legally registering your business, obtaining necessary licenses, opening a dedicated business bank account, and ensuring adherence to tax norms.

Registering your business with Registrar of Companies(RoC) — > Startup India Registration — > KSUM Unique ID

Ownership Distribution and Agreements:

When starting a business with one or more co-founders, it's crucial to have a clear co-founder's agreement in place. This agreement should outline each co-founder's roles and responsibilities, equity ownership, decision-making processes, and procedures for resolving disputes. By addressing these key terms upfront, you can prevent potential conflicts and protect the interests of all parties involved. Draft robust founders' agreements and ESOPs to safeguard interests.

4. Maintaining Compliance and Records:

Meticulous Record-Keeping:

Track financial transactions, maintain clear records, and ensure adherence to legal and accounting standards. This is crucial for audits and operational transparency.

Annual Compliance Calendar or Checklist:

Create a calendar/checklist outlining compliance deadlines, tax filings, and necessary renewals to avoid last-minute rushes or non-compliance issues.

5. Audits and Early-Stage Startups:

Understanding Audit Requirements:

While early-stage startups might not undergo mandatory audits initially, maintaining clean financial records and complying with regulatory standards is essential for future growth and investor trust.

The auditor will provide a list of materials, but in general this includes documentation like:

• Your financial statements (income statement, cash flow statement, balance sheet).
• The trial balances - and related supporting documentation (expect this to go to the year PRIOR to the audited year, as the auditor will want to make sure they agree with the opening positions/balances).
• Tax returns.
• Financing documentation (make sure your lawyer is filing this all away in a shared Box folder so you have easy access). Very important point for VC backed startups undergoing an audit.
• Incorporation documents.
• Employment agreements.

6. Shareholder Roles

Clarify the roles and powers of shareholders, the board of directors, and executives. This ensures alignment and effective decision-making within the startup.

Shareholders:

Role: Owners of the company, holding equity.

Power: Voting rights during major decisions like mergers, acquisitions, or changes in the company's structure.

Board of Directors:

Role: Oversees policies, strategic direction, and executive appointments.

Power: Sets the company's direction, appoints executives, and ensures alignment with shareholders' interests.

Executives:

Role: Manage day-to-day operations and execute strategies.

Power: Implement the board's directives, drive growth, and ensure operational efficiency.

7. Taxation & Employment Laws:

Understanding tax regulations

Goods and Services Tax (GST): Register for GST if your turnover exceeds the prescribed threshold. Ensure timely filing of GST returns.

Income Tax: Comply with individual and corporate income tax requirements. Keep accurate financial records.

Tax Deducted at Source (TDS): If applicable, deduct TDS on certain payments and remit it to the government.

Employment Laws

Hiring and managing employees involves adhering to several labor laws, including:

Employment Contracts: Clearly outline terms and conditions of employment to avoid disputes.

Minimum Wages and Working Hours: Comply with laws related to minimum wages, working hours, overtime, etc.

Employee Provident Fund (EPF) and Employee State Insurance (ESI): Ensure timely contributions to these social security schemes.

Navigating the legal and governance landscape for an early-stage startup demands proactive planning, expert guidance, and a meticulous approach. By prioritizing legal compliance, and seeking professional assistance, entrepreneurs can lay a strong foundation for sustained growth and success.