Hi.

I’m Rohan Arinaya and today, we’ll be talking about the business structures and
compliances that you need to ensure for your business.

I’m sure you’re all excited about scaling up your startup, capturing a huge market share, and
generating massive profits. But before you get to this, the second leg of your journey, you
need to make sure that you’re on the right side of the law.

Did you know that there are 1,248 legislations that are applicable to a business in India?
Have you ever wondered why there are so many of them?

The simple answer is that these are the building blocks of economies and societies. Without
regulations, there would be complete mayhem.

Regulations ensure that all the stakeholders in a business environment—the owners,

vendors, customers, and retailers—are given a fair chance and everybody is working in good
faith.

So, regardless of how time-consuming it is, you will still need to ensure compliance with
regulations. And the best time to take care of all these things is ​before​ you scale up so that
you can focus on the important things. Apart from the fact that you need to abide by the law,
there are a few more reasons you should be ensuring compliance with regulations.

Why is compliance important?

Cost implications

Although ignoring compliance may seem like a cost-saving effort in the short term, not
complying with regulations can end up costing you a lot more in the long term.
Non-compliance can attract hefty fines and sometimes, even legal action. You don’t want to
be dealing with these extra costs while you are scaling up. It is crucial that you invest
enough time, effort, and money into compliance to ensure that your business runs smoothly
throughout.

Reputation

By not complying with regulations, you also risk ruining the reputation and credibility of your
startup. Your company’s reputation plays a ​big​ role in your ability to raise capital or debt,
even in the future. Most importantly, compliance will ensure that you don’t have to deal with
any unnecessary intrusive actions by regulators.

Difficulty in securing funding

When someone is signing you a big cheque, they are bound to be cautious. Now, when a
company is trying to scale quickly, some oversight or discrepancy can take place. But there’s
no getting away with it. Non-compliance is a huge red flag for investors as it increases their
risk. As an entrepreneur, it’s best if you hire professionals to ensure that your company is
meeting all compliance requirements.
Raising debt will also be a problem

When you’re not in compliance, securing loans can also be a big problem. Banks are very
stringent when it comes to regulations. This is where your credibility and reputation come
into the picture. Before you start talking to a bank for loans, make sure your compliance is in
place.

Huge opportunity cost

Besides all of this, the most important thing is that the opportunity cost of not being
compliant could be tremendous. By adhering to compliance, you may pay a little more in
taxes and other expenses but, the opportunity cost that comes with non-compliance simply
cannot be measured. You’re probably not doing this intentionally, but oversights on
compliance are common among startups. Your best bet is to take the advice of
professionals.

The scale of compliance requirements depends a lot on how your business is structured.
Let’s take a look at the different options you have for your business and their respective
compliance requirements.

Different business structures

One: A sole proprietorship

The first and simplest option is the sole proprietorship, where, as the name suggests, there
is a single owner. A sole proprietorship is not a separate legal entity and since the owner
represents the proprietorship, the entire liability of the business falls on the owner. At the
same time, compliance requirements are also limited, which makes it perfect when you are
just starting out and testing the market.

Two: A partnership firm

If you are two or more people starting a business, then it’s recommended that you register it
as a partnership firm. A simple partnership deed will have all the names of the partners, the
capital they’ve invested, and also the profit-sharing ratio. Again, like a sole proprietorship, a
partnership firm is not a separate legal entity and the liability falls on ​all​ the partners. The
extent of the liability is decided by the profit-sharing ratio.

Although it is commonly witnessed in traditional businesses, you can also use the
partnership firm structure for your startup when you and your partner(s) are getting started
and do not want to invest a lot of time and effort before market validation has happened.

Three: A one-person company

The one-person company – an OPC – structure was introduced in the Companies Act of
2013. Before this, a single person could not incorporate a company since a private limited
company needed a minimum of two shareholders. This new structure allows for the
formation of a separate company with just one member, and with far less compliance
requirements than for a private limited entity. It also provides you with limited liability
protection.

The Act provides for mandatory conversion from OPC to private/public company once the
paid-up capital exceeds 50 lakh rupees, ​or​ the average revenue for the last three years
exceeds 2 crore rupees.

Four: A limited liability partnership

A limited liability partnership - an LLP - is a perfect hybrid between a partnership firm and a
company. As the name suggests, the liability of the partners is lower and partners can
separate personal assets from those of the company. Besides being lower on compliance
requirements, it also has added benefits like protection of the name of your company and
transfer of ownership.

But unlike a regular partnership firm, an LLP ​may​ require external help and can add to your
expenses.

Five: A private limited company

A private limited company requires a minimum of two owners and is high on compliance
requirements. It is recommended that you structure your company as a private limited
company ​before​ you start scaling up.

A private limited company is a separate corporate entity and will remain so even in the event
of the owners’ non-availability. The compliance requirements for private limited companies
are the highest and greatly increase the credibility of your business; compliance is
mandatory if you are planning to raise external funding.

Now that you know all the different structures of business available to you, how do you
decide which one to go for? Here are a few things to consider before choosing a structure.

Considerations to have before choosing a structure

The stage at which the business is operating

The most important factor is the stage at which your business is operating. If you are just
starting off, you may not need to go with a private limited structure since the costs can be
high ​and​ it comes with a lot of compliance requirements.

You can start off with an OPC or LLP structure, for example, and then as your business
grows, you can opt for a private limited structure.

Future outlook

What does the road ahead look like for your business? Are you going to be in stealth mode
for a while before making it official? If your answer is yes, then you could probably go with
simpler structures like a sole proprietorship or partnership firm before making it official with a
more organized structure like an LLP or a private limited company.
If raising money is on the cards, then it is best to start preparing to transition into a private
limited entity if you haven’t done that already.

Costs involved

Different structures involve different direct and indirect costs. Not just that, certain
compliances may require your direct involvement, which will take up your time. If you need to
focus on making and selling the product in the initial stages, it is best that one of the partners
is focused on compliance. Another option is to entirely outsource it to a professional.

Timelines

As mentioned earlier, certain compliances may not only need your direct involvement but
also take up quite a bit of your time. If there is a requirement in the future where you are
getting employees on board or getting new board directors, make sure that you factor in the
time it takes to complete all the necessary procedures.

Key legislations you need to follow​

Income tax

Profits of private limited companies are taxed at 25% for an annual turnover of less than 250
crore rupees, and at 30% for an annual turnover of ​more than​ 250 crore rupees. Then
there’s an additional 4% education cess. Additionally, a surcharge of 7% is applicable where
total income is more than 1 crore rupees but less than 10 crore rupees. Where total income
is more than 10 crore rupees, the applicable surcharge is 12%. Profits of LLPs and
partnership firms are taxed at 30%, plus the 4% education cess. LLPs and partnership firms
are liable to pay the surcharge at 10% if the total annual income exceeds 1 crore rupees.

When it comes to reporting your taxes, the sole proprietorship route gives you an easy way
out. Since it is not a separate legal entity, you can declare your business income on your
personal income tax form itself.

Goods and services tax

The goods and services tax (GST) is an indirect tax levied on the supply of goods and
services. This tax has replaced many indirect taxes that previously existed in India.
GST is a multi-stage, destination-based tax that is levied on every value addition. It means
that at every stage of the product, from manufacturing to sales, GST will be added and will
be levied at the point of consumption.

You need to register your business for GST and file your returns for every month before the
20th of the following month.

Employees Provident Fund Act

Employees Provident Fund - the EPF - is the main scheme under the Employees’ Provident
Funds and Miscellaneous Provisions Act of 1952. The scheme is managed under the aegis
of the Employees' Provident Fund Organisation – the EPFO.

It covers every establishment that employs 20 or more people. Some organizations are
covered, subject to certain conditions and exemptions, even if they employ fewer than 20
people.

The contribution paid by the employer is a maximum of 12% of basic wages, plus dearness
allowance, plus any other regular allowance. An equal contribution is payable by the
employee.

Foreign Exchange Management Act

As a thumb rule, if you are receiving money from abroad or sending money abroad, you
must check to see if there are any provisions of the Foreign Exchange Management Act -
FEMA - that apply. The most common application of this law among startups is when they
receive capital from foreign investors. The Act may also be applicable when investors decide
to exit the company.

The Companies Act

All private limited companies are required to file with the Registrar of Companies - the RoC
-details of changes to its directors, details of fund raise, annual performance, details of
borrowings, and so on. The responsibilities of a director are very exhaustive and should not
be taken lightly.

With that, we have covered most of the aspects of business structures and the associated
formalities. The objective of this video was to give you an ​overview​ of the subject, but there
certain nuances that are beyond the scope of this video. I strongly recommend that you take
the help of professionals while completing the formalities to avoid any pitfalls.

You will also find a checklist in the download section below, which you can go through to
ensure that you are on track with compliance.

Thank you for watching, and good luck with your startup.