CA Pratik Anand
1. Choosing the Wrong Legal Entity
Your startup’s legal structure affects your legal reporting requirements and your tax filings and how much you pay as tax, so it’s important to choose the right entity.
There are a number of entity structures that you could choose such as a Registered Company (Public/Private Limited), LLP, proprietorship, partnership etc.
While the proprietorship mode of business could lower your tax pay out to an extent but a registered company is more formal and widely accepted way for doing business especially with foreign clients which generally want to do business with registered companies. Also venture backed startups generally require registered companies for funding.
Also if you do not want personal liability for the losses/liabilities of your startup than you could opt for either a Limited liability partnership or Limited Company, but if you don’t mind your personal assets being used for settling the business losses/liabilities then you could opt for proprietorship or partnership.
Remember that not choosing the right form of a legal entity can get you into a legal tangle and can also result in a higher tax outgo. A discussion with a tax advisor or CA can help you figure out which structure is right for your situation.
2. Not Keeping Track of All Your Expenses
From the moment you launch a business, you’re able to deduct all “ordinary and necessary” business expenses (e.g. office supplies, event fees, kilometers driven to meet with partners). The biggest mistake start-ups make is not keeping track of these expenses throughout the year and trying to gather every receipt when it’s time to file the tax returns. Always remember, you can’t deduct what you can’t document, and failing to record expenses as you go most likely means you’re leaving money on the table.
Find a method for documenting expenses that works for you. There are accounting softwares, such as QuickBooks, Tally, Busy, FreshBooks etc which let you record and manage expenses. You can hire services of an accountant to record all your expenses. You can also get all your accounting outsourced from a professional such as a CA.
3. Mixing Capital Expense with Revenue expense
First-time business filers get tripped up as to which expenses are considered assets /capital expenditure and which are revenue expenses deductible in the P&L A/c. Capital Expenditure/ Assets/ Equipment are typically higher-value items that will last significantly longer than one year. For example, a new computer, server, office chairs. The expenses on their purchases are not deductible as revenue expenses in the P&L A/c but only the depreciation/amortization on them is deductible over a period of time.
Revenue expenditure includes things that you use/consume during the year (e.g. printing paper, pens, toner cartridges etc.).
If you mistakenly deduct your equipment or capital items as revenue expense, the tax department can determine that you improperly characterized the expense and that you’re not entitled to the deduction.
4. Mixing Personal and Business expenses
New startup founders and small business owners often invest so much of their time and money in the company that their personal and business expenses become indistinguishable. This practice can lead to major confusion come tax filing time, and in some cases, can lead to deductions being disallowed on an ad-hoc basis by the revenue and higher tax outgo as a result. Avoid trouble by establishing a company financial account from the start and maintaining separate records for the business.
5. Not Paying Your Taxes Regularly
Businesses, including self-employed sole proprietors, are required to pay taxes on a advance basis i.e they have to determine their taxes for the year in advance and pay as prescribed instalments in Advance. Not paying the taxes deducted from payments of suppliers/ service providers can land you in big trouble. Take a stock of your profit/loss statement at each quarter and pay your advance taxes accordingly. A CA/Tax Consultant can help you estimate these payments if you need some help.
6. Not asking for professional tax help
Once you get established and incorporate, find a tax advisor to make sure you are following all the regulations. Your job is to get your company up and running , to focus your energy on creating your product, forming strategic relationships, and other big-picture ideas. The last thing you want to think about is taxes. It’s essential to hire a tax advisor to accept liability, and make sure you follow all regulations.
Above all, any startup or small business owner must think of taxes as a year-long obligation, not just something to revisit once a year.
(The author is a Chartered Accountant in practice and has wide experience of working startups/new businesses right from incorporation to compliance related filings. He is also founder at taxraasta.com which deals in setting up businesses for startups in India.)
(The author is a CA in practice at Delhi and can be contacted at: E-mail: email@example.com, Mobile: +91-9953199493)