Starting a business is a risky affair.
There are so many things that could go wrong. What business owners need to know is that compliance is one of the best ways to manage most risks that are inherent to startups. Non-compliance to regulatory requirements results in fines, restrictions on operations, and license revocations. Therefore, startups must observe compliance guidelines to ensure smooth operations. Compliance can be a complicated affair, especially when you realize just how much needs to be done.
From compulsory laws to SOC 2 regulation, there is plenty to learn. Here are five aspects of compliance that are relevant to every startup.
Choosing The Right Business Structure
Deciding whether your business will be a sole trader, partnership, limited company, or any other type is extremely important. There are regulations and tax requirements that are unique to each business structure. Understanding how your business structure relates to compliance is the first step for every startup.
You might have enough capital to register as a sole trader or require funding hence opt for a limited liability company. Business capital is governed by a unique set of laws that you have to consider. Whichever the case, keep tax and other regulatory obligations in mind as you make this choice.
Understanding Licensing Requirements
You should steer clear of legal suits by knowing which licensing requirements are required of your business. Does your business have special licensing requirements? What steps need to be taken to meet these requirements?
For example, startups in the healthcare industry must adhere to HIPAA laws. Businesses that accept card payments must be PCI compliant. Businesses that collect and store customer data must look into data security compliance. This may be in the form of SOC 2 compliance, or any other industry mandated attestation.
Most startups either comply with basic licensing or overlook it completely. This is a grave mistake that could have serious legal implications. Take the time to understand the categories your business falls under and what is expected from you as far as licensing goes.
Adhering To Audit And Tax Regulations
All businesses are required to carry out yearly audits and prepare annual audit reports. These reports must contain all financial transactions of the year. Startups are not exempted from this regulatory requirement.
Auditing may not be a familiar concept for most people behind startups simply because not everyone knows the ins and outs of recording transactions. To simplify auditing and ensure you comply with regulatory requirements, maintain a book of accounts. Hire an auditor to crunch the numbers and prepare a report.
Startups are required to declare their tax liabilities at the time of incorporation. Failure to do so creates inconveniences down the road.
Understanding Legal Requirements
There are many laws and regulations established to protect the interests of startups and those who interact with the business. These laws define relationships with investors, customers, staff, regulators, and other shareholders.
Laws vary from one country to another and from one state to the next. You might want to consider your business’ location in regards to laws governing the area. You might find it more convenient to locate your business in an area with compliance requirements that you can fulfill.
Understanding and adhering to legal requirements builds a good reputation, which is essential. Customers trust transparent businesses, and potential investors take compliance very seriously. To keep all those who interact with your business content, it is important to fulfill all your legal obligations right from the beginning.
Undertaking Agreements
All startups must enter into several agreements to enable operations. From shareholder agreements to contracts with employees, there are many instances where you will have to enter into legally binding contracts. It is important that each contract complies with relevant laws.
Having contracts is a must to define liabilities. Contracts must be clear and detailed, specifying the scope of the relationship between both parties. In case of lawsuits, contracts go a long way in your defense. They outline the expectations and responsibilities of either party.
Agreements are not purely a business necessity. They also protect the rights of those you engage in. Employees benefit from employment contracts while investors are guaranteed returns as stipulated in the agreements they sign. Therefore, every startup must have a legal framework for agreements.
Conclusion
Compliance is good for business. When a startup meets all legal requirements, it is assured of smooth operations. Failure to comply comes with costly consequences that will slow down the growth of a business.
At the start of operations, startups must consider the choice of business structure, licensing requirements, tax obligations, contractual agreements, and other legal requirements. Startups must understand what compliance means in their respective industries. The result of such an effort is a good brand reputation, which is good for business.
Author Bio
Ken Lynch is an enterprise software startup veteran, who has always been fascinated about what drives workers to work and how to make work more engaging. Ken founded Reciprocity to pursue just that. He has propelled Reciprocity's success with this mission-based goal of engaging employees with the governance, risk, and compliance goals of their company in order to create more socially minded corporate citizens. Ken earned his BS in Computer Science and Electrical Engineering from MIT. Learn more at ReciprocityLabs.com.
