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A startup is a newly established business that aims to develop a unique product or service with the goal of scaling and growing quickly. These businesses are often established and run by entrepreneurs who have identified a gap in the market or an opportunity to disrupt an existing industry. The ultimate goal of a startup is to become successful and make a significant impact, this could be in terms of revenue, market share or societal change.

The Startup India Initiative, launched on January 16th, 2016, aims to support entrepreneurs, strengthen the startup ecosystem, and transform India into a nation of job creators rather than job seekers. Entities that meet certain criteria can be recognized as startups by the Department for Promotion of Industry and Internal Trade (DPIIT) and receive various benefits and compliance exemptions under the Startup India Initiative.

Incorporation of Startups:

As per the Startup India Scheme, startups must be incorporated as a Private Limited Company, Registered Partnership Firm, or Limited Liability Partnership (LLP) to be eligible for benefits and compliance exemptions.

The Private Limited Company structure is a popular choice for startups that are seeking funding, particularly from venture capitalists. It is preferred due to the limitation of the members' liability to their share in the capital. It is an appropriate option for entities that aim to raise capital from external sources and/or offer Employee Stock Ownership Plans (ESOPs) to employees.

On the other hand, startups that do not require initial funding may choose to incorporate as a Registered Partnership Firm or Limited Liability Partnership (LLP). These structures offer a low tax burden and fewer compliance requirements. LLPs are a suitable option for professional companies that operate as advisory businesses and do not require equity funding. LLPs offer a simple structure and limited liability.

Other Conditions for Recognition:

Entity Age: The entity should not be in operation for more than 10 years from the date of its incorporation. 

Annual Turnover: The entity's annual revenue should not have surpassed Rs. 100 crore in any financial year since its establishment.

Original Entity: The Entity should not have been formed by dividing or reorganizing an existing business.

Innovative & Scalable: A startup should focus on developing or enhancing a product, process, or service and have a business model that can be scaled and has a significant potential for wealth and job creation.

Benefits of Startups over other Entities:

Labour and Environmental Laws Compliance

To reduce regulatory burdens on startups and enable them to concentrate on their core operations, a simplified online procedure has been implemented which allows startups to self-certify compliance with six labour laws and three environmental laws. In regards to labour laws, startups will not be subject to inspections for a period of five years, unless a written and credible complaint of violation has been filed and approved by a senior officer. Regarding environmental laws, startups in the 'white category' as defined by the Central Pollution Control Board (CPCB) will be able to self-certify compliance, with only random inspections being conducted.

Patent & IPR Compliances

Innovation is crucial for startups to thrive. Startup patent applications will be prioritized for examination to allow for the realization of their value at an earlier time. Startups are eligible for a significant reduction in patent and trademark filing fees, receiving a rebate of 80% on patent applications and 50% on trademark filings in comparison to standard rates for other companies. Also, The Controller General of Patents, Designs, and Trademarks (CGPDTM) will establish a panel of facilitators who will be responsible for providing general intellectual property advice and information on protecting and promoting intellectual property in other countries. The government will cover the facilitation fee for any number of patents, trademarks, or designs filed by startups and startups will only need to pay the statutory fees.

Tax Benefits:

Income Tax holiday for 3 Years

As per the provisions of Section 80IAC of the Income Tax Act, startups are eligible for a tax exemption for a consecutive period of three financial years within their first ten years of incorporation. An application for this deduction can be submitted to DPIIT, as long as the annual revenue does not exceed Rs. 25 crores in any financial year.

Angel Tax Exemption

The Income Tax Act's Section 56(2)(viib) states that if a privately held company issues shares at a higher value than its market value, the difference is considered income for the company and is subject to tax and this is known as Angel Tax. However, startups that meet the criteria laid out in Notification No. GSR 127 (E) [F.NO.5 (4)/2018-SI], dated 19-2-2019, are exempt from this tax.

Tax Benefits on Investment in Startups under Section 54GB

Section 54GB of the Income Tax Act offers exemptions on capital gains from the sale of a residential property, provided that the proceeds are invested in equity shares of a startup firm. This provision was established to help individuals or Hindu Undivided Families (HUFs) in starting or establishing a business by allowing them to utilize the proceeds from the sale of a residential property.

Set off of Carry Forward Losses and Capital Gains

Carrying forward losses for eligible startups is permitted, provided that all shareholders who held shares with voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of the previous year in which the loss is to be carried forward.

Easy Winding Up Of Business

The Insolvency and Bankruptcy Code of 2016 allows for the efficient winding up of startups with simple debt structures or those meeting certain income criteria within 90 days of filing an insolvency application. An insolvency professional will be appointed to take charge of the company, including liquidation of assets and paying creditors within six months. The liquidator will be responsible for closing the business, selling assets, and repaying creditors according to the distribution waterfall of IBC. This process follows the principle of limited liability.

Easier Public Procurement Regulations

DPIIT approved startups in the manufacturing sector can register as sellers on Government e Marketplace (GeM) and sell their products and services to government entities directly. They are exempt from the "prior experience and turnover" criteria, while still maintaining quality standards and technical parameters. They must have their own manufacturing facility in India, and demonstrate capability to carry out the project. Additionally, they are also exempt from submitting an Earnest Money Deposit (EMD) or bid security when bidding on government tenders.

"Fundings to Startup"

Funding is a major challenge for entrepreneurs who are setting up a new business. It is essential for a startup to have enough capital to get their venture off the ground and to begin to scale up. There are various sources of funding available to startups, ranging from personal savings and investments to government grants and venture capital. One of the most common sources of funding for a startup is venture capital. This is money that is provided to a startup by investors in exchange for an equity stake in the company. This type of funding is usually only available to startups that have a good track record and an established customer base. Venture capital is typically used to finance the development of new products, services or technologies. Angel investors are another source of funding for startups. These are individuals who invest their own money into a startup in exchange for equity. Angel investors can provide a startup with much needed capital as well as mentorship and advice. Government grants are another option for startups. This type of funding is typically provided to startups that are working to develop innovative solutions to social problems or to stimulate economic growth in a particular region. Crowdfunding is also a popular option for startups. This involves raising money from a large number of individuals who are willing to invest in the startup. Crowdfunding platforms such as Kickstarter make it easy for entrepreneurs to reach a large number of potential investors. No matter which type of funding a startup chooses, it is important to understand the terms and conditions of the agreement and make sure that the startup is able to fulfill its obligations. With the right funding, a startup can achieve its goals and become a successful business.

Conclusion

India now has the world's third largest startup ecosystem after the US and China. Data from the StartupIndia website shows that as of January 2023, the country has more than 87,000 startups that have been officially recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). This rapid expansion of startups is expected to bring a range of benefits, including new innovations, job opportunities for young people, and a significant contribution to the growth of India's economy.

References:

https://www.startupindia.gov.in/content/sih/en/startup-scheme.html#1488109787526

https://taxguru.in/corporate-law/legal-compliances-start-ups-india.html

https://taxguru.in/income-tax/tax-benefits-startups.html

https://www.zeebiz.com/small-business/in-depth-whats-better-for-startups-a-private-limited-company-or-an-llp-2769