Startups: A Modern-Age Entrepreneurship
Author: Avnish Singh
University: Amity Law School, Amity University Chhattisgarh
‘Startup’ the word in itself defines its meaning; it is basically to get started with some idea or thought which something is innovative, new or creative which aims to benefits society, individual or government. Any business startup can be the future of India as now a day any idea can be taken to the highest extent if it has all the planning and preparations to implement it. With the idea to change, it is also essential for an individual to know, study and being aware of legal aspects that shall be required for a business to tag its legal incorporation and avoid all future challenges faced due to non-compliance of required statutes. Getting an idea is often but to implement it properly through all legal statues is challenging as many ideas to get flop due to improper layout and plan. No startup is small or large rather the thing which matters is the thought process and ability to make it a grand success. In this article, I have discussed the concept of the startup and its various aspects one should keep in mind while initiating of any such enterprise. There is a huge requirement for advancement in business laws so the startups get supported so that the founder can take it due advantage and is welcomed warmly by every authority with folding hands. As every leading enterprise was once a startup.
Human beings are milestones of creativity, innovations, and ideas, every human living on this planet has something innovative in their mind, and the only thing which is required is to give it a booster. Many are coming forward with their innovations but due to lack of financial support they put their thoughts down or postpone it and due to which some get outdated, even some postpone or drop their plan due to incomplete knowledge. The idea to do something innovative or make some startup is good but, what’s next? This is the toughest question or situation where one has a plan but to execute it he fails to establish resources, funds, backups and above all the refinery expert opinion which refines or refurbishes the scribbled idea into the frame and along with it help to comply with legal provisions. Nurturing a new startup and visualizing it as business includes many things. One who is stepping in new incorporation should know the basics of startup laws.
Indian Prime Minister in his Independence Day speech announced “Startup India” initiative in 2015. The foremost objective of this initiative was to make India a nation of “Job creators” instead of being a country of “Job Seekers”. It was observed that job ratio is low and one has to suffer a lot for employment, this initiative is mainly focused towards starting in India and providing the job opportunity. The main aim is to initiate in India is as many people in our country are having a marvelous plan to support in county growth, but only support and lifting up is required so that where they are lacking behind can cover up with the help of experts and with their individual growth can contribute in the growth of society and nation. Passionate entrepreneurs who are keenly focused towards building unique solutions that deliver customer delight make the startups successful. It is very important to have strong focus towards customer and market, as it very major aspect of starting any business to judge, study and evaluate the market and take the knowledge that your manufacturing purpose is similar to customers’ purpose. For becoming an entrepreneur it is very essential to have a crystal clear plans to implement in the market as per the market and customer requirement because to survive in the market one should give outstanding performance in/with their startups. Sometimes the idea seems to be innovative to self but the market seems to be completely unaware of such concept, in that very condition demand in the market is to be created or also it can be a scene that market is already demanding it but no such proper setup exists, like for example a concept of self-drive rental cars, motorcycles and scooters service is new for the market, but the demand was already in the market as many wants to hire vehicles which they can drive self. Many in the city find it difficult to arrange the vehicle for their assignments due to the unavailability of appropriate vehicles which might be suitable for their assignments in all sense like cars for longer travels, motorbikes for males and scooters for females. Such a concept is initiated by PEEPPEEP WHEELS as Startup in India to serve that particular market requirement.
With the strong focus towards the customer and the market, it is equally important to have a good understanding of basic laws, rules, and regulations that are essential to be complied with for the smooth running of the business. It is very much essential for an entrepreneur to get aware and updated with the latest legal provisions governing their business and market. The business which complies with all related legal sphere never has to face any non-compliance in future, as one has to go through various laws in relation to business incorporation right from its incorporation to its dissolution or winding up.
What is Startup?
The startup is living incorporation of a founder’s a dream/idea/thought; it basically represents the long journey from idea/concept to reality. The startup is such an opportunity when one can take something which is only termed as a dream and makes it a reality with the aim to provide benefit to society and nation. Such startups are initially funded by its founder scalable to provide the innovative types of products or services, employment at large scale, helps in creating wealth for an individual or society or government.
The appropriate definition of startups was given by the Department for Promotion of Industry and Internal trade in its notification. According to which, “a Startup is an entity:
- is into existence for upto 10 years from the date of its incorporation or registration. Provided such an entity is incorporated in India as a:
- Private Limited Company as per the Companies Act, 2013 or
- Partnership Firm as per the Partnership Act, 1932 or
- Limited Liability Partnership as per the Limited Liability Partnership Act, 2008
- That has a turnover that is not more than Rs 100 crores during any of the financial years since incorporation or registration,
- That is working towards innovation, development or improvement of products or services or processes. Or the entity has a scalable business model having a high potential of employment generation or wealth creation,
- Furthermore, an entity that is created by splitting or reconstructing an existing business unit is not considered a startup. Also, a business entity shall cease to exist as a startup:
- once it completes 10 years from the date of incorporation or registration and
- if its turnover for any of the previous financial years exceeds Rs. 100 crores.”
Startup business has to comply with the following definition to tag themselves as Startups and also to stand eligible for the Startup India benefits.
Benefits of Startup India Scheme
The list of benefits under this scheme is wider, for startups to be termed as entities it is essential to be recognized as a Startup by DPIIT to take benefits of the Startup India Scheme. This scheme mainly focuses on upheld the new players in the market who possess to have good/innovative concepts to help to smoothen the existing tough challenges. Startup India Schemes aims to provide the following benefits:
1. Self Certification under Environmental and Labor Laws
The list of applicable laws is provided under this scheme onto which Startups can self certify their compliance. Startups can take this benefit up to period of five years from the incorporation date of the entity. Such benefits are provided with the aim to lighten the regulatory burden so that the founder can focus on their core business objectives. Following are the laws under which relaxation is granted:
- The Water (Prevention & Control of Pollution) Act, 1974
- The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003
- The Air (Prevention & Control of Pollution) Act, 1981
- The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996
- The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
- The Payment of Gratuity Act, 1972
- The Contract Labour (Regulation and Abolition) Act, 1970
- The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
- The Employees’ State Insurance Act, 1948
2. Three Years Tax Exemptions
The startups being granted certificate from Inter-Ministerial Board which is setup by DIPP are exempted for consecutive years from income tax on the capital gain or profit earned. Such exemptions are given to facilitate startups so that they can well grow and can sustain funds for their initial years. This three years exemption counts from when the business has started filing Income Tax Returns for the taxable amount.
3. Exemption from Tax on Investment above Fair Market Value
If the startup is recognized by DIPP, under Section-56 of Income Tax Act, 1961 is granted exemption from tax if the aggregate amount of paid-up share premium and share capital of the very startup after issuing of proposed share, if any, does not exceed twenty-five crore rupees.
4. Protection against Intellectual Property
It is very much important for a Startup to protect and commercialize their IPRs, Startup India provides excellence services and resources for Startups.
- Established panel of experts to help filing of IP applications
- Cooperation from government to bear the facilitation costs
- Tracking patent application fast for startups
- Providing rebate of 50% in filing Trademarks for company
- Providing rebate of 80% in patents filing for company.
5. Relaxation in Public Procurement Norms
In order to enhance quality and meet all technical specifications all government departments of India, PSUs and ministries are authorized to ease norms with regards to public procurements. Thus, a new business or startup or incorporation can avail exemptions on earnest money deposits, prioritize turnover and experience government tenders’ requirements. Further to it, startups can list themselves as a seller on Government- Marketplace (GeM) E-Procurements portal.
6. Fund of Funds Commitments
Under this scheme government of India has set aside a corpus fund of Rs. 10,000 Crore which is to be utilized under this scheme by the innovation driven enterprise. This fund is completely managed by Small Industries Development Bank of India (SIDBI) and intended to assist for the development and growth by providing equity funding support.
7. Easily Winding Up
As easy is forming a company that easy is the winding up procedure. These Startups are also know as fast track firms, the procedure for winding up goes fast as compared to other companies. Where other companies take at least 180 days to wound up their startup companies can wound up within 90 days. Further to it, an insolvency expert shall be appointed for paying to the creditors and liquidating the assets of such company.
Eligibility for Startup India Scheme
Indian Prime Minister Narendra Modi announced the launching of the Startup India Scheme on the 16th day of January 2016 with the aim to promote startup business all across India. The enthusiasm in young entrepreneurs reached sky by this initiative, many willing to make a startup got wings of governmental support to take their dream ahead. It was a light of hope for the students and young entrepreneurs who were having the dream to make a startup while in their course of graduation. They felt secure that now their career with the support of government is smooth to achieve. The government published a notification on 17th February 2016 identifying the eligibility criteria for a company as a Startup to be complied with to get the benefits under this scheme, or else no eligibility no benefits applies. Below mentioned are the following eligibility criteria this scheme:
1. Must be either Private Company, LLP or Partnership Firm
Any startup to get advantage under this scheme must be incorporated either as a Private Limited Company under Indian Companies Act, 2013 or as Limited Liability Partnership Company under Indian Limited Liability Partnership Act, 2008 or as Partnership Firm under Indian Partnership Act,1932. This is a mandate that a startup is incorporated as a company under above-mentioned Acts to be eligible.
2. Must not be emerging from Existing
It is very much essential to note that such a startup shouldn’t be formed by splitting or reconstructing an already existing business or company. If incorporation is such, it will be disqualified from the benefits of the scheme.
3. Must not be more than 5 years
The benefits of this scheme is not just limited to newly establishing startups but is also extended to existing ones on a condition that all the startups that have been incorporated or registered prior five years from the date of initiation of policy, i.e. 16th February 2016
4. Annual Turnover is less than 25 Crores.
The annual turnover of such a startup or enterprise should not be more than 25 crores in any of the previous five years from the date it is incorporated or registered. The annual term as defined under the Companies Act, 2013 as the aggregate value of the amount realized from the supply of goods or provisions of services in a particular financial year.
5. Must be Entirely New Product or Service
It is the most essential pre-condition for startups to be eligible for the Startup India Scheme. That such incorporation or business must develop an entirely different and new kind of product or service, then only it would be recognized as a startup under this initiative.
Following conditions to be considered:
- The startup must be working towards innovation, development, deployment or commercialization of completely new products, processes or services, which is either driven by technology or intellectual property.
- Such a startup must clearly aim to develop and commercialize, a completely new product or service or a significantly improved version of existing product or service that will create or add additional value towards customers or towards workflow.
- Such startup must not engage merely in, developing products or services which do not have commercialization, undifferentiated potentials for products and/or services, product or services or processes with no or limited incremental value for customers or workflow.
6. Approval of Innovation from DIPP to be obtained
It is important for startups to get approval from the Inter-Ministerial Board set up by the Department of Industrial Policy and Promotion (DIPP), which comprises of Joint Sectary of DIPP, Department Representative of Biotechnology and Department Representative Science & Technology. It is a regulatory step established by the government to bring uniformity in the identification of the innovative nature of their startups. Every startup has to submit an application to the Inter-Ministerial Board (IBM) mandatorily for approval.
Following supporting documents have been identified specifically:
- Recommendation given from an incubator which is established in any Post Graduate College in India
- Recommendation from an incubator who is funded by the Government of India to promote innovation in regard to this scheme
- Recommendation from an incubator who is recognized by the Government of India.
- Letter of Equity Funding of at least 20% from an Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network who is registered with the Securities Exchange Board of India (SEBI). Any of these funds shouldn’t be listed in the negative funds issued by DIPP in future.
- Letter of funding from Central Government/State Government promotes innovation as a part of any policy.
Awareness of basic Startup Laws required:
Establishing a new business includes many things to be taken care of to avoid future hurdles in Startups. One should seek knowledge of basics laws that might be essential to be minded for business or startup while incorporation or in the future.
- Accounting and Taxation Laws
Every enterprise, business or any setup generating revenue has to pay taxes to the Central/State government or the local bodies authorized to collect so. Therefore, it is a necessity for every new entrepreneur to be aware of accounting details that have to be maintained in business and regarding which the amount taxable against it. It is always beneficial to maintain a proper and exact record of every single penny in accounts and revise them periodically to adopt best practices.
- Deciding Venture Type
The most important object before making the incorporation of a startup as a business or entity one should know what kind of organization you want to set up, whether it is a private limited company, public limited company, partnership firm or a limited liability partnership. One should analyze the practicality, sustainability and reoccurring profits which is expected from such type of organization and every single aspect of the company should be taken care of. There are different types of business, for which there is separate laws to be governed by and not complying to it means heavy fines.
- Labour Laws
Once the startup is incorporated and started functioning their comes the requirement to hire new people which will establish an employee-employer relationship and will be governed by labor law.
The best way to increase productivity and the ultimate success of a startup is to maintain healthy relationships and make them happy to work for you or else it could be the reason to spread negativity regarding the organization.
- Securities Laws
Knowing about securities laws which is regulated by the Securities and Exchange Board of India (SEBI) will definitely ease the process of listing startup and keeping the regular updates of various regulations issued by SEBI will assist at various stages for new ventures, even in raising funds. The new entrepreneurs must be aware of and keep updating regarding foreign direct investments, angel investors, venture capitals and joint ventures.
Seeking knowledge regarding corporate governance will boost new entrepreneurs to effectively manage the business and formulate future expansion plans.
- Information Technology Laws
This is the era of digitally empowered India in which every business is running its day to day activities like e-contracts, cloud computing digital signatures, securing confidential data, etc. In this era it is good to take advantage of all this and to take advantage, knowledge is required which will enhance in exploring and growing the ratio of the business.
- Contract laws necessity
In new business, many aspects of the company govern by Contract laws as it is the safest provision to regulate relations by law. It is beneficial to resolve future disputes occurring between the contracting parties, it is an agreement between two parties established by laws to agree upon certain terms and conditions regarding business. Therefore, basic knowledge regarding dispute settlement mechanisms like arbitration, mediation and conciliation can avoid the risk and help in business growth.
- Intellectual Property Laws
If the startup is having such a nature where there is a requirement of intellectual properties like filing patent/copyright/trademark regarding companies logo, title, process, invention, innovation or any such outcome of the company needs to be protected to provide/avoid using to others, it is good to be aware of Intellectual Property Laws, by this company will be legally safe from all aspects and it is the foremost requirement of a company to protect its intellectual property. All the IP audits should be reviewed and updated time to protect and maintain the intellectual stability of a business.
- Knowledge of government schemes/contracts
A successful enterprise always keeps on updating itself regarding several benefits of government schemes and contracts to know whether such a scheme is beneficial for them or not. Newly incorporated companies should keep a keen eye on such offerings from governments, as it would be definitely for them and get the solution for which they are wondering. Bidding for contracts of government can help them enhance growth, revenues and building reputation and goodwill. Smart enterprises always work with their resources and capitals and waits for the booster opportunity to enhance their growth.
Startup is a dream of the founder and the future of society. It is the reality of an idea in which the founder puts all his effort to make it a success and presents it as medium, opportunity or benefits for the requirements. The Startup India scheme is one of the best schemes initiated in the history of the Indian Government, as it has turned everyone’s attention towards youngsters and the person coming with innovative ideas to serve the nation. It is best because many students while in the final year of their graduation plan or get an idea to introduce an innovative business in the market which could blow everyone’s mind, about which something gets thoughts from studies and sometimes knowing about the market requirements while studying. It is sayings that whenever an idea hits to change the world, implement it before get outdated. The startup is such a thing that everyone desires to make their dream a reality and in their thought government has extended hands to lift them up if it founds innovative which is new to the market or can improve the ones already in existence. Individual who is willing to make a startup business should definitely take advantage of this scheme.
Startup India Scheme definitely benefits the eligible founder, further it directly provides benefits towards the society at large like creating job opportunity, supporting the market with innovative product or service, providing processes which improve existing product or service and many more. It is an initiative by one but beneficial for many. A founder fulfilling eligibility criteria for becoming beneficiary of this scheme should also take care of legal compliances regarding his startup as it is the foremost requirement of the incorporation. An entity established by-laws is an entity free from all risk occurring further in relation to legal compliance. As startup is a dream reality of founder he should always take care of its legal sphere and if he is not that knowledgeable to fix everything right he should get suggestion or help from experts, lawyers or any such person having knowledge of Corporate laws like Charted Accountant or Company Secretary who could suggest or mind the gap of legal compliance. Customers’ loyalty and trust also depend upon companies to be incorporated or registered as a legal entity. Legally established company is always reliable and trustworthy hence, startups should be incorporated under legal provisions of Indian Laws and should take due advantage of such schemes to enhance the growth ratio.