India - Start-Up Law Guide
By
Vijay Pal Dalmia, Advocate
Supreme Court of India & Delhi High Court
Mobile No.: +91 9810081079
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As per the latest GSR 127(E) of DPIIT (Department of promotion of Industry and
Internal Trade) dated 19th February 2019, an entity shall be considered a start-up:
1) Up to a period of 10 years from the date of incorporation/registration as private
limited company ( Under Companies Act, 2013) or partnership firm (under
section 59 of Partnership Act, 1932) or Limited Liability Partnership (Under
Limited Liability Partnership Act,2008) .
2) For any of the financial years, the turnover of the company since
incorporation/registration has not exceeded 100 crore rupees.
3) The entity is working towards Innovation, development or improvement of
products or process or services or it is a scalable business model with high
potential of employment generation or wealth creation.
Note:
a) An entity shall cease to be a Start-up on completion of ten years from the date
of its incorporation/ registration or if its turnover for any previous year exceeds
one hundred crore rupees.
b) Break-up part or reconstruction of an existing entity will not make it a start-up.
c) Micro-enterprises can be recognised as Start-ups if they acquire DIPP
(Department of Industrial Policy and Promotion) Recognition.
d) All entities wishing to avail start-up benefits must register themselves as a start-
up and get DIPP recognition after meeting the abovementioned criteria.
With so many upcoming start-ups, it is a must to know what laws govern the respective
sector to be secure and create a stable business. The very first and also the most
important step in securing your start-up is choosing the right type of business form for
your endeavour. Accordingly, the way your company will be taxed is also laid down
and other benefits will be decided.
Business formation
Legally, a business venture can be registered as below mentioned. Each of these
forms have their own benefits that can yield extreme benefit and productivity when
rightly combined with the start-up mark.
1. Sole proprietorship: Such form of business type is good for one person
ventures, usually where the capital is funded by a single person who wishes to
take direct responsibility of their company. A sole proprietorship means that the
company is owned by single individual. It is also good for Home-grown
businesses where the owner is the product or service creator. It is a good type
of business to start with, if one wishes to test out their product in the market
before advancing into complex form of business. Another advantage of this is
the no requirement of formal registration with any of the laws. The downsides
of this form of business is the amount of responsibility and liability that falls upon
the sole proprietor. Good for those persons who do not have enough capital to
start a full-blown company.
2. Private Limited Company: A Private Limited Company (Pvt Ltd.) is an
association of not less than or more than two people and set number of
members with limited liability. In this type of business the Assets and Liabilities
of the owner/promotor/director of the company is not similar to the assets and
liabilities of the Company. This basically means, the director of the company is
not directly responsible for the liabilities of the company. The most sort after
form of business when it comes to start-ups, it offers the right amount of security
and space for innovation. Since they have slightly higher compliances it helps
keep the start-up within the purview of the law. It also allows for foreign
investment and transfer of shares within the company which helps start-up
grow. Funding for the a private limited company can also collected from external
sources which makes it suitable for those who wish to take loans, or just have
the means to further the innovation or idea and not the process. The drawbacks
are various tax filings that a Pvt Ltd is supposed to undertake but with
introduction of GST that has also been relaxed and the amount of capital that
would be required to set up the start-up and maintain it (salaries, fixed costs
etc.).
3. Limited Liability Partnership (LLP): A fairly new development in the Indian
business sector, an LLP combines features of a partnership and Limited
Liability Company. It offers flexibility and the cost of maintenance of an LLP is
far lower than that of Private Limited Company. As far as risks and compliances
are concerned this form of business is much better since there is less of both.
Partners here have limited liability as per the amount of contribution they have
agreed to in the partnership. The drawback in such a business is that FDI
requires prior approval of Reserve bank of India (RBI) and transfer of
ownership/partnership requires the consent of all partners.
4. Partnership Firm: A minimum of 2 persons are required for starting a
partnership type start-up. It is easy to form and does not require registration
(depends on the State the start-up is being started in). Such type of business
is good when you wish to have risk security and share the responsibility of the
company with a group of persons. The resources are available on contribution
basis and hence the burden of funding is not just on one person. The drawback
of such a business is that the liability of the company falls upon the partners.
This means that the liabilities and assets of the owners of the business is the
same as that of the company and the partners will be directly responsible for
any mishaps since the company is not a separate legal entity.
So while partnerships and sole proprietorships are easy to start they do not have
liability protection and stability.
The important thing to keep in mind while selecting the form of business for your start-
up is to look at your capital, short term and long term goals of the company, and the
purpose of the start-up. It would not be beneficial to have a sole proprietorship when
your innovation or product has a larger market need and your start-up should have
been a private limited company nor is it feasible to have a Limited Liability partnership
when you do not have stable partners willing to commit to the cause and you do not
have enough capital to fund your project alone.
Furthermore, it is important to register all your companies properly according to the
set guidelines. After which you would also benefit from drawing up a founder’s
agreement clearing up duties and aims of the partners/directors and the company. It
also helps give credibility to your company since the agreement provides a look of
surety to the world. Following registration of your start up according one of the forms
of businesses, it is important to register your Start up with the government to avail
government provided benefits.
A Quick reference chart to navigate which business type is suitable for your start-up:-
Sole Private Limited Limited Liability Partnership
proprietorship Company partnership Firm
Registration No registration is Needs to be Needs to be Registration is
mandated by law.
registered under registered under Optional. But in
Good for very small
scale start-ups, Companies act, Limited Liability such cases, it
home-grown
2013. Partnership Act, should be done
businesses led by
single person. 2008 regardless.
Legal Status Promoter/owner Separate entity. Separate entity. Promoter/owner
personally Promoter is not Promoter is not personally
Responsible for all responsible for responsible for the Responsible for all
liabilities. the Liabilities of Liabilities of such liabilities.
such company company directly.
directly.
Taxation Taxed as individual Private Limited LLP profits are Partnership profits
on the basis of the Company profits taxed as per the are taxed as per
proprietor’s income. are taxed as per slabs provided the slabs provided
the slabs provided under Income Tax under Income Tax
under Income Tax Act, 1961 plus Act, 1961 plus
Act, 1961 plus surcharge and surcharge and
surcharge and cess as applicable cess as applicable
cess as applicable
Foreign Foreigners not Under Automatic Foreigners can Foreigners not
ownership allowed to own sole route, FDI in Pvt invest in LLP allowed to be part
proprietorships in Ltd is allowed without prior of partnerships.
India. without prior approval of RBI.
approval of RBI. (Subject to
(Subject to conditions, please
conditions, please check the latest
check for latest policy.)
policy.)
Registration as a Start-up
After the registration of your start-up company, It is important to register your start up
with the government to avail tax and other benefits offered by government schemes.
For registering yourself as a start up in India, you must meet the criteria set out in the
latest government policy already mentioned above as per the GSR 127(E) and then
follow these steps:
Create an account on Complete Application submit Note Down Recognition
www.StartupIndia.gov.in with all documents Number
Wait for application
Click on DPIIT recognition approval and then avail
Mention whether you need
under schemes and policies benefits of the recognition in
Tax exemption or not.
then on Get recognised. form of exemptions and
scheme benefits.
Some Schemes to Check out
Find the Online Application Prepare all the documents
after getting DPIIT
for registering your start up mentioned to upload in PDF
recognition: SIPP and Labour
on the website and fill it. format.
Inspection exemption
Step 1: Creating an Account and Registering.
The government has made the process extremely convenient and all of it is doable
online. Go on to www. StartupIndia.gov.in and create/register yourself for an account.
After doing so, Reach for the schemes and Policies tab and click on DPIIT recognition.
Check the criteria to confirm if you meet all requirements to be legally recognised as
a start-up and proceed to fill out the application.
Step 2: Documents required.
In order to judge your start-up as worthy of the DPIIT Recognition, the website asks
you to upload a number of documents to check your credibility. These documents all
must be in PDF format and authentic. Any forgery or falsification of documents if found
upon inspection will call for a hefty fine of 25,000 rupees.
List of documents required:
• Incorporation/Registration certificate of your company: after registering your
company under respective act as per company type, you would have received
a certificate. Use that certificate you fulfil this criteria.
• A Letter of Funding if any of not less than 20% in equity, by an Incubation Fund,
Private Equity Fund, Angel Fund, Accelerator, Private Equity Fund, registered
with SEBI that endorses the innovative nature of business.
• A letter of Recommendation: This is to check the worthiness of your innovation.
You can bring any of the following recommendation letters.
▪ A recommendation letter from an Incubator known in a post-
graduate college in India, in a format approved by the DIPP. This
is regarding the innovative nature of the business; OR
▪ A recommendation letter from an incubator that the Government
of India funds as part of any specified scheme to promote
innovation; OR
▪ A letter from any of the Incubators, recognized by the Government
of India, in DIPP format. A recommendation later by the Central
or any State Government of India; OR
• A patent filed and published in the Journal of Indian Patent office in areas
affiliated with the nature of the business being promoted, if any. This can also
be used as a letter of recommendation in certain cases.
• Proof of Concept: This could be a prototype of the product or service, website
or a sample video that verifies the usefulness and uniqueness of the product
for which start-up is established.
• Awards or Certificates if any.
• PAN Number: In case of a sole proprietorship, individual Pan Number would
work and in case, your start up is a company of more than one persons than
the Company Pan Number would be required and very essential for all
transactions and availing tax benefits.
Once you have collected all the required documents in the PDF format, you can
complete the DIPP recognition form and wait for confirmation after submission. The
Next step is to apply for tax exemption after you have achieved DPIIT recognition for
your start-up.
Availing Tax Exemption
The government has provided various Tax benefits for start-ups and Micro enterprises.
After getting DPIIT Recognition, you may apply for Tax exemption. There are two types
of exemptions that the start-up India scheme provides. To view the official notice, click
here.
1. Tax exemption under section 80 IAC of Income Tax Act.
Section 80 IAC of ITA mentions that an eligible start-up is allowed a deduction
of an amount equal to 100 percent profits and gains for any three consecutive
years out of five years beginning from the year of incorporation of the start-up.
Requirements:
• If the business is incorporated as a Limited Liability Partnership (LLP) or
a Company.
• If the total turnover of the business does not exceed INR 20 Crores in
any of the prior years beginning on or after the 1st of April, 2016 and
ending on the 31st of March, 2021.
• The Start-up should have been incorporated on or after 1st April 2016.
This would mean that sole proprietorships and partnership firms are not
eligible for exemption under this scheme.
It should be noted that the requirement of the turnover not exceeding INR 25
Crores would apply to seven previous years commencing from the date of
incorporation. Further, turnover should not exceed the prescribed limit of INR
25 Crores for the year for which the start-up claims the 100 per cent deduction.
As per the Income Tax Act, for computing deduction under this section, the
gains and profits of the eligible business shall be computed as if such
businesses are the only source of income of the assessee during the relevant
previous years.
The deduction shall be allowed only if a chartered accountant has audited the
accounts of the start-up for the relevant previous year and the assessee
furnishes the audit report in the form that is prescribed, and duly signed and
verified by such an accountant along with his return of income.
The form to apply for the tax exemption is available on the Start-up India
website. For more details about what the application entails, you can visit here.
2. Tax exemption under section 56 of Income Tax Act. (Angel Tax)
Angel tax was tax levied on capital raised by start-ups from private individuals
and organisations to fund their endeavour. First step is to check yourself as
eligible for start-up status, then acquire DPIIT recognition and apply for this tax.
Specifics to get this tax exemption are:
The aggregate amount of its paid-up share capital and share premium of the
start-up after issue or proposed issue of shares does not exceed INR 25 crores.
Further in the calculation of threshold of INR 25 crores, the amount of paid-up
share capital and share premium in respect of shares issued to any of the
following persons will not be included: A Non-resident or A Venture Capital
Company or A Venture Capital Fund. The condition however is that, the start-
up should not invest, within 7 years from the end of the latest financial year in
which the shares are issued at a premium, in any of the following:
Building or land for the purpose (other than own use or as stock in trade or for
the purpose of renting) or For advancing loans (other than where the lending of
money is the substantial part of the business of the start-up) or Capital
contribution to any other entity or Shares and securities or Motor Vehicle,
aircraft, yacht, or any other mode of transport, the actual cost of which exceeds
INR 10 Lakhs (other than that held by the start-up for the purpose of plying,
hiring, leasing, or as stock-in-trade, in the ordinary course of business or
Jewellery (other than that held by the start-up as stock in the ordinary course
of business)or Archaeological collections & Artefacts etc.
Lastly, start-up should not give out loans and advances nor make capital
contributions to other entities.
You can find the form for availing Angel Tax exemption on the Start-up India
Website.
SIPP Scheme
As a start-up it is important to protect your ideas and innovations. Besides, it is also
important to protect the identity that you are trying to create through brand name, logo
or any other symbol. In order to protect young entrepreneurs and their ideas, the
government launched scheme for facilitating start-ups intellectual property protection
which seeks to facilitate protection of patents, trademarks and innovation designs in
order to encourage and promotes creativity amongst start-ups.
The Aim of this scheme is to promote awareness and adoption of Intellectual property
laws. Provisions of the Scheme includes:
1. Providing high-qualification IPR professionals for filing and prosecution of IPR
violations and protection of start-ups for free and the professionals are paid
nominal fees by government itself. However fees for patent/trademark/design
filing application must be undertaken by the start-up itself.
2. There is an 80% reduction in cost of filing patents. For patent and design
applications under the category of Start-up, The start-ups are only required to
pay official fee for filing the application and no professional charges. The
government will bear all facilitating charges.
3. There is a 50% rebate available for Trademark filings.
4. Start-ups can apply for fast tracking of their patent applications by filling request
for expedited examination which mandates the controller to issue an FIR with
105 days when the expedition request is accepted. Granting of patent is
expedited and the time taken is reduced to a year or so compared to a normal
of 5 to 7 years.
It might seem easy to ignore the IPR issues when starting a start-up but in the
longer run it would only be beneficial for your endeavour to be quick with IPR
related issues relevant to your business and also making use of the government
schemes provided to ease the burden of functioning.
Self-Certification and exemption from Labour inspection
In order to catalyse the generation of employment opportunities by Start-ups, the
government has issued a new scheme where start-ups can self-certify themselves in
the field of Labour laws and Environmental Laws.
If start-ups manage to furnish a self-declaration of their compliance with 9 labour laws
in the first year from the date of incorporation, no inspection under the law wherever
applicable will be held. The labour laws covered under this are:
Building and Other Construction Workers (Regulation of Employment and Conditions
of Service) Act,1996
The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service)
Act, 1979
The Payment of Gratuity Act, 1972
The Contract Labour (Regulation and Abolition) Act, 1970
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
The Employees’ State Insurance Act, 1948
The Industrial Disputes Act,1947
The Trade Unions Act,1926
The Industrial Employment (Standing Orders),1946
From the second year onwards, up to 5 years from the setting up of the units, such
start-ups are required to furnish self-certified returns and would be inspected only
when credible and verifiable complaint of violation is filed in writing and approval has
been obtained from the higher authorities
The advisory to State Governments is not to exempt the Start-ups from the ambit of
compliance of these Labour Laws but to provide an administrative mechanism to
regulate inspection of the Start-Ups under these labour laws, so that Start-ups are
encouraged to be self-disciplined and adhere to the rule of law.
Similar is also the case for environment law compliances which can be found on Start-
upIndia.gov.in.
Conclusion
Start-ups are the future of the market and innovation. It is important in a country like
ours where the demographic is young minds who have the ability to create, to have
the right kind of support from government. While the government is trying to do their
part by providing multiple schemes, it is imperative to keep in mind that the growth of
a start-up is in the hands of the owner and how they conduct their business. By
complying with the law, they create stable and risk free foundations from themselves
that allow their innovation to flourish. It also makes the government more trusting of
new businesses and recognise their contribution to the economy. This guide briefly
touched upon laws and rules that can guide start-ups, but there is always room for
more information according to one’s own needs. The idea is to always research legal
and other requirements when starting a start-up given its relative nascent stage in the
economy of India.
References
https://www.startupindia.gov.in/content/sih/en/startupgov/self-certification.html
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entity.html
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