Running a successful startup is extremely difficult. Around 90% of startups fail within their first five years, which might not be a stat you want to hear if you’re at the beginning of your startup journey. But don’t fear, one of the main causes of crumbling startups is entirely preventable: ensuring compliance with regulatory standards.
While easily overlooked, failure to properly navigate regulatory and legal hurdles is the fifth most common cause of startup collapse, so it’s vital to be aware of all the essential compliance regulations.
Business Formation and Structure Compliance
When starting a business, you must register your company and choose a business structure, such as a corporation, limited liability company (LLC), partnership, or sole proprietorship. Each structure has different compliance requirements regarding taxes, liability, and filings. Understanding these can help you avoid legal troubles and optimise your business operations.
Andy Low, Director of Redstone Search comments: “Whilst all of the regulatory and structural requirements for a business can seem daunting at first glance, overcoming these potential pitfalls and obstacles is a simple process. Firstly, proper planning and preparation prevents poor performance. Look at what is needed, whether that’s tax compliance, employment law or data protection ask yourself, am I the professional and does this fit into my normal day to day. In almost all circumstances the answer is no, and this is okay, in fact it is ideal, as a business owner you must direct your time at your job and specialty, for everything else there is a professional.”
“Get a professional to do what you can’t so you can spend time revenue generating to cover the costs. You will spend more, but at the same time earn more, if you are good enough in your field to have the confidence to set up, have the confidence to commit, your time should be worth more than the time spent learning and dealing with complicated regulatory issues. Inform yourself, inform the right professionals and stick to the plan! You started a business to do business, this means deploying your time effectively, so that you have the resources to cover the regulatory requirements, better to pay the fees with cash than pay the costs with your new business.”
Tax Compliance
Tax compliance is crucial for every business. This includes federal and state taxes, payroll taxes, sales taxes, and other applicable levies. In the US for example, startups must obtain an Employer Identification Number (EIN), register with state tax authorities, and set up systems to manage, report, and remit taxes. Frequent updates in tax regulations necessitate staying informed and possibly seeking advice from tax professionals.
Employment Laws
Hiring employees introduces a host of compliance requirements including labour standards, anti-discrimination laws, and workplace safety. Key legislations worldwide such as the Fair Labor Standards Act (FLSA), the Americans with Disabilities Act (ADA), and the Family and Medical Leave Act (FMLA) must be adhered to. Additionally, maintaining proper employee records and ensuring fair hiring practices are essential.
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Data Privacy and Security
With the increasing reliance on digital technology, protecting personal data is not only a technical requirement but a legal necessity. Regulations such as the General Data Protection Regulation (GDPR) in Europe and the California Consumer Privacy Act (CCPA) in the U.S. outline stringent guidelines on data handling and consumer rights. Non-compliance can lead to significant fines and damage to reputation.
Intellectual Property Laws
For startups in technology, creative industries, or any sector that relies on unique products or ideas, protecting intellectual property (IP) is vital. Understanding copyright, trademarks, patents, and trade secrets, and how to register these rights, can secure a competitive edge and prevent costly disputes.
Any Low of Redstone Search added: “When establishing our terms and conditions we asked, are we lawyers? No we are not so we approached a legal firm and engaged them. For tax, payroll and general finances, are we accountants? No we are not, so we approached a reputable accountancy. Get your structure and plans in place first, then run full tilt at your goal with your support team (whether internally employed or externally contracted) clearing the path ahead and tidying up behind you. And remember, always look after your suppliers!”
Securities and Fundraising Compliance
Startups seeking to raise capital through equity funding need to be aware of securities laws. The Securities Exchange Act and regulations by the Securities Exchange Commission (SEC), including specific provisions under the JOBS Act for crowdfunding and small business fundraising, require strict adherence to avoid penalties.
Health and Safety Regulations
Occupational Safety and Health Administration (OSHA) regulations are designed to ensure workplace safety and health. Compliance involves implementing safety standards, conducting regular inspections, and reporting accidents. For startups in manufacturing, chemicals, or other sectors with potential health risks, compliance is especially critical.
Environmental Compliance
Depending on the industry and location, startups may need to comply with environmental regulations related to waste disposal, emissions, and resource usage. Regulations such as the Environmental Protection Agency (EPA) standards in the U.S. require businesses to minimise their environmental impact and maintain proper permits.
Export Controls and International Trade
Startups operating in or expanding to international markets must comply with export controls and trade sanctions. U.S. startups, for instance, must adhere to regulations enforced by the Department of Commerce and the International Traffic in Arms Regulations (ITAR) when dealing with specific technologies or countries.
Industry-Specific Regulations
Certain industries such as financial services, healthcare, and food and beverage face additional regulatory scrutiny. For example, healthcare startups must comply with the Health Insurance Portability and Accountability Act (HIPAA), while fintech companies need to understand the Financial Industry Regulatory Authority (FINRA) requirements and banking laws.
Navigating Compliance: Steps for Startups
- Educate Yourself and Your Team: Knowledge is the first step towards compliance. Utilise resources such as industry seminars, legal advice, and governmental websites
- Implement Robust Systems: Use software and tools that aid in compliance, such as accounting software for tax filings, HR systems for employee management, and security platforms for data protection
- Regular Audits and Reviews: Schedule regular compliance checks and audits to ensure all aspects of your business remain in line with current laws and regulations
- Seek Professional Help: Legal and compliance consultants can provide valuable insights and help navigate complex regulations, particularly in specialised industries
