The Ultimate Guide: How to Start a Startup in India

The Indian startup ecosystem is poised for exponential growth, offering a fertile ground for entrepreneurs aiming to innovate and scale. India hosts a myriad of startups across diverse sectors including technology, healthcare, e-commerce, and fintech, among others. Government initiatives like “Startup India” have been instrumental in providing a conducive environment by offering policy support, financial aid, and incentives. Additionally, the presence of numerous accelerators, incubators, and venture capital firms has further propelled the growth of startups in India.

Legal Requirements for Startups in India

Launching a startup in India necessitates a thorough understanding of the legal framework and compliance requirements. Entrepreneurs must navigate through various legislations including the Companies Act, 2013 for company registration, Intellectual Property Laws for patent and trademark protection, and compliance with sector-specific regulations. Additionally, tax implications under the Goods and Services Tax (GST) and income tax laws must be meticulously adhered to, ensuring a smooth operational runway for startups.

Startup Incorporation: Choosing the Right Business Structure

By choosing the right business structure for startup is a critical decision that has long-term implications on its operations, tax obligations, and legal liabilities. In India, startups can choose from several legal entities when incorporating, each with its own set of legal and tax implications. The choice of entity affects your startup’s ability to raise funds, the liabilities of the owners, and the tax benefits it may avail.

Comparative Analysis of Different Business Entities

1. Private Limited Company (PLC): PLCs are regulated under the Companies Act, 2013. They must have at least two members and a maximum of 200. PLCs offer limited liability to their members and are subject to corporate tax rates. They are required to conduct annual audits, file annual returns with the Registrar of Companies (ROC), and comply with various other statutory regulations.
2. Limited Liability Partnership (LLP): Governed by the LLP Act, 2008, LLPs combine the features of a partnership and a corporation. They provide limited liability to their partners and are easier to establish than PLCs. LLPs must file annual returns and statements of accounts with the MCA, but they often face fewer compliance requirements than PLCs.
3. Partnership Firm: Partnerships in India are governed by the Indian Partnership Act, 1932. They do not provide limited liability to their partners, meaning each partner’s personal assets may be at risk in the event of the firm’s failure. Partnerships are relatively easy to set up and have fewer compliance requirements compared to PLCs and LLPs.
4. One Person Company (OPC): OPC is a relatively new business structure in India, introduced by the Companies Act, 2013. It allows a single individual to incorporate a company, offering limited liability protection. OPCs face certain restrictions, such as a requirement to convert into a PLC if their annual turnover crosses certain thresholds.
5. Sole Proprietorship: This is the simplest form of business entity in India, not governed by any specific regulatory laws. The owner has unlimited liability, and the income from the business is added to the owner’s personal income, taxed according to individual income tax slabs.

Legal and Tax Implications for Each Structure

• PLCs and LLPs are taxed under corporate tax rates, and they can avail various deductions and exemptions under the Income Tax Act, 1961. They are also eligible for benefits under the Startup India Initiative if they meet certain criteria.
• Partnerships and Sole Proprietorships are not taxed at the entity level; instead, their incomes are taxed as personal income of the owners/partners.
• OPCs are treated similarly to PLCs for tax purposes but enjoy certain exemptions and benefits tailored for single entrepreneurs.

Registering Your Startup Under the Appropriate Legal Entity

The process of registering your startup varies depending on the chosen business structure:

• For PLCs and LLPs, registration is done through the Ministry of Corporate Affairs (MCA) portal, where you will need to file the incorporation forms and submit the required documents.
• Partnership firms are registered with the Registrar of Firms of the respective state where the firm is located. The partnership deed, along with KYC documents of the partners, needs to be submitted.
• OPCs follow a similar registration process as PLCs but with a few modifications suited for single entrepreneurs.

Department for Promotion of Industry and Internal Trade (DPIIT) Recognition and Startup India Registration

DPIIT Recognition Process

The DPIIT recognition for startups is a part of the Startup India Scheme aimed at fostering innovation and entrepreneurship in India. To gain DPIIT recognition, startups must meet specific criteria, such as being a Private Limited Company, Partnership Firm, or Limited Liability Partnership. The entity must be within 10 years of its incorporation, and its annual turnover in any financial year should not have exceeded INR 100 crores. The startup should be working towards innovation, improvement, or development of products, services, or processes and have the potential for employment generation or wealth creation.

Benefits of Startup India Registration and DPIIT Recognition

1. Tax Exemptions: Startups can avail of tax exemptions under various sections of the Income Tax Act, 1961. These include exemptions from Section 56(2)(vii)(b) on the issue of shares above fair market value, tax holiday for three consecutive years out of the first ten years from incorporation under Section 80-IAC, and exemption from long-term capital gains tax under Section 54(GB) if the proceeds are invested in a DPIIT-recognized startup.
2. Self-Certification under Labor and Environmental Laws: DPIIT-recognized startups can self-certify compliance under six labour laws and three environmental laws for a period of five years from the date of incorporation. This exemption is aimed at reducing the regulatory burden and allowing startups to focus on their core business activities.
3. Intellectual Property Rights (IPR) Benefits: DPIIT-recognized startups are eligible for rebates on trademark and patent filings, making the process of securing intellectual property rights more cost-effective and accessible for startups.
4. Ease in Public Procurement Norms: Recognized startups have an easier pathway in bidding for government contracts and procurements, as they are allowed to self-certify compliance with requirements and are subject to fewer burdensome eligibility criteria.

Financial Compliance and Fundraising Support to Start a Startup

In India, startups and businesses have a variety of funding opportunities available, which are critical for their growth and expansion. The legal and regulatory environment supports various funding mechanisms, including angel investors, venture capital (VC), and government schemes.

• Angel Investors – These are high-net-worth individuals who provide capital for startups, usually in exchange for convertible debt or ownership equity. They not only provide financial backing but also mentorship and access to their network. Angel investments are governed by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012, which categorize angel funds as a sub-category of Venture Capital Funds.
• Venture Capital – Venture capital firms invest in startups with high growth potential in exchange for equity. Each fund operates based on a specific investment strategy, focusing on certain sectors, startup stages, and investment sizes. In exchange for capital, VCs acquire a stake in the company and often play a role in guiding the startup through mentorship. VC funding is also regulated under the SEBI (Alternative Investment Funds) Regulations, 2012. These firms typically invest at a later stage than angel investors and bring in larger amounts of capital along with expertise in scaling up businesses.
• Crowdfunding: It has emerged as a popular method for startups to raise capital. It involves sourcing small amounts of capital from a large number of people. This method allows startups to access a wide pool of potential investors and can be an effective way to raise funds, especially for early-stage ventures.
• Bootstrapping: To bootstrap a startup means to grow a business with little or no venture capital or outside investment. It means that in order to operate and grow, you must rely on your savings and revenue. For most entrepreneurs, it is the first option because there is no pressure to repay the money or dilute the control of the company.
• Incubators and Accelerators: These organizations assist startups in their early development, offering services and sometimes financial support in the form of grants, loans, or equity. They also provide early-stage support, mentorship, helping startups refine their business models and accelerate growth.
• Bank Loans and NBFC Financing: Startups with proven market success and revenue streams may secure conventional loans from banks or Non-Banking Financial Companies (NBFCs). These loans are particularly useful for operational funding needs. Some founders may opt for loans over selling equity to avoid diluting their ownership.
• Venture Debt: This type of funding involves private investment funds providing capital to startups, mainly as debt rather than equity. Venture debt is often pursued in conjunction with equity financing rounds led by angels or VCs.
• Friends and Family: Often the first source of funding, leveraging personal networks. It is vital to understand the potential impact on relationships.

Legal Framework related to Startup Financing

The regulatory environment for funding in India is framed by various acts and regulations, including:

• The Companies Act, 2013 – Governs the issuance of shares and securities, including private placements and preferential allotments, which are common methods of raising funds in startups.
• Foreign Exchange Management Act (FEMA), 1999 – Regulates the inflow of foreign investment into India, which is pertinent for startups receiving funding from international angel investors or venture capital firms.
• Income Tax Act, 1961 – Provides tax exemptions and benefits to startups under certain conditions, as defined by the Startup India Initiative.

Financial compliances and regulations

Startups in India must adhere to several financial compliances and regulations, crucial for their operation and growth, such as:

• Company-law compliances – Mandatory Annual General Meetings (AGMs), board meetings, appointment of auditors, and filing of various forms and reports as outlined in the Companies Act, 2013.
• Taxation Compliances – Income Tax Act, 1961, and the GST Act, 2017 are essential. Startups can avail of exemptions like the Long-Term Capital Gains (LTCG) exemption under Section 54EE and a three-year tax holiday under Section 80IAC, subject to certain conditions.
• Intellectual Property Rights (IPR) Compliances – These are crucial for protecting the unique assets of a startup. The Government’s Start-ups Intellectual Property Protection (SIPP) initiative aids in the legal registration of intellectual assets.
• Labor-laws Compliances –  It involves adhering to various regulations to protect employee rights, including the Employees’ State Insurance Act, 1948, and the Maternity Benefit Act, 1961.

Government Schemes and Grants for Startups

The Indian government has introduced various schemes and grants to support startups:

1. Startup India Initiative was launched by the Government of India, it aims to build a strong ecosystem for nurturing innovation and startups in the country. The initiative provides tax benefits, simplifies the startup process, and offers a fund of funds.
2. SIDBI Fund of Funds is operated by the Small Industries Development Bank of India (SIDBI), this scheme provides funding to startups through a corpus of ₹10,000 crores. It indirectly invests in startups by providing capital to SEBI-registered Alternative Investment Funds (AIFs).
3. Startup India Seed Fund Scheme (SISFS) announced by the Government of India, it aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry, and commercialization. It helps startups bridge the funding gap in the early stage.
4. ASPIRE (A Scheme for Promotion of Innovation, Rural Industries, and Entrepreneurship) focuses on setting up a network of technology centers and incubation centers, particularly in the agro-business industry.
5. Pradhan Mantri Mudra Yojana offers financial support to micro-enterprises and startups, categorizing loans into different segments based on the stage and needs of the business.
6. Support for International Patent Protection in Electronics and Information Technology (SIP-EIT) provides funding for technology startups to file international patents.
7. Multiplier Grants Scheme (MGS) encourages industries to collaborate with academic and R&D institutions for product development.
8. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) offers loans to startups and small-scale industries with minimal collateral requirements.
9. Single Point Registration Scheme (SPRS) supports Micro and Small Enterprises (MSEs) in participating in government purchases.

Legal Formalities for Startups in India

Business Registration and GST Compliance

Startups in India need to register their business under the appropriate legal entity, such as a Private Limited Company, Limited Liability Partnership, or Sole Proprietorship, in accordance with the Companies Act, 2013 or the Limited Liability Partnership Act, 2008. Post-registration, obtaining a Permanent Account Number (PAN) and a Tax Account Number (TAN) is mandatory.

GST (Goods and Services Tax) compliance is essential for startups if their annual turnover exceeds the threshold limit set by the GST Act. Startups need to register for GST on the GST portal and comply with monthly or quarterly filings of GST returns, depending on their turnover and scheme opted for under the GST law.

Obtaining Necessary Licenses and Permits

Depending on the nature of the business, startups may require specific licenses and permits to operate legally in India. This could include industry-specific licenses (like FSSAI for food businesses, IEC for export-import businesses), professional licenses, or local permits such as trade licenses from municipal authorities. Startups should consult the respective regulatory bodies to understand and fulfil these requirements.

Intellectual Property Rights: Patents and Trademarks

Protecting intellectual property (IP) is crucial for startups, especially those dealing with innovative products or services. Startups should consider filing for patents to protect their inventions under the Patents Act, 1970, and for trademarks to protect brand identity under the Trademarks Act, 1999. The Indian Patent Office (IPO) and the Office of the Controller General of Patents, Designs, and Trademarks (CGPDTM) oversee these processes, respectively.

Labour and Environmental Laws

Compliance with labour laws is essential for startups, especially those with a growing team. This includes adherence to the Minimum Wages Act, 1948, the Provident Funds Act, 1952, and the Industrial Disputes Act, 1947, among others. Environmental compliance is also critical, particularly for manufacturing or waste-generating startups, which must adhere to the norms set by the Ministry of Environment, Forest and Climate Change and obtain necessary clearances.

Building a Brand That Resonates: Marketing Legally

Effective Branding Strategies for Startups: Creating a Compelling Narrative

For startups, establishing a brand identity is crucial. In India, the legal aspect of branding primarily revolves around trademark registration to protect brand identity. Under the Trademarks Act, 1999, startups should consider registering their brand name, logo, and any slogans as trademarks. This legal protection prevents unauthorized use of the brand elements, ensuring that the brand’s unique identity is preserved and can be legally enforced against infringements.

Digital Marketing Essentials: Compliance is Imperative

When it comes to establishing an online presence, startups must navigate various legal considerations to ensure compliance while maximizing their digital marketing efforts:

• Website Compliance: As per the Information Technology (IT) Act, 2000, and the rules thereunder, websites need to display a privacy policy, terms of use, and, if applicable, a disclaimer. This is particularly important as websites are a key component of a startup’s online presence, serving as the digital storefront.
• Data Protection and Privacy: With the increasing emphasis on data protection globally and startups need to be vigilant about how they collect, use, and store consumer data, ensuring transparency and security. Compliance with the Digital Personal Data Protection Act, 2023 is also imperative.
• Advertising Standards: The Advertising Standards Council of India (ASCI) has guidelines that digital marketing efforts need to adhere to, ensuring that advertisements are not misleading, harmful, or offensive. Compliance with these guidelines is essential to maintain brand integrity and avoid legal pitfalls.
• Intellectual Property in Content Marketing: Startups must ensure that their content marketing efforts do not infringe on others’ intellectual property rights. This includes using images, text, or videos that are either original, licensed, or fall under fair use provisions.

Scaling for Success: Growth Strategies and Team Building

Startups and businesses in India aim for rapid scaling must adhere to the Companies Act, 2013, which lays down the foundation for corporate governance, board management, and shareholder rights. As businesses scale, compliance with the Act becomes increasingly complex, requiring a structured approach to corporate governance to avoid legal pitfalls.

The Indian Contract Act, 1872, is pivotal when forging new partnerships, vendor agreements, and customer contracts. A clear understanding of contract law ensures that growth strategies are built on legally sound agreements, minimizing disputes, and fostering long-term relationships.

Cultivating a Winning Team: Recruitment, Culture, and Leadership

As startups scale, they must adhere to labour laws and regulations, including the Indian Labour Act and the Shops and Establishments Act. These laws govern employee rights, working conditions, and dispute resolution, making it imperative for growing businesses to foster a legally compliant HR framework.

Building a positive corporate culture and leadership within the legal boundaries of anti-discrimination laws, such as the Prevention of Sexual Harassment (POSH) Act, 2013, is vital. A legally sound HR policy not only protects the company from potential lawsuits but also contributes to a healthy, inclusive, and productive work environment.

Recent Example of a Startup Scaling Up in India

One notable example of a startup that has successfully scaled up is Zerodha. As India’s largest stockbroker, Zerodha has mastered the art of growth hacking through innovative financial solutions and educational initiatives, all while adhering to the stringent regulations set forth by the Securities and Exchange Board of India (SEBI). Zerodha’s growth is a testament to the fact that legal compliance and innovative growth strategies can go hand in hand, leading to sustainable and ethical business expansion.

Concluding Remarks on Starting Your Startup Journey

Ensuring compliance with business registration, GST, obtaining necessary licenses, protecting IP rights, and adhering to labour and environmental laws lays a solid foundation for a startup’s journey.

The startup ecosystem in India offers a fertile ground for innovation and entrepreneurship, backed by a robust legal framework designed to facilitate growth while ensuring regulatory compliance. By diligently adhering to the legal requisites, startups can mitigate risks and focus on scaling their business. Seeking expert legal counsel from corporate lawyers and leveraging government initiatives like Startup India can provide startups with the necessary guidance and support to navigate the legal landscape, thereby laying a strong foundation for a successful entrepreneurial venture in the dynamic Indian market.