FAQs

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A Start-up in common parlance, is an entity which has come into existence recently and starts an unestablished business with a novel idea of operation or products or services.

Legally, a Start-up is an entity recognized as ‘Start-up’ by the Government of India fitting into the specified parameters which are: –

  1. An entity shall be considered as a startup up to 7 years from the date of its incorporation or 10 years in case of Startups in the Bio Technology sector.

  2. Turnover should be less than INR 25 Crores in any of the previous financial years.

  3. The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership.

  4. The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.

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[su_spoiler title=”What exemptions or benefits* does a Start-up get if it gets registered as a Start-up with the government?” open=”no” style=”fancy” icon=”caret” anchor=”startup-exemptions”]

A Start-up gets the following exemptions if it is recognized and awarded a Certificate of Start-up by the Government of India: –

  1. Self-Certification for Compliance under 9 environmental & labour laws

  2. Tax exemption on capital gains and investment above fair market value

  3. Easy winding up of Company

  4. Fast-track Patent Application and Rebate

  5. Easier Public Procurement Norms

  6. Eligibility of receiving funding from SIDBI Fund of Funds

  7. Benefit of multiple Government Schemes and Networking on site.

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  1. What is a Start-up?

A Start-up in common parlance, is an entity which has come into existence recently and starts an unestablished business with a novel idea of operation or products or services.

Legally, a Start-up is an entity recognized as ‘Start-up’ by the Government of India fitting into the specified parameters which are: –

  1. An entity shall be considered as a startup up to 7 years from the date of its incorporation or 10 years in case of Startups in the Bio Technology sector.
  2. Turnover should be less than INR 25 Crores in any of the previous financial years.
  3. The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership.
  4. The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.
  5. What exemptions or benefits* does a Start-up get if it gets registered as a Start-up with the government?

A Start-up gets the following exemptions if it is recognized and awarded a Certificate of Start-up by the Government of India: –

  1. Self-Certification for Compliance under 9 environmental & labour laws
  2. Tax exemption on capital gains and investment above fair market value
  3. Easy winding up of Company
  4. Fast-track Patent Application and Rebate
  5. Easier Public Procurement Norms
  6. Eligibility of receiving funding from SIDBI Fund of Funds
  7. Benefit of multiple Government Schemes and Networking on site.

*Exemptions and benefits are updated by the government from time to time.

  1. What is the difference between a Partnership, an LLP and a Company?
PartnershipLLPCompany
Formed under Partnership Act, 1932Formed under the Limited Liability Partnership Act, 2008Formed under the Companies Act 1956/2013
Registration is not mandatoryRegistration is mandatoryRegistration is mandatory
Not a separate legal entitySeparate legal entitySeparate legal entity
The Charter document of a Partnership firm is the Partnership deed defining the rights, duties and liabilities of its partners and the business of the firmLLP’s Charter document is the LLP Agreement defining the rights, duties and liabilities of its partners and the business of the firmA Limited Company’s Charter documents are its Memorandum and Articles of Association defining the powers of a Company and entailing the rules and regulations governing the functioning of the Company.
Minimum 2 Partners Maximum 20 PartnersMinimum 2 Designated Partners. No Maximum limitIn case of Private Company – Minimum 2 and Maximum 200 members

 

In case of Public Company – Minimum 7 and No maximum limit

Personal Liability of PartnersLimited Liability of PartnersLimited Liability of Directors and Members
 A Partner’s rights are not transferrable. After the death of a partner, its family members cannot become a partner but can claim refund of contributionA Partner’s rights are not transferrable. After the death of a partner, its family members cannot become a partner but can claim refund of contributionShares are transferrable and after the death of a member, the shares can be transmitted to its legal heirs
Can be dissolved by mutual consentVoluntary or by NCLT orderVoluntary or by NCLT order
The Partners have the ownership of the properties of the Partnership and can be sued or sue third parties in their personal capacityThe LLP owns the properties in its own name as it is a separate legal entity and can sue or be sued in its own nameThe Company owns the properties in its own name as it is a separate legal entity and can sue or be sued in its own name
  1. What form of entity is required to be formed to start a new business? (Dropdown)

A new business can be started with any kind of entity, be it a Sole Proprietary firm, Partnership firm, LLP, or a Limited Company.

  1. Is it required to incorporate a Limited Company for getting investments?

If you wish to seek investments in the form of Share Capital, then incorporating a Limited Company is a must. Otherwise investments in the form of loan or contributions can also be invited for in LLP or Partnerships

  1. Can founders act as partners and form a partnership firm for starting a new business?

Yes founder can act as partners and form a partnership firm but it has to be a registered firm to be recognized as a Start-up

  1. What professional services does a Start-up require to set up and run its business?

A Start-up shall need professional services of a Company Secretary to abide by all the regulations and comply with all the procedural laws; a Chartered Accountant for auditing the financials and advise on taxation and a Lawyer may be required in case of obtaining any regulatory licenses, execution of agreements etc.

  1. What is the difference between Paid Up Capital and Authorized Capital?

The authorised capital of a company is the upper limit of share capital upto which shares can be issued by a company. Paid up share capital of a company is the amount paid up by shareholders against the shares which are issued to them. Paid up capital will always be less than or equal to the authorised capital as a company cannot issue shares above its upper limit i.e. the authorised capital.

  1. Is stamp duty payable on capital infusion at the time of Incorporation of a Company?

Yes. At the time of Incorporation of a Company, Stamp duty is payable to the State Government proportionate to the Authorized Capital fixed by the Company.

  1. Rates of Stamp duty for incorporation of Company
    Rates of Stamp duty vary according to state levied stamp duty rates. Please refer this document published by Ministry of Corporate Affairs regarding Stamp duty rates. These are subject to changes and updates by the MCA. Please confirm before taking any decision. http://www.mca.gov.in/MCA21/dca/efiling/eStamp_rate.pdf
  2. We are 5 founders of our new business? Can all of us act a Directors/Partners in the Company/LLP we are about to incorporate?

Yes, a Company can have as many as 15 directors on its Board without any shareholders’ approval. An LLP can also have as many partners as it wishes to have as there is no restriction in the law.

Minimum directors in a Private Company should be 2 and in a Public Company should 3. Minimum Partners/Designated Partners for LLP is 2 and now even a Single Individual can form a One Person Company.

  1. Are shares of a Company freely tradeable to anyone?

If the shares are that of a Private Company, the Board of Director has the right to restrict the free transfer of shares of its Company. In case of a Public Company the shares of the Company are freely transferable.

  1. Why is trademark important?

Trademark is a logo or picture depicting a Company’s brand image and is essential to distinguish the Company from its competitors doing similar kind of business. It improves the branding of the Company and disallows any other entity or person to use the same logo or picture giving it benefit of exclusivity

  1. What are the different modes of raising finance? (Dropdown)
  2. How can preference shares be a mode of raising finance How are preference shares different from equity shares?

Equity shareholders are ultimately the owners of the Company. They have a right to vote on each and every decision of the Company requiring shareholders’ approval. On the other hand, Preference shares have the right to vote only on matters affecting their rights but have a preference over equity shareholders in matters of dividend and liquidation.

  1. How can debentures be a mode of raising finance?

Debentures are a secure way of borrowing or loans. These are securities representing loans taken from individuals or bodies corporate and come with specific rules and restrictions which must be mandatorily abided by the Debenture issuing companies.

  1. How can Convertible Debentures be used for raising finance?

Convertible Debentures are instruments which are generally issued in form of debt and which can be converted to equity shares in the future pursuant to fulfilling of certain conditions. These can be optionally convertible at the choice of the investors or compulsorily convertible after the completion of a specified period or condition. This benefits the Start-up as no dividend has to be paid to the Investors and voting rights can be restricted. Modes of raising finance in an LLP

An LLP can raise finance either by way of accepting loans from banks, or individuals or by way of accepting contributions from individuals or bodies corporate to be admitted as partners in the LLP.

  1. Why is Valuation required? What are the types of Valuation?

In case of Startups, valuation is required to assess the value of a Business considering its growth prospects, market scope etc.. Typically, a Start-up needs Valuation for raising funds (read valuation for shares) as the investors invest in the Start-up as per the valuation  that determines the premium infused on funding. Types of Valuation are: –

  1. DCF Valuation
  2. Asset Method Valuation
  3. Earning based Valuation
  4. Why DCF Valuation is preferred for Start-ups?

DCF Valuation is preferred for Start-ups because other forms of Valuation like Asset or Profit based valuation are mostly irrelevant for a Start-up. A Start-up being a new business, there are less possibilities of any existing fixed assets in the possession of a Start-up as well there may be no profits to display.

  1. What do the critical legal terms in a Subscription Agreement mean? (Dropdown)
  2. What is Anti-Dilution clause?

Anti-dilution clause is generally offered to Investors to safeguard their interests in the Company in case the Company issues same class of securities at a lower price to new investors in the next round of funding. In such a scenario the Company is bound to issues additional shares to the Investor to compensate the investors.

  1. What is Tag along rights?

Tag along rights are beneficial to Investors mostly in cases where the Promoters/Founders are selling their shares to a third party then the Investors have the right to tag along and sell their shares as well to the same party in the same transaction.

  1. What are Drag along rights?

Drag along rights are usually given to majority investors. This right may be used in cases where the majority investors are selling their shares to third party and they need to sell minority shares as well to close the deal and hence they can force the minority shareholders to sell their shares to this third party.

  1. What is a Pre-emptive right?

A Pre-emptive right is given to existing investors/shareholders. This right puts an obligation on the Company to compulsorily offer them any securities in the future fund raising round first and, on their rejection, approach a third party for the issue.

  1. Can Investors appoint their representative on the Board? (Dropdown)

Yes. Investors can appoint their representative on the Board as a Director subject to mutually agreed terms between the investor and the founders.

  1. Who is a Board observer?

A Board observer is generally a representative of an Interested party involved with the Company on whose Board such observer is appointed. The observer is appointed to safeguard the interests of that Interested Party thereby observing all Management decisions and execution and providing 1st hand information to that part for analysis.

  1. Who is a Nominee Director?

A Nominee Director is a Director appointed on the Board of a Company representing a particular institution, body or group of individuals. Considering the stake of such an institution or persons in the Company, the nominee director represents the interest in the company and can take active participation in the decision-making process of the company to safeguard its interest.

  1. Do you really require a Fund raise? (Dropdown)
  2. Pre-requisites of a Fund Raise?

A Fund-raise must follow many procedural formalities to build the trust of the Investors which may include Valuation, Legal Due Diligence, Financial Due Diligence, Business Deck along with Projections etc.

  1. Should it be need based or long term?

Generally, for budding Start-ups who have not much traction to show and not a concrete roadmap should go for need based funding and try utilizing the same in the most optimum manner  to avoid any wastage and non-targeted use of funds. On the other hand, if a start-up is able to convince the investors with its product idea and has a consistent performance, then long term funding should be sought for huge market growth and expansion.

  1. What are the substantial shareholders rights in a Company?
  2. To receive dividend as declared by the Board
  3. To vote and get acquainted of all material facts of the Company