Accounting, Audit and Taxation

As a legally operating entity, it is important to put into place good accounting practices. I would urge all founders
to engage the services of a good CA to manage the accounts and financial compliance needs of a startup.
If the startup is not compliant with all financial regulations, it will be a major hindrance for investors while investing
in your company, as during the due-diligence, the investors legal and financial representatives will identify the
compliance gaps.
Accounting needs vary by industry. A B2B company is likely to raise far lesser numbers of invoices than a B2C
company. Similarly, an e-commerce company will have a different accounting requirements. In addition to
invoices, managing regular expenses of the startup also vary. E.g. a company with sales representatives across
multiple geographies will have a different accounting and accounts management need than a company which has
all its staff in one central location.

Keep the following in mind while managing the finances of a startup:

Create the processes for team members to record and submit expenses
Create the policies around reimbursements and claims i.e. who can claim, how much and for what. Especially
applicable for local travel and for outstation stay and expenses. Perceived favoritism in expenses claims
often lead to friction among colleagues.
Set a date by which expenses of the previous month are to be submitted and ensure that it is respected.

Critical

Make sure you deduct TDS and that the deducted TDS is deposited with the tax authorities in time.
Make sure that payments above Rs.20,000 are always made in cheque.

Setting up a incorporated legal entity

Setting up an legal entity or incorporation is the most important first steps while starting up.Incorporating
gives your business idea a legal entity and is required if you are to raise money from investors who take equity in
your company. Be it valuation, submission of tax returns or sale/purchase of goods and services or even when
closing down a business, incorporation creates a clear line of sight, ease of use and protection.
Setting up a company involves several steps and interaction with government bodies, principally the Registrar of
Companies and the Income Tax Department. While the steps have become easier in the last few years , it is best
to engage an experienced chartered accountant in the incorporation process.
A good summary of the process can be found at the World Banks Doing business in India website
athttp://www.doingbusiness.org/data/exploreeconomies/india/starting-a-business . Other relevant sites include
the Ministry of Corporate Affairs subsite at (http://www.mca.gov.in/MCA21/ )

A summary of the steps (non-sequential) are:

Look for and reserve a name for your legal entity. This can be done online at the MCA site.
 Look for and appoint directors. A minimum of 2 directors should be appointed. Directors are the voice of the
shareholders in the management of the company. The choice of directors should be made carefully as they
not only provide management guidance to the business but are also responsible to regulators for compliance
with laws. A director may or may not hold any shares in the company. Every director is required to obtain a
digital signature.
Pay stamp duties online, file all incorporation forms and documents online and obtain the certificate of
incorporation. The most important incorporation documents are the articles of association and the
memorandum of association. The documents outline decision making process in the company as well as the
rights and duties of shareholders and directors. It is therefore very important to review these documents
thoroughly as often these documents become unwitting roadblocks during valuations, sell offs etc. The Indian
Companies Act, 1956 prescribes a model form of the articles and the memorandum of association, however it
not uncommon for changes to be made to accommodate specific needs.

Shares are directly or indirectly the centre point to every company activity. By purchasing a certain amount of
shares at a certain cost the shareholders pay money to the company, this money is used by the company to run
its affairs including payments of salaries, business activities, purchase of goods and services etc. Stamp duty to
the government is paid on the value that has been ascribed to the shares and the number of shares that are
proposed to be issued (the share capital). The value of a share is a direct function of the business idea and the
amount of work that has been put in to develop the idea, however it is not uncommon to ascribe a nominal value
of INR 10/- at the time of incorporation. Depending the share capital, one may need to also engage a company
secretary for the company.
Obtain an income tax PAN number, a service tax number as well as other labor law registrations, as required.
Incorporating a company places obligations of yearly reporting and filings and hence it is important to engage a
chartered accountant to help with the process.

Company registration

You can start your venture under one of the following legal structures in India.

1. Proprietorship
2. Partnership
3. Limited Liability Partnership LLP
4. Private Limited Company

All of the above are legally valid forms for conducting business. However, for startups seeking venture capital,
it will be necessary to register yourself as a private limited company.

Steps for setting up as a private limited company:

The Registrar of Companies [ROC] is the government agency that deals with incorporating companies. You will
therefore have to follow the procedures laid down by the ROC while forming your company.
A lawyer or a chartered accountant should be able to help you with the registration process.
Identify 4-5 name options for your company. Ensure that the names you submit do not belong to some other
company.
Get your lawyer to prepare the Memorandum of Association and Articles of Association, and submit with the
relevant documents to the ROC.
The directors of the company will need to have a PAN Card, A DIN Number and a Digital Signature. Again, your
CA or lawyer should be able to help you with the process.
For forming a Pvt Ltd company, minimum two shareholders and two directors are required. It is not necessary for
the shareholders to also be the directors. E.g. in the case of a startup, the uncle of one of the founders may be an
angel investor, and hence hold shares in the company. However, he may not want to be a director on the board
of the company and hence just the two founders could be the directors at the time of company formation.