What are the Practical and legal challenges faced by startups in India?
Before delving into discovering the practical and legal challenges startups face, there is a need to understand the term and concept of a ‘Start-Up.’ As per the Department for Promotion of industry and Internal Trade (DPIIT), MOCI, under its Start-up India Scheme, a startup is an entity that has the following salient features:
- Since incorporation, the entity’s turnover should not exceed INR 100 crores in any FY.
- The entity should be registered as a Private Limited Co. or Registered Partnership or Limited Liability Partnership (LLP).
- The entity’s period of existence and operations should not be more than ten years from the Date of Incorporation.
- The formation of the entity should be original i.e., it should not have been split up or reconstructed out of an already existing business.
- The entity should work towards innovation, development or improvement of products or processes or services, employment generation, or wealth creation.
What is the Relevance of a Startup in the Present Scenario?
There were times when having your own business was primary, then the economy shifted to the service sector as it offered stability and lower risks. However, the pandemic has taught the importance of one’s venture and gave a craving for independence to the country’s youth.
Further, creating employment has become the primary concern of the nation’s economy. As a result, today’s nation needs more employment generators and more innovation, which only startups and their founders can make come true.
Moreover, the Central Government has introduced various startup schemes, though not to much success. Despite the government’s support and the zeal for budding entrepreneurs –
Why do Most Startups Fail?
The answer lies in the topic of this blog – Various Practical and Legal challenges faced by startups. This blog will highlight the most pertinent challenges as follows:
Major Practical and Legal Challenges Startups face:
- Should I incorporate a company or register as proprietor?
One of the significant practical challenges is the business entity’s registration, which requires the founder to decide on the organization’s structure.
The law recognizes specific structures for an organization, namely, Sole Proprietorship Firm, Partnership Firm, Limited Liability Partnership Firm (LLP), and Company (Private, Public, One Person Company, Charitable, etc.). Hence, your business entity must register itself under one of these categories.
Most startups end up registering as a ‘Company’ right at the beginning, and a company has substantial compliance costs. Founders are usually unaware of other organization structure options available with less compliance cost. Moreover, any defect in the registration and documentation could lead to unfavorable consequences later when the business has bloomed.
- Do I need any Licenses or Registrations under any law?
Startups are ideas coming to reality. There are 100s of matters to look into that one generally forgets that their entity may need industry related licensing as well. For instance, a trader needs a registration under the ‘Shops and Establishment Act,’ A supplier also requires registration under ‘GST’ based on the turnover threshold, so on and so forth.
Depending on the type of business you enter into, different licenses are required. A loose end in this department generally leads to litigation difficulties later on.
- Are there any Exemptions in Income Tax for Start-ups?
Most startup ventures are unaware that you are free from paying income tax for three consecutive years under Section 80IAC of the Income Tax Act like a startup company.
Furthermore, startups can also avail themselves of the Angel Tax Exemption under section 56(2)(viib) of the Income Tax Act 1961, once the entity qualifies and meets the requirements laid down under the provision.
Please note applications for these exemptions must be made separately as they have varied eligibility criteria.
- Are there any other benefits under Start-up India Scheme?
Suppose you qualify for recognition as a startup (as mentioned above). In that case, you can register your entity as a STARTUP with DPIIT and avail various benefits available for startups, including the above income tax benefits and many other benefits like self-certifications, compliances, government tenders, etc.
However, please note every such benefit has separate eligibility criteria and application forms.
- Does a startup need registration as MSME?
A startup may register as an MSME if the eligibility conditions under the MSME Scheme are met. A startup can simultaneously be registered as an MSME and can reap the benefits under the scheme.
- What compliances apply to Startups?
Just like any other business entity, income tax compliances, GST compliances, Company Law compliances (in some cases), Indian Penal Code, and other law compliances specific to the industry (like FSSA for the food industry or Banking Regulation Act on Banking Industry, etc.) are duly applicable on a Start-up. However, while carving the business model of the Startup, one forgets to carve the compliance model of the Startup. It is one of the most common mistakes made by start-ups.
- Should I engage a CEO/CFO? Where to get the budget to hire a CEO/CFO?
Startups need the guidance of experts who have been CEOs and CFOs in the industry or professionals with years of experience working with various industries. However, most startups don’t have the budget to engage such an expert.
Gone are the days of having full-time CEOs and CFOs. Now it is time for Virtual CEOs, CFOs, and other management executives to consult the startups on their functioning, model, processes, compliances, taxation, etc., when required, and that also virtually from any corner of the globe.
Conclusion of the Startup Story
The startup story in India had, is, and will be witnessing hurdles. Whether in terms of economic backing or compliance issues, the struggle is real for startups to operate within India. However, irrespective of the challenges, the youth of India still have their minds flooded with innovation, creativity, and whatnot.
If you also have a new idea in your mind, don’t be afraid to bring it into reality. MASTER BRAINS’ EXPERTS have experience in various industries and have worked with many startups. They can provide you with vivid end-to-end guidance in planning and executing your Startup. They can enable you to overcome not just the significant challenges detailed above but any other hassles you are facing in FINANCE, TAX, and LAW.
Reach out to us today by sending you a query at https://masterbrains.co.in/client-registration/
Whatsapp us at +91-8595867402.