The term startup has become a real buzzword in the last couple of years. The unprecedented growth of startups in a short span of time has given them a cult status.

The entrepreneurial spirit and booming economy have led people to jump into this bandwagon without giving due thought to what actually a startup is, how to leverage its full potential and most importantly its legal framework in the Indian ecosystem. It is imperative to delve into the procedure of the registration of a startup to fully leverage the benefits that accrue to it. However, prior to that, we need to first understand what a startup is.

WHAT IS A STARTUP?

As per Investopedia, “A startup is a company that is in the first stage of its operations. These companies are often initially bankrolled by their entrepreneurial founders as they attempt to capitalize on developing a product or service for which they believe there is a demand.”

A few years back, the term ‘startup’ was a new concept and was not defined anywhere in the Indian legal context. With a view to bringing uniformity and clarity, the Department of Industrial Policy and Promotion (DIPP) vide its first notification dated 17th February 2016 introduced the definition of a startup. During the last 3 years, the definition has undergone several changes and Department for Promotion of Industry and Internal Trade (DPIIT) vide its notification dated 19th February 2019 amended the definition of a startup as under:

An entity shall be considered as a Startup:

Up to a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees.
Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

Further, an entity shall cease to be a Startup 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.

HOW TO ESTABLISH A STARTUP IN INDIA?

In order to commence operations, Startups require registration with relevant regulatory authorities. Delays or lack of clarity in the registration process may lead to delays in the establishment and operations of startups, thereby reducing the ability of the business to get bank loans, employ workers and generate incomes. Enabling the registration process in an easy and timely manner can reduce this burden significantly.

The following steps enumerate the startup registration process:

Step1: Incorporate Business

First, you must incorporate the business as a Private Limited Company or a Limited Liability Partnership or a Partnership firm and make it a legal entity. Also make sure you have obtained all the certificate of partnership or incorporation registration, PAN, and other necessary compliances.

Step 2: Register with Startup India

Startup India, initiated by the Government of India is a flagship initiative launched in January 2016. This initiative is taken by the government of India to boost the ecosystem for supporting innovation and startups in India. Through this scheme, the government is looking forward to driving sustainable economic development and enhance employment opportunities in India.

Registering for a startup is a very simple process. All you need to do is upload a form with all requisite documents (in PDF format only) on the startup India website. The entire process is simplified and made online by the government.

Step 3: Process of Recognition

In terms of DIPP’s 2016 notification, the application for availing the recognition of startup required a recommendation letter from an incubator established in PG College in India or a letter of support from an incubator or letter of funding by Government of India or any State Government, etc.

Nonetheless, to make it simple, the amended process of recognition of an entity as the startup does not contain such requirement and the amended process is as under:

A Startup shall make an online application over the mobile app or portal set up by the DPIIT.
The application shall be accompanied by:

A copy of Certificate of Incorporation or Registration, as the case may be, and
A write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.
The DPIIT may, after calling for such documents or information and making such enquires, as it may deem fit, —

(a) Recognize the eligible entity as Startup, or

(b) Reject the application by providing reasons.

Step 4: Answer whether to avail tax benefits

To enable the startup to focus on the growth of their business, reliefs or exemptions have been extended to them under various legislations and some of the critical legislation and exemptions thereof are summarized below:

(i) Income Tax Benefits

(a) ‘Eligible startups’ carrying on ‘eligible business’ as explained under Explanation to section 80-IAC of the Income Tax Act, 1961 may obtain Certificate for the purpose of the said section by making an application in prescribed Form-1 to the Inter-Ministerial Board.

The Board before granting the Certificate may call such documents or information as they may deem fit. It can also reject the application by giving reasons thereof.

Obtaining Certificate under Section 80-IAC of the Income Tax Act allows the eligible startup, in computing total income, a deduction of an amount equal to 100% of the profits and gain derived from such business for a consecutive 3 assessment years. Such deduction can be claimed by the assessee for any 3 years out of total 7 years from the date of incorporation of a startup.

(b) Startups are also eligible for availing exemption under section 56(2) (viib) of the Income Tax Act, 1961. The said section states that if the company receives any consideration for issue of shares which extends the Fair Market Value (FMV) of such shares, such excess consideration is taxable in the hands of the recipient. To seek exemption as above, the startup needs to fulfill the following conditions:

it has been recognized by DPIIT; and
the aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of a share, if any, does not exceed, twenty-five crores rupees.

To compute the paid-up share capital, the amount of paid-up share capital and share premium of Rs. 25 crores in respect of shares issued to any of the non-resident or a venture capital company/ fund shall not be included. Apart from this, there are investment restrictions on certain assets detailed in the DPIIT notification dated 19thFebruary 2019.

The startups that fulfill the above condition can submit a declaration in Form 2 to DPIIT which will forward the same to CBDT for granting the exemption under this section.

(ii) Relaxation under Companies Act, FEMA and Labour, and Environmental Laws

The government of India realizing the hardships faced by startups aims to reduce their regulatory burden thereby allowing them to focus on their core business. Keeping this in mind, it has exempted/relaxed them from a plethora of compliances under various laws such as Companies Act, FEMA and Labour, and Environmental laws.

Step 5: Self Certification

The startup needs to self certify that the following conditions are satisfied:

i) Your company must be registered as a Private Limited Company or Partnership firm or a Limited Liability Partnership.
ii) Your business must be incorporated/ registered in India, not before five years.

iii) Turnover must be less than 25 crores per year.

iv) The business must be operating towards innovating something new or significantly upgrading the existing technology.
v) The particular startup business should not be an outcome of splitting up or reconstruction of an existing business.

Step 6: Immediately get Recognition Number

Once the application is submitted, a recognition number will be immediately issued to the startup. The Certificate of Recognition will be released upon the examination of all the submitted documents. If the appropriate documents are not uploaded or are found to be forged, a fine on the applicant will be levied equivalent to 50% of the paid-up capital of the startup with a minimum fine of R. 25,000.

Step 7: Other Areas

Some other areas where the government has aided in fostering the startup ecosystem are:

i) Legal Support and Fast-tracking IPR, Patent, Trademarks and/or Design registration at lower costs.
ii) Relaxed norms for Public Procurement for startups through the Government e-Marketplace (GeM) and other channels.

iii) Facilitating Incubation and Industry-Academia partnership.

iv) Faster exit for startups.
v) Providing funding support through a Fund of Funds with a corpus of INR 10,000 crores.

The Government of India through its flagship Startup India Program initiative has taken a slew of policy initiatives to build a robust, conducive and growth-oriented environment intended to catalyze startup culture and build a strong and inclusive ecosystem for innovation and entrepreneurship in India. The current government is welcoming of young entrepreneurs to be a part of the growth story of India. The startups have the potential to redefine our economy by establishing India as a technology-rich nation, providing employment opportunities, create wealth for investors and inspire people, especially the students, to become entrepreneurs.

Giving a legal structure to your startup is not rocket science. With the right professional guidance and advice, you can easily give legal wings to your dream startup journey. You will never know if your idea is not just an idea but the next big revolution in the making until you try.

So, take the plunge as, “A journey of a thousand miles begins with a single step.” – Lao Tzu

(Disclaimer: The information contained in this article is general in nature and should not be considered as a piece of professional advice)