As an entrepreneur, it is important to be aware of all the local and national laws that apply to your business. Often Entrepreneurs are so engrossed in their idea, especially in the initial stages, that they completely ignore important issues that could land them up in a prison. Forming a limited liability partnership or a Limited liability company does not protect its promoters/directors from criminal liabilities.
So what are the laws that most of the startups should be careful about?
One of the most misunderstood laws in India are the Income Tax Act. In the initial years when I was starting a business, I met at least 5 different Chartered Accountant firms in Mumbai. Almost all never fully understood my business (online software sale), what PayPal is, how payments are being processed etc. Even after explaining them everything in detail, I couldn’t just take it for granted that they will be able to handle our accounts. It is important for you as an entrepreneur to explain to your CA about your business in as simple terms as possible. This is especially true if you are working on a tech or unconventional idea.
Many CAs that I met in my initial days cribbed a lot about Indian accounting systems and how account adjustments (faking accounts) was a norm and how one cannot survive in the Indian context without indulging in such practices. You can guess what we did with such firms – fired them the very next day! Clean and true books of accounts are very important not just from compliance point of view, but also from investor point of view. Always remember that as a promoter of your company, you are criminally liable for all tax mis-deeds. If you raise money in 2nd or 3rd year of your operations, any investor will appoint his/her CAs and lawyers to do due diligence. Such account adjustments will cost dearly at the time when investors turn their back on your company due to accounting malpractices.
Another important area that is over looked is the Tax Deduction at Source. Are you deducting and depositing the TDS on every payment that you make to your contractors, employees and agents? Often this gets overlooked in the initial years only to haunt back the company few years later when they receive notices from the IT department. Same is true for Profession Tax which is applicable in many states of India. Make sure you comply with every tax law of the country in letter and in spirit.
We, in the high tech industry don’t hire labourers, but we do hire employees and contractors. Hence it is very important to understand the labour laws of your state. What is the minimum wage that you must pay to your employees? Is sweat equity part of minimum wage? Another mis-conception that many entrepreneurs have is that if you hire a person as a contractor, he/she is treated as a contractor as per the law. This may not always be true. It is important to take advice from a labour law specialist. Also if your staff strength (full time employees + contractors) is more than 20, you must register and comply with Provident Fund and ESIC laws in India. A professional labour law consultant can help you with the compliance. Before hiring your employees/consultants, talk to a labour law professional and get the necessary paper work done.
It is also important to protect privacy rights of your employees. Often many companies ask very personal and direct questions to prospective employees during interview. Asking any information that is irrelevant for the job profile is not only illegal, it can land you in court if the person chooses to sue you.