Startups in India: A Founder’s Guide to Structure, Funding, Tax & Compliance

CA Vijay R Singh, FCA·A Founder’s Guide·14 min read·Updated 16-Jun-2026

Building a startup in India means making a long string of decisions before you make any money — what structure to use, how to raise, how to keep control and your cap table clean, how to pay your team and yourself, how to stay on the right side of the ROC, the income-tax department and the RBI, and — if it comes to it — how to close down without leaving a mess behind.

This is the map. Each step below is a real decision you’ll face as a founder, in roughly the order you’ll face it. Read it top to bottom for the whole journey, or jump to the part you’re at — every step links to the full deep-dive when you need more.

STEP 01Choosing your structure

Before anything else: Pvt Ltd or LLP? The honest answer comes down to one question — are you going to raise equity or issue ESOPs? If yes, you need a Private Limited company; investors and ESOPs simply don’t fit an LLP. If you’re bootstrapped and owner-run, an LLP is lighter and cheaper. Get this right on day one, because unwinding it later is expensive.

Should a holding company sit on top?

A question that comes up early, usually from a well-meaning adviser: should you own your startup through a holding company “to save tax on exit”? For most founders, on the exit-tax question, the answer is no — owning directly is taxed once at 12.5%, while a holdco adds a second slab-rate layer when you pull the money out. A holding company genuinely earns its place for deferral (reinvesting without the second layer), running several businesses under one roof, and clean succession — not as a magic lower rate.

STEP 02Recognition & the tax breaks

Once you’re a Private Limited company, DPIIT recognition opens the door to real benefits — the Section 80-IAC tax holiday (a 100% deduction of profits for any three years in your first ten) and relief from angel tax. Not every startup qualifies for the holiday, but it’s worth knowing exactly what’s on the table before you assume you do, or don’t.

The 22% rate — and why timing it matters

There’s also a flat 22% corporate tax rate (Section 115BAA) a company can elect, against the 30% headline. It looks like an obvious win — but for a startup it’s a trap if taken at the wrong time: electing 22% means giving up the 80-IAC holiday, and the choice is irreversible. The smart sequence is to use your holiday first, then switch to the 22% rate for the steady years that follow.

Angel tax is gone — but valuation isn’t

The tax that punished ambition for a decade — angel tax — has been abolished. Raising above a notional “fair value” no longer triggers a charge on the company. Just don’t read that as “valuation no longer matters”: Section 68 (where your investor’s money came from), FEMA pricing for foreign investors, and the rules on shares issued below value all survive untouched.

STEP 03Raising money

When you raise, four things matter — the process, the instrument, the source, and your control. Each has its own pitfalls:

What a round can quietly do to your losses

There’s a trap inside the round itself. Your early losses are a tax asset — they cut your bill once you turn profitable. But if a funding round shifts more than half your ownership, the law can cancel those carried-forward losses. DPIIT-recognised startups get a shield, and the nuance catches people out: fresh shares to new investors are usually fine, but a full secondary exit by an early backer can break it.

Should you “flip” to the US?

Some startups go further and “flip” — putting a US (Delaware) parent on top to court US investors and raise in dollars. It is no longer the default it once was. The flip carries real Indian tax and FEMA costs, and the biggest names — PhonePe, Groww, Razorpay — are now paying hundreds of crores to reverse it and come home for an Indian IPO. Worth understanding before you copy the playbook.

STEP 04Equity, ESOPs & your cap table

Before you grant a single share, get your cap table and founder vesting right. Reverse vesting (the market standard is four years with a one-year cliff) lets the company reclaim equity if a co-founder leaves early, and a clean cap table is the first thing an investor checks in due diligence. But equity carries tax traps in your own shares: cheap shares are taxed in the receiver’s hands (Section 56(2)(x)), and sweat equity is taxed as salary the moment it’s allotted — so price every issue and transfer at a registered-valuer fair value.

ESOPs for your team

Equity is how startups hire above their weight. But ESOPs are taxed at two moments — at exercise and at sale — and the timing is where it catches people out, especially the “dry income” tax bill at exercise. Set the pool and the communication up before you grant, not after the surprise.

How should you pay yourself?

And what about your money? Salary, dividend, a loan from the company, or equity — each is taxed very differently, and the cheapest route on paper is rarely the cheapest after tax. The director’s loan in particular is an outright trap (a deemed dividend), while building wealth in equity and realising it as a long-term capital gain is the quiet winner.

STEP 05Tax in the running business

Once you’re trading, two everyday taxes catch founders out. The first is GST on exports. If you sell software or services to customers abroad, it’s usually a zero-rated export — you charge 0%, and with a Letter of Undertaking on file you can even claim back the GST you paid on your costs. Many founders either add 18% they don’t owe to a foreign invoice, or never claim the refund they’re due.

The TDS that quietly piles up

The second is TDS — the bills that build up in year one that aren’t invoices at all. Rent, contractors, professional fees, a brand-new partner-payment rule for LLPs, and foreign vendors all need tax deducted and deposited on time. Miss it and you face interest, a per-day late fee, and — the real sting — up to 30% of the expense disallowed.

STEP 06Staying compliant

A Private Limited company carries a steady compliance load from day one — annual ROC filings, a statutory audit every year, board meetings, director KYC, and the per-day penalties that follow if you miss them. None of it is hard; all of it has deadlines:

And when filing season arrives, your personal return has its own traps — founder income is rarely just a salary, and classification mistakes are exactly what assessments reopen.

• Essential compliances every startup must follow →
• The annual compliance calendar →
• The Founder’s ITR — 10 tax traps founders miss at filing time →

STEP 07Winding down

Not every startup works, and how you close matters as much as how you started. The worst move is the obvious one — stop filing and walk away. The company stays alive on the register, the ₹100-a-day penalties keep running, and three years of non-filing can disqualify you as a director of any company for five years. Close it actively instead.

There are clean exits for every situation: strike-off for an empty shell with no assets or liabilities, voluntary liquidation if there’s money or obligations to settle, or dormant status if you might revive the idea later. Picking the right one — and handling the tax on closure — is what keeps a wind-down from following you around.

STEP 08Where a CA fits in

The registered-valuer valuations, the FC-GPR and FLA filings, the board and shareholder resolutions, the irreversible tax elections, and the unforgiving deadlines — these are the parts worth handing off. If you’d like a hand with the setup, the funding compliance or the ongoing filings, that’s exactly what we do for startups and growing businesses across India.

• CA services for startups & SMEs →
• Browse 500+ tax & compliance answers in our Q&A hub →
• About CA Vijay R Singh & the firm →

This guide is for general information and isn’t legal or tax advice. Rates, limits and rules change, and your situation deserves advice specific to it.

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CA Vijay R Singh, FCA

Founder, Vijay R Singh & Co., Chartered Accountants · ICAI M.No. 153926 · FRN 136869W

Chartered Accountant for startups, NRIs and SMEs in Mumbai, in practice since 2013. More about CA Vijay →