This post has been written by Vanshika Darbari, a third year law student from Maharaja Agrasen Institute of Management Studies, GGSIPU.
Startup India is an initiative by the Government of India. It is based on an action plan aimed at promoting bank financing for startup ventures to boost entrepreneurship and encourage startups with job creation. The campaign was announced by Prime Minister Narendra Modi in his 15th august, 2015 address from the Red Fort. The ‘Startup India initiative’ was announced by the Government of India for creating a conducive environment for startups in India. The various ministers of the government of India have initiated a number of activities and schemes to promote startups in their respective states.
A startup company is an entrepreneurial venture typically designed for emerging, fast-growing business that aims to solve unmet needs by developing a viable business model around an innovative product-service processor platform. It is usually a company designed to develop effective and validate a scalable model.
- They come in all forms and sizes. The critical tasks for establishing a startup is building a co-founding team having complementary skills, know-how, financial resources, and other elements to build the product for the target market.
- It can sometimes be hard to attract investors to support the product/services or attract buyers as startups operate in high-risk sectors.
What is a startup?
An entity shall be considered as a startup up to 5 years from the date of its incorporation if its turnover for any financial year has not exceeded Rupees 25 crore and it is working towards innovation, development, deployment, or commercialization of new products.
An “entity” here means a private company or a registered partnership firm or a limited liability partnership. But any entity formed by splitting up or reconstruction of business which is already in existence shall not be considered as a ‘startup’.
EXEMPTIONS/ BENEFITS FOR STARTUPS
The Startup India Initiative is aimed at promoting entrepreneurship and job creation at the grass-root level. The Government has allowed certain exemptions in establishing a startup and ease of business to encourage and attract people having innovative ideas and willing to start their own business.
- Simplified Process – The government of India has launched a mobile app and a website for easy registration of Startups. The process is completely online, anyone who is interested in setting up a startup can fill a simple form on the website and upload certain documents.
- Cost reduction – The government provides up to 80% cost reduction in the cost of filing patents. It has listed a number of facilitators of patents and trademarks who provide high-quality Intellectual Property Rights services including examination of patents at lower fees. The fees of these facilitators are borne by the government and startups bear only statutory fees.
- Easy access of funds – A 10,000 crore rupees fund is set up by the government to provide funds to the startups as venture capital.
- Tax holiday for 3 years – On certification from Inter-ministerial Board (IMB), startups are exempted from income tax for 3 years.
- Apply for government tenders – Startups can apply for government tenders. They are exempted from the “prior experience” criteria for the normal companies.
- No time-consuming compliances – Various compliances have been simplified for startups to save time and money. They are allowed to self-certify compliance ( through the Startup mobile app) with 9 labor and 3 environmental laws.
- Tax saving for investors – People investing their capital gains in the venture funds set up by the government will get tax exemption from capital gains. This will help startups to attract more investors.
- Easy exit – In case of exit, startups can close their business within 90 days from the date of application of winding up.
PROCESS OF RECOGNITION OF START-UPS
1.Incorporation of Business
A business first may be incorporated as Private Limited or a Partnership or a Limited Liability Partnership. Normal procedures for registration of any business like obtaining the certificate of Incorporation/Partnership registration, PAN, and other required compliances are to be followed.
2.Registration with Start-up India
The process of registration is simple and easy, all you need to do is log in to the Start-up India website and fill-up the form with the details of the business and upload certain documents.
3.Documents to be uploaded
(A)Start-ups may be required to submit any of the following documents :
(i) A recommendation (regarding innovative nature of business) from an Incubator established in a post-graduate college in India, in a format specified by the Department of Industrial Policy and Promotion (DIPP); OR
(ii) A letter of support by an incubator, which is funded (in relation to the project) by Government of India as part of any specified scheme to promote innovation; OR
(iii) A letter of recommendation (regarding innovative nature of business), from an Incubator, recognized by the Government of India in DIPP specified format; OR
(iv) A letter of funding of not less than 20% in equity, by any Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network, duly registered with SEBI that endorses innovative nature of the business; OR
(v) A letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation; OR
(vi) A patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of the business being promoted.
(B)Incorporation Certificate –The subject of incorporation of the Company/LLP has to be uploaded.
(C)Business description – A brief description of the nature/type of products or services.
4. Availing Tax Benefit
For availing tax exemption for 3 years, a certificate from Inter-Ministerial Board is required.
5. Self- Certify certain conditions
(a) The company is registered as Private Limited, Partnership or a Limited Liability Partnership.
(b)The business was incorporated in India, not before 5 years.
(c)The turnover should be less than 25 crores per year.
(d)The business must be working towards innovating something new or improving existing technology.
(e)The business must not be a result of splitting up or reconstruction of already existing business.
6. Immediate recognition
On uploading all the necessary documents and fulfilling all the conditions as mentioned, a certificate of recognition is issued on examination of all the documents.
OTHER NECESSARY COMPLIANCES
- Choosing the right legal structure for the start-up – It is one of the most crucial decisions for any start-up. It should be taken on the basis of Individuals circumstances and host factors such as nature/sector and scale of business, tax and regulatory considerations, capital and funding requirements, cost of administration and formation process, etc.
- Registration and business licensing –Post incorporation of an entity, certain registrations like Permanent Account Number(PAN), Tax Deduction and Collection Account Number(TAN), etc are mandated by the law.
- Intellectual property protection – Intellectual property protection acts as an important asset for a start-up and protecting start-ups can help to gain competitive advantage. It is essential to obtain trademark registration for business name/trade name under the Trademarks Act.
- Founder equity split and Founder agreement –Founder equity should be split on the basis of the nature of the role played by each founder along with their time, efforts, and capital contribution to the start-up. The most valuable tool to establish the relationship between the founders of a startup is a start-up agreement as it represents a clear understanding of all the key issues relating to the start-up.
- Third-Party Agreements – Prior to entering into a third-party agreement and while negotiating terms, it is advisable to execute a non- disclosure agreement. If creation of intellectual property is a component of such a third party agreement, then it must clearly state that all rights to that intellectual property rights shall vest and be owned by the start-up and the party can not claim on the same and will do all the acts possible to ensure the protection of the intellectual property.
- Investment structuring – Raising capital of working capital requirements and growth is one of the most challenging and time-consuming aspects of operating a start-up. In India, investors invest in growing companies on varied terms, so it is imperative for the start-ups to seek legal advice while negotiating terms and conditions of the investment.
- Compliance management –There are multiple laws applicable to specific entity structures under which separate event-based and annual compliance is mandated. For the sustainable growth of any business, it is very important that the start-up is in compliance with legal, secretarial, accounting, taxation, and other associated compliance. The consequences of non-compliance can be levy of punitive fines on the start-ups.
Image from https://entrackr.com/2019/12/startups-raised-about-14-5-bn-equity-funding-in-2019/