Four reasons why startups should e-file their tax returns

Startups are fun. The adrenalin rush that comes with building a product, service or business is uncomparable to anything else in the world. To be a part of a culture that is heralding a newer, bolder India is by itself something to be proud of. Startups are not only changing the way business is done in India, but also the way work is done. Indian millennials have long waited for a work culture that allows them to have the freedom to creatively express themselves without any hangups of the past. It is no wonder then that more and more people want to work with startups.

However, running a startup isn’t all hunky-dory. If you’re a startup entrepreneur, you have probably compromised your social life for long hours at the office. It takes effort to build a startup, but by and large it is a lot fun. Except, maybe, when it comes to taxation.

Taxation is one part of running a startup that entrepreneurs would shy away from. But, it doesn’t need to be said that a business cannot afford to ignore their taxes. In fact, filing tax returns is an integral part in helping your startup grow.

Note that this applies to startups that are registered as partnership firms, limited liability partnerships (LLP) or private limited companies. In case your startup is a sole proprietorship, then you will need to e-file the income tax returns as an individual. In this case, you can also use the Rs 2.5 lakh exemption limit that is available to individual taxpayers. For other kinds of startups, there is no exemption limit. They would have to pay income tax on any income that is earned.

Here are four reasons why all startups should e-file their income tax returns.

To set off losses

The first few years of a startup are always a warming up period. It is never easy to start making profits right away. Any new business has to see a couple of years of losses before they see an uptick in the profits section of their balance sheet. The good news is that these losses can be set off in the coming years. But to do so, the startup needs to e-file their income tax returns with the losses to be able to set them off later.

To apply for loans

Just as is the case with individual taxpayers, a startup is also required to submit their income tax returns at the time of applying for loans. Tax returns are the best proof of a company’s existence and operations, which is why they’re required in case a loan is required. Financial institutions that help startups with loans ask for the previous years’ income tax returns.

To receive funding

Funding is an important way for a startup to raise capital. There are angel investors, venture capitalists and other sources that startups usually approach to raise funds. These investors would require the startup’s previous years’ income tax returns to understand the company’s book value and decide how much funding can be given to it. This, again, makes filing income tax returns important for a startup.

To resolve disputes

Wherever there is a  business, disputes can’t be far away. Often, the founders of a startup end up having differences of opinions or they just might want to part ways amicably. In either case, or to solve any other dispute with external parties like investors, the startup would have to rely on their income tax returns to solve money-related issues in the dispute.

These are the four primary reasons why startups should file their income tax returns. It’s not something that has to be done too often and the benefits are many.

Check out ClearTax for Business that helps startups with an easy way to e-file income tax returns.

This article was published on Your Story on 27 June 2016.

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