Due Diligence for Startups

With the startup community growing stronger than ever, there has been a rise in the number of angel investors, venture capital investors, and private equity firms who are willing to invest in such startups. Among the various factors evaluated in the due diligence report, adherence to legal compliance is one of the essential points to be taken care of.

Private Limited Company Registration  - Ventureasy.com
Due Diligence for Startups

This helps the company gain credibility and is also an indication of how diligent its founders are about following protocol. The compliance protocols are not only essential to attract investors, but also prospective clients.

    • Existence as a business entity The very first step in raising funds for a company is to set it up as a private limited company. The constitution, ie the Memorandum of Association and Articles of Association of the Company must also be drafted in such a way that the equity investment is handled without any amendments to both the above documents.
    • ROC Compliance Compliance with all the provisions of the Companies Act, 2013 is mandatory and increases your credibility while raising funds. Some of the important provisions are appointment of Auditor, conducting board and shareholder’s meetings, filing statutory annual returns, and maintenance of statutory registers. These criteria should be met and will be verified by the investors.
      1. Appointment of Auditors The First Auditors of a Company should be appointed within one month of its incorporation. The first auditor shall hold office till the conclusion of the first annual general meeting. Thereafter, an auditor shall be appointed who can hold office for a period of consecutive five years.
      2. Conducting board meetings A company must conduct at least one meeting in every three calendar months. Four such meetings should be held every calendar year. Minutes of the meeting are to be signed by the Chairman of the said meeting.
      3. Filing Financial Statements and Annual Returns Private Limited Companies are required to file its Annual Accounts and Returns disclosing details of its shareholders, directors etc to the Registrar of Companies. Such compliances are required to be made once in a year.
      4. Maintenance of Statutory Registers and Records A Private Limited Company has to maintain various statutory registers and records as required by the Company law such as Register of shares, Register of Members, Register of Directors etc. Besides, Incorporation documents of the company, Resolutions of the meetings of the Board of Directors, Minutes of the Board Meetings and Annual General Meeting etc are also required to be preserved by the Company.
    • Tax Compliance Tax compliance measures vary with the kind of business and the nature of services. A company selling goods would need to comply with the state VAT laws. Similarly, businesses working as service providers need to obtain service tax registration, make service tax payments, and file service tax returns on time. The business should also comply with relevant income tax rules and regulations.
    • Compliance with Labour Laws When you start an organization, it is obvious that you will have employees working for you. There will be independent consultants and contractors as well. Work is also outsourced to agents. Such professional relationships are governed by various labour legislations. Flouting these is not only a financial burden on the company but is also a black mark on goodwill. Therefore, it is important that the workforce of a company is happy and that the company complies with all the labour legislations. For instance, A business with an employee strength of over 20 needs to comply with ESI and PF regulations. The investor would ensure that the all such compliances are in place.
    • IP Rights (Trademark, Copyright, Patent) For an organization that codes, or designs, or programs, or does research, it is equal to having immense intellectual property (IP). Protecting the IP legally is very essential in order to avoid stealth. Timely IP audits, and filing the right patent/trademark/copyright claims increases the worthiness of a Company and is something which is advised and checked by the Investors first hand.

Ensuring that all the above compliance protocols are adhered to is a must. This is because an investor evaluates the company through all perspectives and the quality of controls and functionality determines the competence of the team behind it.

If you are running a startup, you should consider working with a professional company like VenturEasy who takes care of legal and compliance side of your startup.

Nikita Bhatia is the co-founder of VenturEasy, an online platform for Company registration, book-keeping, accounting, tax consultancy and legal compliances in India. A Chartered Accountant and company secretary by profession, she has wide experience in the fields of audit, accountancy, taxation and corporate governance.