What is a Startup

The most frequently used term in business news is “startups’ The startups are valued at so many billion dollars, startups are going for IPO, startups are funded by venture funds, startups get incentives, startups turn as unicorns, so on and so forth. What does a startup mean? Whether all newly started companies are startups? Or whether this animal has extra horns or corns? Let’s understand the basics here.

Startup – on common parlance

As all of us can make out, it is a company in the early stages of business, meaning just started. It is usually founded by young technocrats who want to develop a product or service which will disrupt the way the business is done to date. Mostly, the business revolves around mobile applications. To illustrate,

  • Booking tickets or hotels was a painful experience in the past (Ex: Makemytrip or BookMyShow solved it)
  • Delivering parcel from point A to point B was a nightmare (Ex: DUNZO solved it)
  • Did you imagine 2 idlis can be delivered at your doorstep (Ex: Swiggy solved it)
  • Paying the vendors, a complex process (Ex: Paytm or UPI solved it)
  • Getting lab tests was a horrible experience (Ex: PharmEasy solved it)

In short, a startup is a business model in which once the application is developed, it can reach millions of users, across the country or continents. Something that is scalable, done differently than the traditional way can be called a startup.

Startup – as defined under the Law

A company must meet the following criteria to be considered for Department for Promotion of Industry and Internal Trade (DPIIT) startup recognition –

  • Set up a legal entity in the form of a Private Limited Company, Limited Liability Partnership, or Registered Partnership Firm. (This means a sole proprietor entity can’t be recognized as a startup)
  • The entity should not have completed 10 years of existence. (The infant or startup stage of the company is birth to 10 years)
  • The entity should not have exceeded Rs.100 Crore’s sales/turnover (If it crosses, then it is considered as a grownup, not a startup)
  • The entity should work towards the development or improvement of a product, process, or service and/or have a scalable business model with high potential for the creation of wealth & employment.
  • We already run a business, can I split it into another company and get the benefit of startups? No. An entity should not be formed by splitting up or reconstructing an already existing business.

Startup as per Income Tax

For availing of income tax benefits, all the above points hold good, except the entity can be either a Private Limited Company or a Limited Liability Partnership (LLP).

My view Considering Startups offers ESOP to the employees; the Entity option narrows down to only a Private Company instead of a partnership firm or LLP. Want to start a startup? Go for Private Limited Company.

Well, what are the benefits available for a startup? How do they raise their funds? Where do they spend? Will they make money? When will they make money? I will try to cover all these points in parts, over sequel writeups.

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 25+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional and Registered Valuer (F&SA).Prasad welcomes your comments and questions. Please email him at simplifiedlaws20@gmail.com

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