ALL ABOUT STARTUPS

When I look at Ocean, Mountains and Sky, I always wonder how the world came into existence and how it all started. When you Google the same, you get scientific results like “Big Bang Theory”, spiritual results like “Of course God created it”. Since I was not there at the start of the Universe, (or maybe I do not have memory of it), the answers given by Google does not seem convincing that how it all STARTED out of NOTHING!

However, if you have questions about STARTUPS and you want to get STARTED out of NOTHING, then here we go!

1.       History of Startups:

Ø  As cited in the Oxford English Dictionary (1989 edn) start-up, in the business sense, is first recorded in the year 1976.

Ø  In the year 2015, the Government of India came with an initiative of Startup India.

Ø  The campaign was first announced by Indian Prime Minister, during his 15 August 2015 address from the Red Fort, in New Delhi.

Ø  The event was inaugurated on 16 January 2016 by finance minister. Among the attendees were CEOs, startup founders and venture capitalists.

2.       What is a Startup?

In simple language, Startup means a newly established Business.

Startup Definition - As defined by Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry, Government of India

Startup means:

an entity, incorporated or registered in India :

Ø  Upto a period of seven years from the date of incorporation/registration or upto ten years in case of Startups in Biotechnology sector

Ø  As a private limited company or registered as a partnership firm or a limited liability partnership

Ø  With an annual turnover not exceeding Rs. 25 crore for any of the financial years since incorporation/registration

Ø  Working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

An entity shall cease to be a Startup:

Ø  On completion of seven years from the date of its incorporation/registration, ten years in case of Startups in Biotechnology sector, or

Ø  If its turnover for any previous year exceeds Rs. 25 crore

As at the end of April 2018, 9,041 Startups have been recognised out of which 1,053 startups were recognised last month and 287 in the current month. Further, 99 Startups have been funded by the Alternative Investment Funds (AIFs) and Fund of Funds for Startups (FFS).

Source: https://www.startupindia.gov.in/

3.       To whom this discussion is relevant?

Ø  Any person who wishes to start a business from scratch (No age limit – from teenagers to super senior citizens)

Ø  A salaried person who always dreams of having his own business

Ø  An already established Indian business wishing to start a new business (However, Startup benefits are not available to an entity formed through splitting up or reconstruction)

Ø  An NRI wishing to start a business in India

Ø  A Foreign Company wishing to enter into Indian Markets

4.       What Options do you have?

a)      Proprietorship Business

b)      HUF Business

c)       Partnership Firm

d)      LLP

e)      Company

5.       Which Option should you choose?

Proprietorship and HUF Businesses get the benefit of basic exemption under Income Tax Law. This form of Organisation is suitable for very small businesses. Partnership firm is also a traditional form of Organisation which is taxed at flat rate of income tax.

For modern businesses who aim to grow endlessly, one should form a Company or a Limited Liability Partnership.

Particulars	Partnership	LLP	Company
Registration	Registered under the Partnership Act, 1932 with Registrar of Firms (Not Compulsory)	Registered with the Ministry of Corporate Affairs under the Limited Liability Partnership Act, 2008	Registered with the Ministry of Corporate Affairs under the Companies Act, 2013
Legal Status of Entity	Not recognised as a separate legal entity and the partners are personally liable for the liabilities of the partnership	Separate legal entity registered under the LLP Act, 2008. Partners of a LLP are not personally liable for the liabilities of the LLP	Separate legal entity under the Companies Act, 2013. The Directors and Shareholders of a Private Limited Company are not personally liable for the liabilities of the Company
Charter Document	Partnership Deed	LLP Agreement	Memorandum and Articles of Association
Minimum Number of Members	Two	Two	Two for Pvt. Co. And Seven for Public Co. Even One Person Co. can be formed
Maximum Number of Members	Twenty	No Limit	Two Hundred for Pvt. Co. and No Limit for Public Co.
Existence or Survivability	Dependent on the Partners. Could be up for dissolution due to death of a Partner	Not dependent on the Partners. Could be dissolved only voluntarily or by an Order of the Company Law Board	Not dependent on the Directors or Shareholders. Could be dissolved only voluntarily or by Regulatory Authorities
Member(s) Liability	Unlimited liability and responsible for all the liabilities of the Partnership	Limited liability and liable only to the extent of their contribution to the LLP	Limited liability and liable only to the extent of their share capital
Fund Raising	Least trusted	More Trusted	Most trusted
Startup India Benefits	Available	Available	Available
Corporate Brand Identity	No	Yes	Yes
FDI	Difficult	Difficult	Easier
Tax Rates	Profits are taxed at 30% plus surcharge and cess as applicable No Divident Distribution Tax  (DDT) applicable	Profits are taxed at 30% plus surcharge and cess as applicable No Divident Distribution Tax  (DDT) applicable	Profits are taxed at 25%, 29% or 30% (as the case may be) plus surcharge and cess as applicable DDT @ 15% plus surcharge and cess
Taxability of Income for recipient member	Exempt u/s 10(2A)	Exempt u/s 10(2A)	Dividend is exempt for shareholders up to Rupees Ten Lakhs. Excess is taxed @ 10% of such Income
Benefits of Section 44AD	Available	Not Available	Not Available
Legal & Regulatory Compliances	Minimum	Moderate	Higher
Duration to incorporate	A week	One month subject to approvals	One month subject to approvals
Conversion to LLP	Possible	Not Applicable	Possible
Conversion to  Company	Possible	Possible	Not Applicable
Winding up procedure	Easier	Easier	Difficult

6.       Why one should register under Startup India?

Ø  Tax Benefits U/s 80-IAC, 56 and 54GB of the Income Tax Act, 1961 (Discussed in detail)

Ø  INR 10,000 Crore FFS through AIFs

Ø  INR 2,000 Crore Credit Guarantee Fund for Startups through National Credit Guarantee Trust Company / SIDBI over 4 years

Ø  Self-Certification and Compliance under Environmental and Labour Laws

Ø  Fast track Patent filings with upto 80% rebates

Ø  Fast track Public Procurement (Purchase of work, goods or services by Government from startups)

Ø  Easy Winding up within 90 days under Insolvency & Bankruptcy Code 2016

7.       Tax Benefits under Income Tax Act, 1961 to Startups

A.      U/s 80-IAC

Ø  100% deduction of profits derived from an eligible business by an eligible start-up.

Ø  Such benefit is available for any 3 consecutive assessment years out of 7 years at the option of the assessee. (Beginning from the year of incorporation).

Conditions to be fulfilled:

  (i) it is not formed by splitting up, or the reconstruction, of a business already in existence.

  (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Definitions:

(i) "eligible business" means a business carried out by an eligible start-up engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation.

(ii) "eligible start-up" means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions, namely:—

(a) it is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2021;

(b) the total turnover of its business does not exceed twenty-five crore rupees in the previous year relevant to the assessment year for which deduction is claimed; and

(c) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government.

B.      U/s 56

Ø  Income Tax is payable on amount received for issue of shares in excess of fair market value.

Ø  Above provision is not applicable to Angel Investors for Startups.

C.      U/s 54GB

Ø  Exemption available to an Individual / HUF for capital gain on sale of residential house property, if such person invests funds in eligible startup doing eligible business and uses such funds for purchase of new asset.

8.       Benefits under MSME Act:

A Micro, Small and Medium Enterprise is understood with respect to the investment made in the plant and machinery/equipment. The investment limit for each enterprise is as follows:

	Investment Limit (in INR)
	Plant and Machinery (if manufacturing or producing goods)	Equipment (if providing or rendering services)
Micro Enterprise	<= 25,00,000/-	<= 10,00,000
Small Enterprise	25,00,001/- to  5,00,00,000/-	10,00,001/- to 2,00,00,000/-
Medium Enterprise	5,00,00,001/- to 10,00,00,000/-	2,00,00,001/- to 5,00, 00,000/-

Few of the benefits available to MSME are:

Ø  Preference in procuring Government tenders.

Ø  Protection against the delay in payment from Buyers.

Ø  Right of interest on delayed payment.

Ø  Time-bound resolution of disputes with Buyers through conciliation & arbitration.

Ø  Likelihood of your business being sanctioned a Bank loan is high, and lower bank interest rates. There may also be preferential treatment in case of delay in repayment.

Ø  Tax Benefits as discussed above.

Ø  Subsidies from State Government on power, taxes and entry to state-run industrial estates.

Ø  The central government, from time to time, announces schemes to benefit MSMEs, such as the credit guarantee scheme.

Registration:

The Registration process of an MSME requires the filing of an Entrepreneurs Memorandum (“EM”) with the District Industries Centre (“DIC“) of the concerned area, after which, DIC shall issue an acknowledgment along with an EM number.

As a part of its recent initiatives, for the ease of registration of MSMEs, the Ministry vide Press Release dated 18th February 2016, has started Udyog Aadhar Memorandum which is an online registration system.

9.       Modes of Funding for Startups:

Ø  Bootstrapping (Self-funding)

Ø  Equity Funding

Ø  Crowdfunding

Ø  Angel Investors

Ø  Venture Capital

Ø  PE Investors

Ø  Business Incubators & Accelerators

Ø  Debt Funding

Ø  Bank Loans

Ø  NBFCs

Ø  Government Funding Programs

Ø  Issue of Debentures

Ø  For Short term – Trade Credit, Factoring and Discounting of Bills of Exchange

Ø  Bank overdrafts and Cash credits

Ø  Unsecured Loans from family and friends

10.   Future of Startups:

Predicting the future is an entertaining exercise, but we now have a real opportunity at creating it ourselves. Eric Schmidt, the former CEO of Google, said a few years ago “Just think what will happen when India's entrepreneurial innovators can create great global companies without leaving their country. They will change the world. Hundreds of large firms focused on the Internet will be founded and will succeed by focusing purely on Indian consumers, Indian taste, and Indian style, and one of them can ultimately become the next Google”.

11.   Who will do all these for you?

Team of Practicing Chartered Accountants.

12.    How a team of Chartered Accountants can help a Startup Business?

Ø  Team of CAs help startups to decide the best form of Organisation considering Strengths - Weaknesses - Opportunities - Threats (SWOT) of promoters of the startup.

Ø  Team of CAs incorporate the entity as decided above.

Ø  Team of CAs make application for various licenses & registrations required for the startup business, viz. PAN, TAN, GST Registration, Startup India registration, DIC registration and so on.

Ø  Team of CAs provide total accounting solutions for startups including implementation of accounting systems, preparation and finalization of books of accounts.

Ø  Team of CAs help to build a strong team for the startup alongwith advisory on payroll and HR management.

Ø  Team of CAs take care of all the legal and regulatory compliances of the startup under Income Tax, GST and Company Law.

Ø  The team of professional CAs draft various Legal Documents for startups to safeguard their startup business.

Ø  Stuck before entering into a transaction? Team of CAs provide Transaction Advisory Services.

Ø  Team of expert CAs help startups with Tax Advisory thereby optimizing tax and reduce litigations.

Ø  Received notices from Income Tax or GST Department? Team of CAs handle all the litigations.

Ø  Stuck with Funding? Team of CAs help you raise funds which suits your requirement.

Ø  Team of CAs conduct various Audits required under law and also which are not required under any law.

Ø  Team of expert CAs conduct Financial & Compliance Health Checkup for startup business.

Ø  Are you an NRI or a Foreign Entity wishing to enter Indian Market? Team of CAs have end to end solutions for you from scratch.

Ø  Need expert in a particular field? Eg. CS, Lawyers, Cost Accountants, etc – Team of CAs generally have tie ups with experts in various fields.

13.   After availing services of team of Chartered Accountants, What action remains for the startup business?

Ø  TO FOCUS ON CORE BUSINESS ACTIVITY ONLY.

Feel free to contact

CA Arun Valera

+91 9664456234

arun@shahvalera.in

www.shahvalera.in