Incorporation FAQ

Most Indian VCs will only write a cheque into a Private Limited company. The Companies Act, 2013 lets you issue equity, preference shares, and ESOPs with clean cap-table records. An LLP cannot issue shares, so there is no standard way to take preferred stock, run an ESOP pool, or do a priced round.

LLPs are fine for services firms and bootstrapped businesses. The moment you want institutional capital, convert (or incorporate) as a Pvt Ltd. Investors also prefer the governance, annual filings, and limited-liability structure that companies already have.

If you are still exploring, start with the entity you can actually operate — then convert before a priced round, not after term sheets are on the table.

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DPIIT recognition (under Startup India) is a certificate that your company is an eligible startup: incorporated as a Pvt Ltd, LLP, or OPC, under 10 years old, turnover under ₹100 crore, and working on innovation, improvement, or scalable business.

It unlocks practical benefits: easier public procurement, faster IP filing support, self-certification on some labour and environment laws, and access to schemes such as SISFS. Tax holidays under Section 80-IAC still need a separate Inter-Ministerial Board approval — recognition alone is not the tax exemption.

Apply on the Startup India portal with your Certificate of Incorporation, PAN, and a short description of what is innovative about the product. Keep the certificate; banks, accelerators, and some state policies will ask for it.

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You must register for GST if any of these apply:

• Goods: aggregate turnover exceeds ₹40 lakh (₹20 lakh in some special-category states)
• Services: aggregate turnover exceeds ₹20 lakh (₹10 lakh in some special-category states)
• You make inter-state taxable supplies (with limited exceptions)
• You sell through an e-commerce operator that is required to collect TCS
• You are liable under reverse charge or other notified cases

Turnover is counted across India, not per GSTIN. Many early SaaS and agency founders register earlier than the threshold so they can issue tax invoices to GST-registered customers who want input credit.

Registration is on the GST portal. After that you file returns on the prescribed cycle (typically GSTR-1 and GSTR-3B). Missing filings attract late fees quickly — treat compliance as a monthly habit, not a year-end task.

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ESOPs are usually taxed at two points:

1. Exercise — the gap between fair market value and the exercise price is taxed as a perquisite under salary.
2. Sale — any further gain is capital gains (holding period starts from the exercise date).

For eligible DPIIT-recognised startups, employees can defer the perquisite tax until the earliest of: leaving the company, selling the shares, or 48 months from the end of the exercise-year. The company still has to report this correctly in payroll and withhold when the deferral ends.

Grant and vesting themselves are generally not taxable. Get a valuation and a written ESOP plan before you promise options — informal “you’ll get 1%” emails create disputes and tax mess later.

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Yes, in many sectors — 100% FDI is allowed in LLPs under the automatic route where 100% FDI is already allowed for companies and there are no performance-linked conditions. Pricing, reporting (including Form LLP and RBI filings), and FEMA rules still apply.

In practice, most foreign funds still prefer a Private Limited company. Share classes, liquidation preference, and secondary sales are simpler. Some sectors (and any approval-route case) cannot take FDI into an LLP at all.

If a foreign angel or fund is likely, incorporate as a Pvt Ltd from day one. Converting an LLP later is possible but slower than starting with the right entity.

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SISFS gives early-stage money through government-selected incubators — not directly from a central portal to your bank account. Typical support is up to ₹20 lakh for proof of concept, prototype, or product trials, and up to ₹50 lakh for market entry, commercialisation, or scaling, depending on the incubator’s mandate.

You apply to a participating incubator. They diligence the idea, then disburse in tranches against milestones. DPIIT recognition and a real prototype (or a tight plan for one) help. This is grant-style / incubator funding, not a substitute for a priced VC round.

Check the current incubator list on the Startup India site — the roster changes, and each incubator runs its own application window.

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Yes. An OPC is a company under the Companies Act. A statutory audit by a practising Chartered Accountant is mandatory every year, even if revenue is nil.

You also file AOC-4 (financials), MGT-7A (annual return), and income tax returns. Board meetings have lighter rules than a multi-shareholder Pvt Ltd, but ROC filings do not disappear.

An OPC is useful when you want limited liability and a corporate bank account without a co-founder. It is a poor fit if you need investors soon — conversion to a private limited with multiple shareholders is an extra step.

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No. You and the proprietorship are the same legal person. Business debt, GST notices, and lawsuits land on you personally. There is no share capital, no ROC filing, and no limited liability.

That simplicity is why many people start here: a current account, GST if needed, Udyam if useful, and you are trading. The trade-off is personal risk and a structure investors will not fund.

Move to an LLP or Pvt Ltd before you take serious vendor credit, hire at scale, or raise outside money. Keep the same brand; change the legal wrapper.

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Angel tax (the old Section 56(2)(viib) charge on share premiums above a “fair” value) has been abolished for shares issued from 1 April 2024. Resident and non-resident investments into Indian companies are no longer hit by that specific provision.

You still need a clean valuation for FEMA (if any non-resident is on the cap table), for income-tax documentation, and for your own board. Share-subscription agreements, PAS-3 filings, and bank receipt trails remain mandatory.

Treat “angel tax is gone” as “one famous headache is gone,” not “fundraising has no tax paperwork.”

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Use this as a default map, not legal advice:

• Sole prop / Partnership — testing a service, no outside capital, you want minimum cost.
• LLP — two or more partners, professional firm, limited liability, no plan to issue ESOPs or raise VC.
• OPC — one founder, want a company and limited liability, no co-founder or investor yet.
• Pvt Limited — you will hire, offer ESOPs, raise angels/VCs, or build a product company.

A Pvt Ltd needs at least two directors and can start with two shareholders (they can be the same people). Compliance is heavier (board meetings, auditor, ROC). That cost is usually worth it if a priced round is even a 12-month possibility.

You can convert later. Conversion takes months and professional fees — cheaper than rebuilding a cap table after a messy LLP raise.

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The usual MCA path looks like this:

1. Get DSC (digital signature) for directors and a DIN if they do not already have one.
2. Run a name check and file SPICe+ Part A (name reservation). Keep a few backups; trademark conflicts get rejected.
3. File SPICe+ Part B with MOA, AOA, registered office proof, and identity/address KYC. PAN, TAN, EPFO, ESIC, and optional GST/bank/EPFO can be bundled.
4. Receive the Certificate of Incorporation. Open a current account, issue share certificates, and deposit share capital.

Most first-time founders use a CA or company-secretary firm. Budget professional fees plus government fees, and keep the registered office address real — virtual offices are common but must satisfy MCA documentation.

After incorporation: first board meeting, appointment of auditor, and statutory registers. Skipping those is how “we incorporated last year” turns into a due-diligence failure.

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A short first-year list that catches most new companies:

• Board meetings — at least four in a calendar year, with a gap of not more than 120 days (small-company relaxations may apply; confirm with your CS).
• First auditor appointment and statutory audit.
• AOC-4 and MGT-7/7A with the ROC after the AGM.
• Income tax return and, if applicable, tax audit.
• GST, TDS, PF/ESI if you have crossed those thresholds.
• Share certificates, register of members, and deposit of subscription money.
• Beneficial ownership (SBO) and DIR-3 KYC for directors.

Put reminders on a calendar the week you incorporate. Late ROC filings are cheap compared with compounding later, but they look sloppy to investors.

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Yes. Both conversions are provided for in company law.

• OPC → Pvt Ltd happens when you add a second shareholder and follow the conversion process, or mandatorily if you cross the paid-up capital / turnover triggers. You file the prescribed forms with MCA and adopt new AOA.
• LLP → company is a conversion under the Companies Act: valuation, partner consents, creditor checks, and a set of MCA filings. Assets, contracts, and GST registrations need a clean handover.

Plan 6–12 weeks and professional help. Convert before a priced round so the subscription agreement is into the company investors actually want. Do not raise on an LLP “and fix it later” unless the investor has already agreed to that timeline in writing.

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Udyam is the government registration for Micro, Small, and Medium Enterprises. It is free, Aadhaar-based, and done on the Udyam portal. Classification now uses investment in plant & machinery and turnover.

Why founders bother: easier collateral-free loan schemes, preference in some public tenders, delayed-payment protection, and a document banks keep asking for. It does not replace incorporation, GST, or DPIIT recognition.

Register once you have a PAN and are actually trading. Keep the classification honest — overstating turnover to look bigger can lock you out of “micro” benefits you actually wanted.

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Government fees depend on authorised capital and state (stamp duty on MOA/AOA). For a simple two-director company with modest capital, MCA + stamp duty is often in the low thousands of rupees, not lakhs.

What founders actually pay is professional fees on top: CA or company-secretary charges for SPICe+, DSC, PAN/TAN, and a registered-office package. A straightforward incorporation commonly lands in a ₹5,000–₹15,000 band from a good firm; rush jobs, foreign directors, or trademark work cost more.

After incorporation, budget the first-year run-rate: auditor, ROC filings, bookkeeping, and GST if you register. That recurring cost is why people start as a sole prop when they are only testing. If you know you will raise or hire, pay for the Pvt Ltd once and do it cleanly.

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Yes, with conditions. A Private Limited company needs at least one director who is a resident in India (182+ days in the previous calendar year). An NRI can be a co-founder, shareholder, and additional director. A company with only foreign directors will not sail through MCA.

Shareholding by NRIs and foreign nationals is FDI. Most software and product startups fall under the automatic route at 100%, but you must follow FEMA pricing, reporting (including FC-GPR after allotment), and sector caps. Some sectors need approval.

KYC is heavier: passport, overseas address proof, and notarised / apostilled documents are common. DIN and DSC still apply. Talk to a CA who does FEMA before you allot shares — fixing a wrong allotment is slower than incorporating correctly.

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