Setindiabiz Team |Updated : May 25, 2024

Business Types for Startups in India: A Deep Dive into Compliance

Overview :Welcome back to our eight-part series, ‘Business Types for Startups in India.’ In this sixth instalment, we will discuss an essential aspect that every entrepreneur must be aware of: Compliance. Adhering to the various regulatory requirements and legal mandates is crucial for both legal compliance and your startup’s smooth operation and credibility. This article aims to clarify how different business structures in India, such as Companies, LLPs, Partnership Firms, or Sole Proprietorships, come with their own compliance obligations. We will offer valuable insights to help you navigate the complex regulatory landscape, ensuring that your business remains on the right side of the law.

After journeying through the intricacies of legal structures, ownership and control, owner’s liability, and taxation in Indian businesses, our focus now shifts to the often understated yet critical backbone of business management – compliance. Whether dealing with financial reporting, recordkeeping, statutory audits, or adhering to industry-specific regulations, each business structure presents unique challenges and requirements. Understanding these compliance nuances is indispensable for any startup, as it prevents legal pitfalls and bolsters your business’s long-term integrity and success.

As our series progresses, we will continue to explore other crucial topics, such as Ownership Transferability and the Closure or Winding-up processes, each playing a significant role in the entrepreneurship landscape in India. Our commitment is to equip you with a holistic understanding and practical insights, empowering you to make well-informed decisions as you navigate the multifaceted journey of starting and running a business in India. Stay with us as we delve into the critical yet often overlooked world of business compliance, an essential pillar in the foundation of any thriving startup.

Running a business successfully is not just about market strategies and financial management; it also involves a thorough understanding and adherence to various regulatory and legal requirements. Each business structure—Company, LLP, Partnership Firm, Sole Proprietorship—comes with its own set of compliance obligations. Keeping on top of these requirements is crucial to avoid unnecessary disruptions, penalties, and even reputational damage.

Company: Navigating Complex Compliance Terrain

Companies are subjected to the most rigorous compliance requirements. They are governed by the Companies Act, which mandates them to comply with a plethora of regulations, including periodic filings and disclosures, as well as maintaining high standards of corporate governance. This encompasses detailed record-keeping, annual financial reporting, conducting statutory audits, and ensuring robust corporate governance practices. Although these stringent regulations enhance credibility and transparency, they also require dedicated resources to manage compliance. Companies, due to their complex legal structure, face the most stringent compliance requirements, which include:

• Extensive Regulations: Companies need to abide by laws such as the Companies Act, 2013 which provides for its incorporation with the registrar of companies and outlines detailed requirements on corporate governance, disclosures, and periodic filings.
• Recordkeeping: They must maintain elaborate and accurate records, including minutes of meetings, financial records, and statutory registered as prescribed under the Companies Act, 2013. The companies are required to maintain their books of account on software that has the facility of log file maintenance with effect from 1st April 2023.
• Financial Reporting and Audits: Every year, companies are required to create and present detailed financial statements, which must be audited by a chartered accountant appointed as the company’s first auditor. The purpose of statutory audits is to ensure financial transparency and accountability.
• Company Annual Filing: Companies must submit an annual report, which consists of two parts, to the ROC. The first part is the filing of AOC4, which includes the audited financial statements duly adopted by the shareholders during the Annual General Meeting (AGM). The second part is the annual report in Form MGT-7/7A. Additionally, all companies must file their respective Income Tax Returns (ITR) for the previous financial year.
• Corporate Governance: The company must adhere to strict corporate governance procedures, ensuring ethical operation in accordance with the law.

LLP & Partnership Firm: Moderate Compliance Needs

While less complex than companies, still have significant compliance duties. They must adhere to the LLP Act, which requires specific disclosures, periodic filings, and maintenance of accurate financial records. Although the regulatory burden is lighter than that of companies, LLPs must ensure diligent adherence to maintain their legal standing. LLPs (Limited Liability Partnerships), while simpler than companies, still have significant compliance requirements:

• Industry Regulations for LLPs: LLPs must adhere to specific regulations such as the LLP Act, and the laws relevant to their industry and maintain proper tax records. The LLP is also required to adhere to state-specific legal requirements.
• LLP Agreement: In order to ensure the smooth operation of a Limited Liability Partnership (LLP), it is essential to have a well-structured agreement in place. The LLP Act plays a vital role in regulating the relationship between the partners of the LLP. Therefore, it is crucial to have a well-drafted LLP agreement that is properly executed by and between all the partners of the LLP. This agreement should outline the roles and responsibilities of each partner, as well as the terms and conditions that govern the partnership. By having a well-structured LLP agreement, partners can avoid potential conflicts and misunderstandings that may arise during the operation of the LLP.
• Recordkeeping & Audit: Every Limited Liability Partnership (LLP) must maintain its books of account using the double entry system. The partners of the LLP are also responsible for preparing and finalising the LLP’s financial statement within 180 days after the end of the respective financial year. If the turnover of the LLP exceeds INR 40 Lakhs or the Capital of the LLP is more than 25 Lakhs, then a statutory audit would also be required.
• Annual Filing: Limited Liability Partnerships (LLPs) are obligated to file their annual return in Form-11 with the Registrar of Companies (ROC) before the 30th of May after the conclusion of the financial year. Additionally, another return in Form-8 must be submitted to the ROC before the 30th of October to report the financial position of the LLP.

Partnership Firms - Regulatory Aspect

Partnership firms are easy to form as they do not require mandatory registration. They come into existence when an agreement is executed between the partners. The Partnership Act is an old legislation that does not provide much guidance on how partnerships should regulate themselves. This means that the regulation is light, which is not preferred among startups.

Sole Proprietorship: Simplified Compliance Requirements

As a sole proprietorship, you can enjoy a simple business structure with fewer strict compliance obligations. You only need to maintain basic records of your income and expenses for tax purposes. Additionally, you must obtain any necessary licenses or permits depending on your business type and location. You also need to comply with relevant tax regulations, which include filing income tax returns and paying due taxes.

The Importance of Compliance Across Structures

Proper compliance is crucial for any business, regardless of its structure. Failure to comply with regulations can result in severe consequences like legal actions, fines, and damage to the company’s reputation. Hence, business owners must keep themselves informed about the latest regulatory updates and changes that could affect their business. They should also ensure accurate and timely record-keeping and reporting. Seeking the expertise of compliance and legal professionals can help ensure that the business adheres to all necessary regulations and industry standards.

Conclusion

Compliance is not a burden but a vital aspect of running a successful business. It helps to maintain the company’s integrity and support sustainable growth. Entrepreneurs should understand and respect the compliance landscape specific to their chosen business structure to avoid legal problems. By doing so, they can build a strong foundation for their business endeavours.