Copyright Forbes
Prasanna Kumar, Founder and CEO of FinloTax. Compliance is an ongoing, multifaceted process that many startup founders unintentionally overlook, focusing instead on business growth. Founders direct most of their energy toward securing funding, developing products and expanding market share. Often, this leads to the subtle but vital compliance components slipping through the cracks. I’m aware of several that startup founders commonly overlook, which creates gaps in compliance and penalties or audits. In this discussion, I highlight why founders must address these gaps not merely as a matter of prudence but also as essential aspects that impact long-term operational integrity and investor confidence. Compliance Missteps That Could Derail Your Success The Recurring Nature Of Compliance In my experience, clients fail to realize the recurring nature of compliance requirements. They need to be constantly reminded that filing deadlines, whether for tax submissions, regulatory reports or employment-related disclosures, are not a one-time event. I’ve had founders assuming that once the initial setup was completed, the compliance was, too, when in reality, it’s just the beginning. This is a risky misconception to harbor, as it can lead to missed compliance deadlines and hefty fines, audits or even legal challenges. The best way to mitigate this risk is to establish a robust compliance calendar with automated reminders to track deadlines and prevent small oversights from becoming major problems. I’ve had a founder of a promising fintech platform assume that registering the entity and filing initial tax documents meant they were “done” with the compliance aspect. Several months later, they approached me for help with a notice for failing to file quarterly tax estimates and missing a CCPA update that affected how they handled used data. The implications of this lapse weren’t just financial. Later, they also had to explain the lapse to investors during a funding round. This incident underscores a lesson I keep emphasizing with clients: Compliance isn’t a one-off thing you do and then forget about. It’s a convention you need to build into your business operations. Communicating With External Advisors Another practice I’ve observed with founders is that they tend to delegate all compliance matters to external advisors, such as accountants or legal teams, under the mistaken impression that their own involvement is no longer necessary. A founder I work with told me about an incident with his firm, where, prior to working with me, they had hired a reputable CPA firm to handle all tax filings and thought that was it from their end. Consequently, they failed to inform the CPA firm about a midyear equity grant to a new cofounder. The oversight resulted in a disparity in the company’s cap table, prompting a Form 83(b) filing issue and resulting in the startup having to scramble to alter the paperwork. While professionals are absolutely essential to smoothly meeting your compliance needs, you must ensure constant communication to keep them updated on the day-to-day operations of your startup, which can include critical changes like new hires, vendor updates or shifts in shareholding. I consider active communication with your startup's external advisors, maybe on a monthly basis, a critical component of internal oversight. This will better ensure no important detail is overlooked by the people who help ensure your startup complies with the law. Beyond Statutory Filings Many startup founders believe that compliance aspects are restricted to statutory filings, but that’s not always the case. Beyond this, compliance also encompasses data privacy regulations, contract management, intellectual property rights and even employee-related regulations. Founders generally have the tendency to focus on the obvious, like tax filings, while neglecting less visible areas, such as data protection laws, particularly if they are operating in multiple markets. Employment law compliance is another area where I’ve found companies slipping up on compliance. Here, there are several components to compliance, including sending out appointment letters, drafting workplace harassment and leave policies, adhering to wages and working hours laws, etc. Startups must attempt to integrate all of these factors into their standard operating procedures to safeguard against potential litigation and loss of reputation. Frequent Compliance Oversights Opting For The Wrong Business Structure Many startup founders make the beginner’s mistake of choosing the wrong legal structure at the get-go. I advise clients to consult with the experts even before the business becomes operational and choose the best legal structure for their startup (e.g., sole proprietorship, partnership, LLC, S corporation, C corporation, etc.). This has major tax and legal implications in the future, including the amount of tax you pay and how much funding you can raise for your business. Neglecting Contracts And Agreements This is another dangerous tendency I’ve seen many founders adopt in their eagerness to kick-start operations. Leaving out the contract-signing aspect of startup formation can be highly risky. Drafting agreements between your cofounders in the beginning will take away much of the hassle of sorting out disagreements that are bound to arise in the future as your startup grows and flourishes. These agreements provide clarity regarding ownership and make it easy for founders to exit and new investors to enter the business. Failing To Comply With Employment Laws While bringing new talent on board is an exciting part of the journey of a new startup, the administrative burden tied to each employee, such as contracts, tax forms and regulatory documentation, can quickly become overwhelming. Problems I’ve seen arise include misclassifying employees as contractors, failing to clearly state the terms of employment and ignoring labor laws on minimum wage, working schedules and employee compensation packages. The Hidden Costs Of Noncompliance Ultimately, there’s a price to be paid for failing to comply, and founders rarely consider this. Ignoring or underestimating compliance does not merely impact a business financially through penalties and fines. There’s also the damage to investor confidence and your brand’s reputation that must be considered. Since startups typically operate on thin margins and rely heavily on investor trust, even a minor regulatory lapse can have far-reaching consequences. Trust me, investors will look at a good compliance record and view it as a sign of a robust and growth-focused business. It assures them that your company is not only innovative but also responsible and believes in complying with the law of the land. It would be reckless for startups to neglect compliance. Unwittingly doing so could prove to be an extremely costly mistake, one that impacts the funding and reputation of your startup. What founders need to do is stay proactive when it comes to compliance, maintain regular internal oversight and recognize that compliance is a dynamic, continuous process. This will help position their startups on the road to growth and long-term resilience. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
