Registration of Startup Companies in India: A Complete Legal and Practical Guide Evolution of Startups in India

Introduction

During the initial phases of the economic development of the nation of India, most of the companies were established in conventional forms like proprietorships or partnership firms or in terms of limited companies. However, with the advent of economic growth and technology-based business entities assuming greater prominence in the ecosystem, the Indian government understood the requirement to encourage innovation and entrepreneurship in the nation. To enable the above-said goal, various measures were introduced in the country’s policy framework. The Startup India Initiative is a result of efforts made by the Government of India, and it is a systematic attempt to foster a fantastic startup ecosystem in India. By this initiative, the startups are recognized, promoted, and encouraged so that they can help with economic growth, employment, and advancements in technologies. An essential part of this initiative is the registration of startups through the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce, and Industry.[i]

What Is Meant by a Startup under Indian Law

According to the DPIIT definition, a startup cannot be simply determined based upon its size or age. Rather, it is based upon its nature. According to DPIIT definition, a startup is an entity which is engaged in innovation, development, or improvement in products, services, or processes. It may also be considered to be a startup when it possesses a scalable business model with high employment or wealth generation potential. It is also important to note here that simply establishing a company does not mean it is a startup. In order to be treated as a startup, it is necessary to obtain DPIIT Startup Recognition. This is an important part of all rewards associated with Startup India.[ii]

Eligibility Criteria for Startup Registration

Eligible Forms of Business

If one wishes to be recognized as a startup or a startup entity, then a certain type of business entity only can apply. This can be a private limited company constituted under the Companies Act of 2013[iii]. Secondly, the applicant can be a partnership firm which is recognized under the Partnership Act of 1932.[iv] Lastly, one can be a limited liability partnership which is recognized under the LP Act of 2008.[v] However, a sole proprietorship or a partnership firm which is unregistered is not recognized or considered a startup. Also, the applicant or the recognized business entity shall not be more than ten years old from the date of its incorporation or registration. Moreover, the annual turnover of the entity shall not be greater than INR 100 crores at any point between its incorporation. Lastly, the recognized entity must be its original entity. Also, the business entity shall not be a split-up or reconstruction of any pre-existing business. That is, a business entity whose businesses are split or reconstructed is not a startup entity.[vi]

Innovation and Scalability Requirement

The enterprise must show innovation or improvement in the product, service, or process, or, alternatively, the enterprise must demonstrate that the business model itself is scalable and leads to large employment or wealth creation. Trading or service sector businesses, which do not involve any element of innovation, would not qualify for credits.

Importance of Proper Startup Documentation

Before applying for recognition of a startup, it is important that the core documentation of the entity is done in a correct manner. Documents like Memorandum of Association, Articles of Association, LLP Agreement, or Partnership Deed should clearly convey the innovative aspect, objectives, and ambit of the startup. If not drawn properly, it may lead to the rejection of recognition of the startup, even if it is innovative. It also avoids disputes among promoters and investors in future, scaling of which becomes a problem for startups.[vii]

Procedure for Startup Registration and DPIIT Recognition

Incorporation of the Business

The initial stage of the entire process is the legal incorporation or registration of the business. Depending on the nature of the business structure adopted, the business has to be incorporated with the Registrar of Companies or the Registrar of Firms. After the incorporation of the business, other statutory registrations such as PAN, GST (if applicable), and Digital Signature Certificates must be completed. [viii]

Registration on the Startup India Portal

After it is incorporated, it is necessary to register an account with the Startup India website. This enables it to benefit from learning facilities, mentor programs, incubations, government initiatives, as well as finances.

Application for DPIIT Startup Recognition

After making a Startup India profile, it is necessary for obtaining recognition from DPIIT through the National Single Window System. It is necessary for a startup to provide information for obtaining recognition, which includes date of incorporation, nature of business, industry sector, and a write-up saying why it is innovative or scalable. It has to make a self-declaration that it fulfills all conditions for eligibility. [ix]

Documents Required for Recognition

Some critical documents needed are the certificate of incorporation or registration and a detailed write-up on the kind of business activity and what is innovative about it. While not necessarily required, pitch decks, proofs of concept, or intellectual property may be useful in enhancing it. On submission and verification of documents, the DPIIT Recognition certificate is issued in a matter of a few working days. One of the most important advantages of recognition in a startup is that it lessens regulatory formalities to a great extent. Startups recognized under the act are permitted to self-certify satisfaction of six labor regulations and three environmental regulations. For labor regulations, there are no inspections required for five years if it is not a genuine complaint. For environmental regulations, if it belongs to white category industries, it is required to self-certify. Startups are then subject to random checks.[x]

Income Tax Exemption under Section 80-IAC

Section 80-IAC of the Income-tax Act, 1961[xi] provides an exclusive profit-linked tax exemption to approved start-ups in section 80-IAC. It states that all recognised start-ups are allowed a hundred percent tax exemption on their profit earned in each year out of the first ten years from the date of formation of the business in cases where the start-up has completed three years from the date of formation in respect to each assessment year. Thus, the provision provides flexibility to start-ups to allow exemption in those years in which they earn higher profit and make higher use of the exemption facility. The rationale behind introducing this provision is to enable start-ups to use their profit to increase business, R&D activities, or employment generations and prevent them from spending on taxation costs.

this exemption is not bestowed on every startup. In order for an entity to get exemption under Section 80-IAC, it first needs to be recognized by the DPIIT.[xii] Apart from recognition, approval from the Inter-Ministerial Board of Certification is required. The Board assesses whether there is substantial innovation in the development or improvement of a product, service, or process or if the model has a scalable business model with a high potential for employment generation or wealth creation.

The startup should maintain correct books of accounts, regularly file income tax returns, and comply with all audit-related requirements. Inability to conform with compliance matters may result in the removal of exemption from such tax.[xiii]

Angel Tax Exemption under Section 56(2)(viib)

Another key tax exemption available to DPIIT-recognized start-ups is an exemption from the ‘angel tax’ under Section 56(2)(viib) of the Income-tax Act.[xiv]In an ordinary case, there is taxation on the amount if excess consideration is received on issue of shares by a closely held company in excess of the fair market value of such shares. This was a major hindrance for start-ups, since early-stage investments are often made on the basis of an assessment of the future value of a business, rather than considering its present-day valuation. Recognizing this, the government granted ‘angel tax’ exemption to DPIIT-recognized start-ups. Once a business is recognized as a start-up by DPIIT, investments by resident investors in such businesses, including angel investors, will not be taxed even if issue price of its shares is more than its fair market value. Since only non-resident investments are still subject to the condition, this removes any uncertainty among investors and motivates them to fund early-stage businesses with no sword of higher tax incidence due to valuation premium over their heads. This will be important for a start-up functioning in areas concerning technology, innovation, or research, as valuations are inherently speculation in the early years. By protecting both startups and investors from adverse tax consequences, this provision strengthens India’s startup funding ecosystem.[xv]

Startup India Seed Fund Scheme

Arranging funding or funding at the right time is one of the biggest hurdles a startup faces. This is especially true when a startup is at the stage of its idea, proof of concepts, and prototype development. This is a point where the startup has little to no traction or revenue or assets to attract funding from both the private sector and the banking sector. Realizing the funding challenge faced by startups, the Government of India has come up with the “Startup India Seed Fund Scheme.” The scheme has a total financial outlay of 945 crores and is managed by DPIIT.[xvi] Its main aim is to provide financial support to a startup at a very nascent stage and help them develop prototypes and test their product proofs in the market.

Under the initiative, the funds are not directly provided to the startup by the government. Rather, the support services are channelled through approved incubators that are chosen and tracked by DPIIT. The incubators assess the startup for support, mentor them, offer infrastructure, and provide funds considering the startup’s progress. The financial assistance provided under the Seed Fund Scheme could be used for activities like product development, product testing, entering the market, obtaining regulatory clearance, and developing the startup. This initiative provides an essential bridge for startups by filling the existing financial gap during the seed stage, allowing the startups to develop into an investment-ready phase, thereby securing funds from angel investors, venture capital funds, or other institutional sources. Apart from the funding provided to the start-ups at the initial stage of development, various other funding opportunities are available to start-ups. Some of these are incubators and accelerators, angel investors, venture capital firms, government-backed funds, and industry-specific schemes. Every funding option has its own set of expectations and the level of control and involvement the funding option has with respect to the start-up.[xvii]

Post-Registration Compliance and Internal Governance

Although there are numerous advantages of registration and recognition of startups, it is imperative for startups to be aware of compliance and best practices for internal governance post-registration. Compliance with laws will help the startup retain benefits from the government and avoid fines and penalties. The compliance process for startup registration includes having proper accounts and maintaining compliance with income tax returns and GST, when applicable. Additionally, it is necessary for a startup to be in compliance with company law and LLP law. This compliance may entail annual filings and disclosures. Being in compliance not only validates a startup from a legal point of view but also enhances credibility before investors and regulatory bodies. Best practices for internal governance are highly integral for a startup’s long-term survival and viability. It is strongly recommended for founders and startup promoters to draw up proper and well-constructed co-founders’ agreements. Employment contracts, confidentiality agreements, and intellectual property assignment agreements are also critical for ensuring that the interests of the startup are protected. Such agreements would prevent any misuse of confidential information or any claim of ownership of intellectual property that has been created by consultants or employees during their term of engagement with the startup. Governance agreements would not only address any issues within, but would also add significant value to the startup itself.

Conclusion

Registration of startups in India has a legal intervention aimed at facilitating innovation and startup activities. This registration with DPIIT provides a basic support system for gaining benefits related to taxation, exemptions, funding, and intellectual property. The legal provisions under Section 80-IAC, along with the Startup India Seed Fund Scheme, help in establishing the financial stability of startups in their initial vulnerable phases. Thus, with good documentation and governance, the main focus remains on innovation, development, and the development of the Indian economic environment.

Author:– Advika Mattoo,  in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

[i] https://www.dpiit.gov.in/

[ii] https://www.startupindia.gov.in/content/sih/en/startupgov/startup_recognition_page.html

[iii] https://www.indiacode.nic.in/bitstream/123456789/2114/5/A2013-18.pdf

[iv] https://www.indiacode.nic.in/bitstream/123456789/19863/1/indian_partnership_act_1932.pdf

[v] https://www.indiacode.nic.in/bitstream/123456789/2023/1/A2009-06.pdf

[vi] https://www.startupindia.gov.in/content/sih/en/startup-scheme.html

[vii] https://www.nsws.gov.in/portal/approval-details/ministry-of-commerce-and-industry/dpiit/registration-as-a-startup

[viii] https://cleartax.in/s/7-steps-to-register-your-startup-in-startup-india

[ix] https://www.khuranaandkhurana.com/2025/01/29/dpiit-startup-registration

[x] https://livelaw-nlul.refread.com/law-firms/law-firm-articles-/startups-in-india-startup-compliance-make-in-india-aastha-abhya-atreus-law-firm-299539

[xi] https://incometaxindia.gov.in/Acts/Income-tax%20Act%2C%201961/2016/Others/section80iac.htm

[xii] https://www.startupindia.gov.in/content/sih/en/startupgov/startup_recognition_page.html

[xiii] https://cleartax.in/s/section-80iac-of-income-tax-act

[xiv] https://incometaxindia.gov.in/Acts/Income-tax%20Act,%201961/2014/102120000000037175.htm

[xv] https://www.khuranaandkhurana.com/2025/01/29/dpiit-startup-registration

[xvi] https://seedfund.startupindia.gov.in/aboutv

[xvii] https://www.startupindia.gov.in/content/sih/en/bloglist/blogs/startup-india-seed-fund-scheme.html

Author:

Advika Mattoo 

Intern – Khurana & Khurana