Startup Registration in India

Launched by the Government of India in January 2016, the Startup India Initiative stands as a revolutionary scheme aimed at bolstering the ecosystem for innovative and technology-driven startups. Spearheaded by the Department for Promotion of Industry and Internal Trade (DPIIT), the initiative seeks to foster innovation, generate employment, and support startups throughout their life cycle with a suite of policy reforms.

Central to the initiative is the provision for startup recognition. Startups, upon recognition by the DPIIT, become eligible for a host of benefits. These range from tax exemptions, both on capital gains and investments, to an easier compliance regime. The Initiative also encompasses the Fund of Funds for Startups (FFS), managed by SIDBI, which is instrumental in providing equity funding support for development and growth.

The legal foundation for Startup India lies in the Startup India Action Plan, which outlines measures to simplify the startup process, offer financial support, and provide incentives to spur growth. The recognition criteria are explicitly detailed in the G.S.R. notification 127(E) of the Ministry of Commerce and Industry, which addresses the definition and eligibility criteria for startups.

If you want to understand nuances of starting a startup, read our blog on how to start a startup in India.

Why Your Startup Needs to be registered?

Registration under the Startup India initiative is not merely a formal process but a gateway to numerous benefits designed to assist startups in their formative years. Legally, the process begins with the incorporation of the business entity—be it a Private Limited Company, Partnership firm, or Limited Liability Partnership (LLP)—followed by registration with DPIIT.

Eligibility Criteria for DPIIT Startup Recognition

India’s burgeoning startup ecosystem is bolstered by the government’s supportive policies, among which the Department for Promotion of Industry and Internal Trade (DPIIT) Startup Recognition stands out. This recognition is part of the broader Startup India initiative, aiming to build a strong ecosystem for nurturing innovation and startups in the country. Here, we delve into the eligibility criteria set by DPIIT for startups to qualify for this recognition, focusing on company age and operations timeline, business type definitions, financial benchmarks, and the pillars of innovation and scalability.

• Company Age and Operations Timeline

Under the DPIIT’s guidelines, an entity is considered a startup up to 10 years from the date of its incorporation or registration. This timeline is pivotal as it recognizes the extended lifecycle of innovation-led enterprises and their journey towards stability and growth in the competitive market.

• Defining Your Business: Private Limited, LLP, or Partnership?

The startup must be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership (LLP). This classification ensures a structured approach towards business operations, legal responsibilities, and financial management, thereby facilitating a conducive environment for the entity’s growth and scalability.

• Financial Benchmarks: Navigating Annual Turnover

One of the key financial eligibility criteria for DPIIT recognition is that the startup’s turnover must be less than INR 100 Crores in any of the previous financial years. This financial benchmark ensures that the benefits and support are directed towards emerging startups that are in the critical phase of building their market presence and operational scale.

• Innovation and Scalability: Keys to Success

The essence of a startup, as per DPIIT’s recognition criteria, is its focus on innovation or improvement of existing products, services, and processes. The startup should demonstrate a potential for employment generation or wealth creation. Moreover, an entity formed by splitting up or reconstruction of an existing business does not qualify as a startup, emphasizing the importance of genuine innovation in the business model or technology that can scale.

Entities meeting these criteria can apply for DPIIT Startup Recognition through the National Single Window System (NSWS), where they can also access a host of business approvals from central and state government bodies. Post-recognition, startups can avail themselves of various benefits like tax exemptions under Section 80IAC of the Income Tax Act, 1961 and exemptions under Section 56 (Angel Tax), fostering a nurturing environment for their growth and development in the Indian market.

The benefits of registration are multi-faceted:

• Legal Compliance and Ease of Business: The initiative provides for self-certification under three environmental and six labor laws, reducing the compliance burden on startups. This self-certification regime allows startups to focus on their business rather than being ensnared in bureaucratic compliance.
• Intellectual Property Rights (IPR) Support: Recognized startups are given a fillip in protecting their inventions and innovations through a scheme for fast-tracking patent applications at lower costs. The government also offers rebates on trademark and patent filing fees, essential for safeguarding intellectual assets.
• Tax Exemptions: Startups are accorded income tax exemptions for three consecutive financial years out of their first ten years since incorporation. This fiscal benefit is pivotal for startups, ensuring that they reinvest the capital back into the business.
• Access to Funds: The Fund of Funds (FoF) scheme, aimed at providing equity funding to startups, underscores the government’s commitment to financial assistance. Besides, startups can avail of exemptions on investments above fair market value.

Registering your startup under this initiative is a strategic step toward leveraging these benefits. It not only legitimizes your business in the eyes of the government and investors but also opens avenues for financial assistance, intellectual property protection, and ease of doing business.

Process for DPIIT Recognition

The application for DPIIT recognition is submitted through the Startup India portal. The process includes:

1. Registration on the Startup India Portal: Startups must register and create a profile on the Startup India portal.
2. Filling the Recognition Application: The application form for DPIIT recognition is available on the dashboard post-registration. It requires details about the startup, including its business model, innovation, products/services, and documents evidencing incorporation.
3. Document Submission: Key documents to be uploaded include the Certificate of Incorporation, details of the directors/partners, and a brief about the business and how it fulfils the innovation criteria.
4. Review and Approval: The application is reviewed by DPIIT. If approved, the startup will be issued a recognition number, and the Certificate of Recognition will be available for download from the portal.

Startup Registration Process: Step-by-Step Guide

When planning to register your startup in India, the preliminary step involves deciding on the most suitable business model. The choice of business model significantly impacts legal compliances, tax obligations, and eligibility for various incentives under the Startup India initiative. This section delves into the legal frameworks governing different business models and offers guidance on choosing the optimal structure for startups in various sectors.

Choosing the Right Business Structure for Startups in India

India’s regulatory environment offers several incorporation options for startups, each with its distinct legal and financial implications:

1. Private Limited Company (PLC): Governed by the Companies Act, 2013, a PLC is the most preferred business structure for startups seeking venture capital funding. It offers benefits like limited liability, perpetual succession, and ease of share transfer. PLCs are ideal for tech startups and businesses aiming equity funding, provides limited liability protection, and enables easy share transferability. For startups involved in manufacturing or trading, where the investment is substantial, and the risk is higher, a Private Limited Company structure offers necessary risk mitigation through limited liability.

2. Limited Liability Partnership (LLP) : Combining the features of a partnership and a corporation, LLPs are governed by the Limited Liability Partnership Act, 2008. They offer flexibility in operations and management, along with limited liability protection. LLPs are suitable for professional services startups, including legal, accounting, and consulting firms.
3. Partnership Firm : Governed by the Indian Partnership Act, 1932, this model offers simplicity in establishment and operation but comes with unlimited liability, meaning personal assets of partners can be used to meet business debts. Best suited for small-scale startups with minimal capital requirements and low-risk business models.
4. One Person Company (OPC): Introduced under the Companies Act, 2013, OPC allows a single entrepreneur to enjoy the benefits of limited liability and corporate status, making it ideal for solo founders. However, there are restrictions on turnover and paid-up capital, beyond which conversion to a PLC is mandatory.
5. Sole Proprietorship: This is the simplest form of business entity, with minimal regulatory compliance. While it offers full control to the owner, it also comes with unlimited liability. Sole proprietorships are suitable for small, local businesses in retail or trade.

Documents Required for Incorporation

The documentation process is critical and varies slightly depending on the chosen business structure. Here is a general list of documents required for incorporating your business in India:

• For Private Limited Companies and LLPs:

For a Private Limited Company and LLP, registration is mandated with the Ministry of Corporate Affairs (MCA). The process involves obtaining a Digital Signature Certificate (DSC) for the proposed directors/partners, securing a Director Identification Number (DIN) for each director, and filing for the name approval of the company or LLP through the SPICe+ form (INC-32 for companies and FiLLiP form for LLPs).

Post name approval, incorporation documents, including the Memorandum of Association (MoA) and Articles of Association (AoA) for companies, need to be submitted online via the MCA portal. Upon verification, the Registrar of Companies (RoC) issues the Certificate of Incorporation.

• For Partnership Firms :

Partnership deed needs to be executed on a stamp paper stating the details of the partnership arrangement along with the PAN of the partnership firm and identity and address proof of the partners.

These documents serve as the basis for your startup’s legal identity and must be prepared with accuracy and due diligence. After incorporation, your startup can proceed with the registration under the Startup India initiative by applying on the Startup India portal, providing details of your business, and submitting the required documents for DPIIT recognition.

Read our blog on other legal agreements for startups in India for more information on startup contracts.

Government Schemes for Startups

The Indian government, recognizing the pivotal role of startups in the economic framework, has instituted the “Fund of Funds for Startups” (FFS) under the Small Industries Development Bank of India (SIDBI). This initiative is designed to provide financial assistance to startups across the country by facilitating the flow of venture capital. The scheme, which aims to generate employment and foster innovation, has a corpus of INR 10,000 crores.

The FFS does not directly invest in startups. Instead, it allocates money to SEBI-registered Alternative Investment Funds (AIFs), which in turn provide funding to a wide array of startups. This approach ensures that funds reach a broad spectrum of sectors and stages of business, promoting diversity and innovation.

Seed Fund Scheme: Kickstarting Your Venture

The “Startup India Seed Fund Scheme” (SISFS) is another significant initiative by the government to support early-stage startups in their most vulnerable phase. Launched with an outlay of INR 945 crores, the scheme aims to provide financial assistance for proof of concept, prototype development, product trials, market entry, and commercialization.

Eligibility for this scheme requires DPIIT recognition, showcasing the integration of schemes under the Startup India initiative. The scheme is designed to bridge the initial funding gap for startups, providing a robust foundation for their growth and scalability.

The Startup India Action Plan and various notifications issued by the Department for Promotion of Industry and Internal Trade (DPIIT) lay the groundwork for the implementation and operationalization of this scheme, ensuring a structured approach to funding and support.

Role of Incubators and Accelerators

Incubators and accelerators play a crucial role in the startup ecosystem, acting as catalysts for growth and development. Recognizing this, the government has implemented several schemes to strengthen these support systems. The Atal Innovation Mission (AIM) under NITI Aayog, for example, promotes the establishment of Atal Incubation Centres (AICs) and Atal Community Innovation Centres (ACICs), focusing on fostering innovation in underserved regions.

Additionally, the Biotechnology Industry Research Assistance Council (BIRAC) under the Department of Biotechnology provides support to biotech startups through a range of programs, including incubation support, mentorship, and funding.

These initiatives are supported by various legislations and guidelines that detail the framework for incubators and accelerators, including eligibility criteria, application procedures, and the benefits provided. This structured support not only aids in the nurturing of startups but also ensures their alignment with national economic goals and policies.

In sum, the Indian government’s schemes for startups, including the Fund of Funds, Seed Fund Scheme, and the support for incubators and accelerators, are intricately designed within a legislative framework that promotes growth, innovation, and economic contribution. These schemes are pivotal in providing the necessary financial, infrastructural, and regulatory support to propel startups towards success.

Read our blog on Government Schemes for Startups in India for more information.

Financial Compliance and Management

GST, PAN, and TAN: Navigating Tax Registrations for Startups

Adhering to tax regulations is fundamental for startups to avoid penalties and ensure smooth operations. The Goods and Services Tax (GST) is a comprehensive, multi-stage tax on goods and services, requiring startups to register if their annual turnover exceeds the threshold limit, as per the GST Act, 2017. Additionally, obtaining a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) is mandatory for income tax purposes and for deducting or collecting tax at source, respectively, under the Income Tax Act, 1961.

Startups must also adhere to the Income Tax Act’s provisions, such as Section 80-IAC, which offers tax benefits to DPIIT-recognized startups. Compliance with these regulations not only ensures legal operations but also positions startups to take advantage of various government schemes aimed at facilitating ease of doing business.

Regulatory Compliance and Industry-Specific Laws for Startups

Complying with Employment Laws and Regulations

Employment Agreements: Fundamental to any employment relationship, these agreements should clearly outline the terms of employment, incorporating elements such as duration, roles, compensation, benefits, and termination clauses. Compliance with the Indian Contract Act, 1872, and specific statutes like the Industrial Employment (Standing Orders) Act, 1946, ensures that these agreements uphold the legal standards and protect both the employer and employee rights.

Labor Laws Compliance: India’s labor laws, including the Shops and Establishments Act, the Minimum Wages Act, 1948, and the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, mandate standards for working hours, wages, and social security benefits. Startups must adhere to these laws based on their industry, employee count, and operational jurisdictions, ensuring rights such as equal remuneration, health and safety, and grievance redressal are safeguarded.

To foster a legally compliant workplace, startups must:

• Draft clear employment agreements that define the terms of employment, including roles, responsibilities, compensation, and termination conditions, in line with legal standards.
• Adhere to labor laws ensuring employee rights are protected, including working hours, health and safety standards, and grievance redressal mechanisms.
• Implement policies reflecting compliance with statutory benefits, such as provident fund contributions, gratuity, and maternity benefits.

Recent Developments and Government Schemes for Startups 

India’s commitment to improving its IP landscape is evident from its first National IPR Policy announced in 2016, aiming to promote IP awareness, generate innovations, enhance access to IPs, and strengthen enforcement and adjudication mechanisms. The Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry, spearheads this initiative, emphasizing the need for startups to leverage IP rights for growth and competitiveness.

Furthermore, the establishment of the Cell for IPR Promotion and Management (CIPAM) and the implementation of the IPR enforcement toolkit illustrate the government’s efforts to streamline IP processes and combat IP infringements effectively.

 Strategies for Startups:

1. Early IP Assessment: Startups should conduct thorough IP searches early in their development phase to ensure their innovations do not infringe on existing IPs and to identify potential IP assets for protection.
2. Tailored IP Strategy: Developing a comprehensive IP strategy that aligns with the startup’s business goals, including decisions on which IP rights to pursue based on the product or service offered.
3. Utilizing Government Schemes: Engaging with government initiatives such as Start-up India, which offers benefits like IP fast tracking, and taking advantage of the National IPR Policy’s provisions for startups.

Read our blog on a comprehensive legal checklist for startups for more information on building a compliant startup.

Conclusion: The Road to Startup Success in India

The government’s proactive approach through initiatives like Startup India and DPIIT recognition plays a pivotal role in nurturing innovation and entrepreneurial spirit. These initiatives not only offer a plethora of benefits such as tax exemptions, easier compliance, and IPR fast-tracking but also underscore a commitment to building a supportive environment for startups. The myriad of resources, including financial aid through schemes like the Startup India Seed Fund Scheme, and platforms for mentorship and investor connection, provide a solid foundation for startups to innovate, scale, and thrive.

The path to success in India’s startup ecosystem is marked by continuous adaptation and a deep understanding of legal and financial frameworks. Entrepreneurs are encouraged to leverage the comprehensive support system established by the government, stay updated with regulatory changes, and engage with the ecosystem’s extensive network of mentors and investors. With the government’s unwavering support and a clear focus on innovation and scalability, Indian startups are well-positioned to drive significant economic growth and contribute to the global marketplace.