Planning Startup? Just Do It!

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Are you planning to start a startup in India? Then you are at right place for the required information. Here, we have shared relevant details about “How to Start a Startup in India?”

India registered over 1300 start-ups in the year 2019. In comparison to India’s population of 130 crores (in fact more than that), one start-up per 1,00,000 people was started. Undoubtedly, India, as a country, has tremendous scope to improve this situation.

  1. A start-up can give you a source of earning
  2. You can be your boss
  3. Alongside, it can also employ many others

But we don’t do it!

When we retrospect and analyze the situation, common reasons for these are:

  1. The difficulty in getting funds
  2. Difficulty in establishing the firm
  3. We think the legal procedures are too many and too complicated

We just run away from start-ups with this mindset. Nevertheless, let’s discuss whether these reasons hold ground or are just the misconceptions that we have. 

We know you want to know “How to Start a Startup in India” but let’s start with its key definition.

What is a start-up?

A start-up is a young company, started by an entrepreneur or a group of entrepreneurs, which provides a unique product or service to the consumers.

Type of registrations for a profitable business

FeaturesPrivate Limited CompanyPublic Limited CompanyOne Person Company
DefinitionAccording to Section 2(68) of Companies Act, 2013, a Private Limited Company is a business entity that is held by a small group of people and is registered for pre-defined objects. It is owned by a set of members who are called shareholdersAccording to Section 2(68) of Companies Act, 2013, a company that has limited liability and offers shares to the general public qualifies to be a public limited company. Its stock can be acquired by anyone, either privately through Initial Public Offering or via trades on the stock market. It is required to publish its true financial health to its shareholders as wellAccording to Section 2(62) of Companies Act, a one-person company has only one person as the member. All other members of such company are subscribers to its MOA or its shareholders
Minimum members271
Minimum directors231
Maximum members200Unlimited1
Minimum capital1,00,0005,00,0001,00,000
Invitation to publicNoYesNo
Issue of prospectusNoYesNo
Quorum at AGM2 members5 membersNo AGM
Certificate for commencement of businessNoYesNo
The term used at the end of namePrivate limitedLimitedOPC
Managerial remunerationCan not exceed more than 11% of net profits for that financial yearCan not exceed more than 11% of net profits for that financial year<5%
Statutory meeting (mandatory)NoYesYes
Liability ResponsibilityThe Directors and Shareholders of a Private Limited Company are not personally liable for the liabilities of the CompanyThe buyers of those shares have limited liability. They cannot be held responsible for any business losses over the amount they paid for the sharesThe Director and Nominee Director of a One Person Company are not personally liable for the liabilities of the Company
RegistrationRegistered with the Ministry of Corporate Affairs under the Companies Act, 2013Registration is governed under the provisions of the Indian Companies Act, 2013Registered with the Ministry of Corporate Affairs under the Companies Act, 2013
Legal Status of EntityPrivate Limited Company is a separate legal entity registered under the Companies Act, 2013The public limited company is a separate legal entity, and each shareholder is a part of itOne Person Company is a separate legal entity registered under the Companies Act, 2013
Member(s) LiabilityShareholders have limited liability and are liable only to the extent of their share capitalShareholders have limited liability and are liable only to the extent of their share capitalDirector and Nominee Director have limited liability and is liable only to the extent of his/her share capital
Foreign OwnershipForeigners are allowed to invest in a Private Limited Company under the Automatic Approval route in most sectorsForeigners are allowed to invest in a Private Limited Company under the Automatic Approval route in most sectorsDirector and Nominee Director cannot be Foreigners
TransferabilityOwnership can be transferred by way of share transferThe securities or other interest of any member of a public company shall be freely transferableOwnership can be transferred
Existence or SurvivabilityIt does not depend on the Directors or Shareholders. It could be dissolved only voluntarily or by Regulatory AuthoritiesExists even after the death, retirement, or departure of the shareholders of the companyIt does not depend on the Director or Nominee Director. Could be dissolved only voluntarily or by Regulatory Authorities
TaxationPrivate Limited Company  profits are taxed at 30% plus surcharge and cess as applicableTax rate of 30% on the total income and surcharge of 5% if the income exceeds 10 Million plus 3% Education cess & Secondary and Higher Education cess on the total of income tax and surchargeOne Person Company profits are taxed at 30% plus surcharge and cess as applicable
Annual FilingsPrivate Limited Company must file Annual Accounts and Annual Return with the Registrar of Companies each year. Income Tax Return must also be filed for the Private Limited CompanyPublic Limited Company must file an annual return with the MCA every year. In addition to filing MCA annual return, companies must file income tax return tooOne Person Company must file Annual Accounts and Annual Return with the Registrar of Companies each year. Income Tax Return must also be filed for the One Person Company
FeaturesSole ProprietorshipPartnership FirmLimited Liability Partnership Firm
DefinitionThe term Sole Proprietorship refers to a person who owns the business and is the only one responsible for its debtsThe Indian Partnership Act, 1932, Section 4, defines partnership as “the relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all”LLP is a business organization in which some or all partners have limited liabilities (general partners still have unlimited personal liabilities) and each partner is not liable for another partner’s faults
Minimum members122
Minimum directorsDoes not have directorsDoes not have directorsDoes not have directors
Maximum members1100Unlimited
Minimum capitalNo minimum capitalNo minimum capitalNo minimum capital
Invitation to publicNoNoNo
Issue of prospectusNoNoNo
Quorum at AGMNot requiredNot requiredNot required
Certificate for commencement of businessNoNoNo
The term used at the end of nameAny trade name“and Company”, “and Co.” or “and Associates”LLP
Managerial remuneration<5%Any interest to any partner exceeding 12% disallowed
Statutory meeting (mandatory)NoYesNo
Liability ResponsibilityPromoter is personally liable for the liabilities of the ProprietorshipPromoters are personally liable for the liabilities of the partnershipThe partners of an LLP are not personally liable for the liabilities of the LLP
RegistrationHere is no formal registration for ProprietorshipPartnership can be registered or unregisteredRegistered with the Ministry of Corporate Affairs under the Limited Liability Partnership Act, 2008
Legal Status of EntityProprietorship is not recognized as a separate legal entityPartnership is not recognized as a separate legal entityLLP is a separate legal entity registered under the LLP Act, 2008
Member(s) LiabilityThe proprietor has unlimited liability and is responsible for all the liabilities of the ProprietorshipPartners have unlimited liability and are responsible for all the liabilities of the PartnershipPartners have limited liability and are liable only to the extent of their contribution to the LLP
Foreign OwnershipForeigners are not allowed to start a ProprietorshipForeigners are not allowed to start a PartnershipForeigners are allowed to invest in an LLP only with prior approval of Reserve Bank of India and Foreign Investment Promotion Board (FIPB) approval
TransferabilityNot transferableNot transferableOwnership can be transferred
Existence or SurvivabilityDepends on the ProprietorDepends on the Partners. Could be up for dissolution due to death of a PartnerIt does not depend on the Partners. Could be dissolved only voluntarily or by an Order of the Company Law Board
TaxationTaxed as an individual, based on the total income of the ProprietorPartnership profits are taxed at 30% plus surcharge and cess as applicableLLP profits are taxed at 30% plus surcharge and cess as applicable
Annual FilingsNo requirements to file an annual report with the Registrar of Companies. Income Tax Return must be filed based on the income of the ProprietorshipNo requirements to file an annual report with the Registrar of Companies. Income Tax Return must be filed for the PartnershipLLP must file Annual Statement of Accounts & Solvency and Annual Return with the Registrar each year. Income Tax Return must also be filed for the LLP

Which registration option is best for a startup?

It completely depends on your nature of business and also your founding team. However, startups and businesses which have higher growth aspirations and goals popularly choose “Private Company” as a suitable business structure.

How to register your startup?

The most important thing about “How to Start a Startup in India” is Registration. Let us discuss this in detail.

1. Sole Proprietorship

A sole proprietorship doesn’t require any specific registrations, it is advised to obtain a few registrations to make business function smoothly.

  1. Registering as SME

You can get yourself registered as Small and Medium Enterprise (SME) under the MSME Act. The application can be filed electronically. Although it isn’t compulsory to register as an SME, it is highly beneficial, especially at the time of taking loan for the business. The Government runs various schemes for SMEs where loans are provided at the concessional rate of interest.

  1. Shop and Establishment Act License

This license isn’t mandatory at all places. But it is required to be obtained as per the local laws. Municipal party issues are based on the number of employees.

  1. GST Registration

In case, your turnover is more than 40 lakhs then you have to go for GST registration.

2. Partnership Firm

Indian Partnership Act, 1932 governs the partnerships. Registration of a partnership firm is optional and at the discretion of the partners. Registration of a partnership firm may be done at any time – before starting a business or anytime during the continuation of the partnership.

It is always advisable to register the firm since a registered firm enjoys special rights that aren’t available to the unregistered firms. An application form along with fees is to be submitted to the Registrar of Firms of the State in which the firm is situated. The application has to be signed by all partners or their agents.

3. Private, Public, OPC, LLP

Refer to the images for the registration process. The same images can be checked at Startup India website.

LLP

Private Public OPC

How to differentiate your business as a startup

In addition to this, you need to differentiate your business as a start-up. For this, you need to register as a start-up at the Startup India website. It is a straightforward process and requires some primary documents. It has a few conditions as well to qualify as a startup.

  1. The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership
  2. Registration of the business should not be more than ten years old
  3. The maximum turnover per year should not be more than INR 100 crores
  4. The product/service provided by the start-up should be innovative

How to fund your startup?

We all want to know – How to Start a Startup in India? but we have found many of us are more interested to know – how to fund it? In our view, knowing about funding is very important but always have a focus to start and run on your own first.

Often in such matters, stress of accumulating enough funds and generating profit takes  a toll on our decisions. Do you know how to tackle financial stress?

The old saying ‘money makes more money’ holds in almost all cases. Most start-ups need a lump sum amount of money to get started. But, from where to get that money?

1. Own money

If you have your family backings, savings, or any other financially capable entity backing you, the issue doesn’t look big. But, what if, you don’t?

2. Government Encouragement

The best thing that has happened in the last few years is encouragement from the government to start-ups. It is evident from the fact that the Government has set up a fund with an initial corpus amount of INR 2,500 crore and a total corpus amount of INR 10,000 crore over four years. The fund is like ‘Fund of Funds’, which means that the Government will not invest directly into Start-ups, but shall do it via the capital of SEBI registered Venture Funds. Professionals manage the fund with LIC as a co-investor.

3. Other ways to get funded

1. Take Bank Loans

With a good credit score, you can take loans from trusted banks. Many of the nationalized and private banks offer various loan schemes to promote start-ups. Banks offer competitive interest rates.

But, these loans have a financial cap based on your credit score and financial assets. Keeping these restrictions in mind, you can always choose a bank to get started.

2. Partnership with suitable investor

If you can’t do it alone, get support! This approach is one of the constructive methods for getting funded. You can find a compatible, efficient and trustworthy partner who can invest in your start-up. Once your start-up gets going, you can pay back the amount.

3. Angel Investor

Angel investors are the real angels who can change your life for good!

These are the people who invest in a start-up with an aim much beyond getting monetary returns. Their interest lies in helping you to get going. For this purpose, they can also provide valuable advice, connect with industry experts.

Private Limited companies can search for angel investors through referrals, business contacts, start-up pitching platforms, open invitations, etc.

4. Venture-capital investor

Risks – Failure -Success – That’s how it works!

Venture capital investors are risk-takers. They invest in multiple risky projects. They hope that at least some of them will turn into Gold. You need to find such risk-takers and attract them with your unique idea.

5. Equity share

Share your risks and gains with the investors. Equity shares give the right to the investors to be part of all decisions related to the firm. Different types of equity shares are Authorized share capital, Issued share capital, Subscribed share capital, and Paid-up capital.

6. Incubation cells

Incubations cells help early-stage start-ups. They can help to get your company going. Once your company holds some ground, you can approach an accelerator. An accelerator can help your business to fly off high.

7. Crowdfunding

A sea needs a large number of different drops. Similarly, you can raise money from a large number of people in your circle of professional and non-professional.

Riding in the taxi of taxes

Running a company needs you to pay various taxes like:

1. Direct Tax

Income Tax, Capital Gains, Securities Transaction Tax, Prerequisite Tax, Dividend Distribution Tax, Fringe Benefit Tax and Minimum Alternative Tax

2. Indirect Tax

Goods and Service tax

3. Other taxes

Property Tax, Professional Tax, Entertainment Tax, Registration Fees, Stamp Duty, Transfer Tax, Education Tax, Entry Tax, Road Tax, and Toll Tax

However, the Government of India has given some liberty in terms of exemptions. 

So you have enough knowledge of how to start a Startup in India, registration process, taxes applied, etc. We can now discuss tax exemptions.

The tax exemptions for start-ups

1. The taxes start after three years

Starting from the financial year 2016-17, the Indian Government is providing tax rebates to start-ups. Start-ups can avail this rebate up to three consecutive years out of its first ten years since incorporation, given that it does not violate the conditions mentioned.

  • The entity should be a recognized Startup  
  • Out of all the registrations type, only Private limited or a Limited Liability Partnership is eligible for tax exemption under Section 80IAC
  • Last, the Startup should have been incorporated after 1st April 2016

This scheme excludes Minimum Alternate Tax (MAT) and the startup has to register itself at the Department of Industrial Policy and Promotion (DIPP).

2. Capital Gain Taxes

The tax levied on the profit or gain earned on selling capital assets is called capital gains tax. These gains are liable for tax. But, startups receive exemptions on 20% of capital gains.

3. Angel Investment tax

Angel tax in India is a unique tax where a startup has to pay a certain percentage of the angel investment they receive to the Government of India. This is applicable only if they get an investment higher than the Fair Market Value (FMV). The concept behind the tax levied is that the extra amount is an income and the receiver has to pay taxes according to the income tax laws.

The amendment of the Income Tax Act – Section 56(2) (vii) (b) has given entrepreneurs the chance to issue shares at a higher rate than the noted value helping them raise funds with more ease.

The process to start a startup in India appears to be easier than what it seems, right?

4. GST matters

While Indian businesses are reforming with the launch of Goods and Service Tax, it provides startups an advantage of its own. The GST regime allows the organizations with turnover under 40 lacs to skip GST registration. Most of the startups have turnovers between 5 lacs to 40 lacs.

Other benefits of startups

1. Don’t worry about long-term capital gains

Start-ups can invest the capital gains into Government notified funds. If start-ups invest this amount inside a period of six months, start-ups can avail tax exemptions through them. The maximum investment limit is INR 50 lacs. The start-ups need to invest this amount for three years. In the case of the broken investment, the start-up is liable for paying taxes in the year of breakage.

2. Not any tax for investments above-market fair

Investments made by resident angel investors, family or funds & investments made by incubators above fair market value get exempted for start-ups.

3. Case of a change in the Shareholding pattern

Eligible start-ups get relaxation in case of the restriction of holding 51 percent of voting rights to be remaining unchanged u/s 79.

If an individual or HUF sells a residential property and invests the capital gains to subscribe to the 50% or more equity shares of the eligible start-ups, then tax on long term capital will be exempt provided that such stocks are not sold or transferred within five years from the date of its acquisition.

Documents should be kept handy

Knowledge about “How to Start a Startup in India” is incomplete if you don’t have knowledge of required documents.

To prove authenticity and improvise a start-up portfolio, you need to create or provide certain documents at various stages. In case if you fail to upload stipulated documents, you can be fined up to 50% of business capital.

The documents are:

1. Letter of recommendation

You can generate a letter of recommendation from an incubation center (either government-funded or from a graduation college), letter of funding by investors or Government, patent filing details.

2. Start-up registration certificate

You need to provide the incorporation or registration certificate while applying for a start-up program.

3. Idea and Process brief

Keeping the idea and process brief handy will help you to pitch the start-up better.

4. Start-up Identity Number

Once you apply for start-up India, you will immediately receive a unique registration number. This number is an essential number like your Aadhar card number or Passport number. You can be fined up to 50% of business capital if you fail to upload stipulated documents, 

We hope, we covered most of how you should go about planning your startup. You, now have enough information about starting your startup in India. Do you have any further queries about “How to Start a Startup in India”? Just let us know and we would be happy to help!

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