India's corporate landscape has seen remarkable changes over the past decade, largely driven by the rise of startups. These new-age businesses have brought about a shift in the way business is conducted, challenging traditional business models and encouraging innovation. On 16th January 2016, the Startup India initiative introduced several key programs designed to support entrepreneurs, create a startup ecosystem, and transform India into a nation of job creators rather than job seekers. These programs are overseen by a dedicated Startup India team under the Department for Promotion of Industry and Internal Trade (DPIIT).

Today, India proudly holds the position of having the third-largest startup ecosystem in the world. It is expected to grow consistently at an annual rate of 12–15%. In 2018, India had around 50,000 startups, out of which approximately 8,900 to 9,300 were technology driven. In 2019 alone, about 1,300 new tech startups were launched this means that nearly 2 to 3 tech startups were being born every single day.

As of January 15, over 1.59 lakh startups have been officially recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). With this rapid growth, India has firmly secured its position as the third-largest startup ecosystem in the world. According to government data, from 2016 to October 31, 2024, these recognised startups have created more than 16.6 lakh direct jobs, making a significant contribution to the country's overall employment generation.

Traditional companies, governed by the Companies Act, 2013, continue to play a pivotal role in India's economy. This legislation provides a comprehensive legal framework for the incorporation, regulation, and dissolution of companies. While it ensures transparency and accountability, the compliance requirements can be stringent, often posing challenges for newer ventures.

This blog undertakes a comparative legal analysis of startups and traditional companies under Indian Company Law. It explores key aspects such as the legal framework, compliance requirements, funding avenues, the impact of COVID-19, success and failure rates, and other relevant factors to provide a comprehensive understanding of how India's legal landscape accommodates and distinguishes between these two business models.

The number of DPIIT-recognised startups has grown from just 502 in 2016 to 1,57,706 by December 31, 2024. These startups have generated over 17.28 lakh direct jobs, with the IT Services sector contributing the most (2.10 lakh jobs), followed by Healthcare & Lifesciences (1.51 lakh), and Professional & Commercial Services (96,474). Moreover, 75,935 recognised startups as of December 2024 have at least one woman director, highlighting the rise of women-led ventures. With simplified compliance, self-certification, and tax exemptions for the first three years, the government has made it easier to operate and grow startups.

Legal Framework Overview

Startups in India: Legal Framework and Government Support

The legal framework for startups in India is designed to make it easier for new businesses to get started and grow. One of the biggest initiatives to support startups is the Startup India Initiative, launched on January 16, 2016. This program, under the Department for Promotion of Industry and Internal Trade (DPIIT), offers a lot of benefits such as:

• Tax exemptions
• Easier compliance
• Self-certification schemes to help startups focus more on their business rather than paperwork

The government has also recognized over 1.59 lakh startups as of 2025, and these businesses have created more than 16.6 lakh direct jobs. This shows how the startup ecosystem is not only helping entrepreneurs but also contributing to job creation and economic growth. Additional government support includes:

• Facilitating easier and lower-cost intellectual property protection
• Allowing startups to patent ideas affordably
• Fund of Funds for Startups (FFS): A government-backed initiative to improve access to early-stage funding

Traditional Companies: More Complex Governance

Traditional companies in India are governed by the Companies Act, 2013, which lays out more complex requirements. These include:

• Regular financial reporting
• Mandatory audits
• Submission of detailed annual returns

To form a traditional company, several steps must be followed, such as:

• Appointing directors
• Issuing shares
• Following corporate governance norms as laid out in Chapter II of the Companies Act

Additionally, traditional companies must comply with complicated tax regulations, ensuring transparency and accountability but making it harder for smaller or newer businesses to establish themselves.

Compliance Requirements: Balancing Flexibility and Responsibility

Startups: Simplified Compliance to Encourage Innovation

Startups recognised by the DPIIT can self-certify compliance with nine labour and environmental laws for a period of five years. This helps by:

• Avoiding routine inspections
• Reducing regulatory burdens during the formative years

They are exempt from statutory audit requirements until their turnover exceeds ₹1 crore, allowing them to focus on growth rather than early financial formalities (Companies Act, 2013, Section 2(40)). Startups also enjoy a 100% tax exemption on profits for any three consecutive years out of their first ten years, provided they are eligible and DPIIT-recognised (Income Tax Act, 1961, Section 80-IAC).

Traditional Companies: Strict but Structured
Traditional companies are required to appoint a statutory auditor within 30 days of incorporation and must conduct annual audits, regardless of the company's scale or operational status .They also need to file annual returns (Form MGT-7) and financial statements (Form AOC-4) with the Registrar of Companies (RoC) every year—even if they didn't undertake any business activities during that year MCA, Compliance Filing Guidelines, 2023

Further, public companies and certain private companies must establish various Board committees such as the Audit Committee, Nomination and Remuneration Committee, and Stakeholders Relationship Committee to ensure sound corporate governance (Companies Act, 2013, Sections 149 to 177.

Impact of COVID-19 on Startups vs Traditional Companies
The COVID-19 pandemic has been a transformative force for businesses worldwide. In India, while traditional companies and startups faced their unique challenges, the pandemic highlighted the flexibility of startups and the resilience of traditional companies.

Startups were quicker to adapt to the sudden shift in market dynamics. As businesses and consumers moved online, startups in sectors like e-commerce, edtech, fintech, and healthtech experienced a surge in demand. With minimal bureaucratic red tape and a digital-first approach, many startups were able to pivot their services and respond to market needs swiftly. For instance, PharmEasy, an online pharmacy platform, saw substantial growth during the pandemic, driven by a surge in demand for home delivery of medical supplies and medicines. Similarly, Urban Company (formerly UrbanClap), a platform offering at-home services, quickly adjusted to the increased demand for contactless home services like cleaning and plumbing during the lockdown, which helped it thrive in challenging times.

On the flip side, traditional companies especially those in industries like manufacturing, hospitality, and retail found the transition difficult. The rigid structures and reliance on physical operations made it harder to quickly pivot. However, the pandemic served as a wake-up call, pushing many traditional companies to adopt digital tools and adjust their business models. Established companies like Reliance Industries and Tata Group made quick digital transformations to safeguard their positions in a post-pandemic world.

Startups: Navigating Unprecedented Challenges
Indian startups faced significant hurdles during the pandemic. A survey revealed that 70% of startups experienced adverse business impacts, with some ceasing operations entirely. Notably, only 22% had sufficient cash reserves to cover fixed expenses for the subsequent 3-6 months. Despite these challenges, certain sectors witnessed growth. Startups in EdTech, FinTech, and cybersecurity saw increased demand due to the accelerated shift towards digital solutions. For instance, companies like Mindhouse and Cure.fit offered free services to support mental and physical health during lockdowns.

Traditional Companies: Striving for Resilience
Traditional businesses, particularly in manufacturing and retail, encountered severe disruptions. The Indian fashion industry, heavily impacted by the pandemic, faced significant challenges such as halted sales, wage losses, and layoffs. Efforts to maintain business continuity included shifting towards e-commerce and flexible contractual terms.To support small retailers, the Indian government introduced the Open Network for Digital Commerce (ONDC), aiming to level the playing field against large e-commerce platforms.

Success and Failure Rates: A Reality Check

Startups: High Growth, High Risk

India has emerged as one of the most dynamic startup ecosystems globally. With over 1.59 lakh startups officially recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) as of January 2025, the pace of entrepreneurship has accelerated dramatically. However, this rapid growth is also matched by equally high failure rates. According to a study by the IBM Institute for Business Value and Oxford Economics, approximately 90% of Indian startups fail within the first five years of operations.
The key reasons identified include:

• Lack of market demand
• Insufficient funding
• Flawed business models
• Team-related issues
• Inability to scale operations effectively

A 2025 analysis indicates that approximately 90% of startups in India fail, with only 10% achieving sustainability. Despite these statistics, notable successes include companies like Zerodha, BYJU'S, Nykaa, and Flipkart, which have disrupted industries and significantly contributed to employment and innovation on a national scale. Article published on Startup Wired

Year-wise Failure Breakdown:

• First Year: Around 20% of startups do not survive their inaugural year, often due to inadequate market research, insufficient funding, or poor product-market fit.
• Second Year: The failure rate increases to 30% by the end of the second year, with challenges in scaling operations and managing cash flow being primary contributors.
• Fifth Year: By the fifth year, approximately 50% of startups have ceased operations, facing issues like market saturation and operational inefficiencies.
   

Contributing Factors to High Failure Rates:

• Lack of Market Demand: Many startups fail to validate their business ideas, leading to products or services that don't meet market needs.
• Insufficient Capital: Limited funding hampers growth, marketing efforts, and operational scalability.
• Operational Challenges: Ineffective management, poor strategic decisions, and inability to adapt to market changes contribute to business failures.
   

Traditional Companies: Stability Over Speed

In contrast, traditional companies, especially those incorporated under the Companies Act, 2013, tend to have lower failure rates.
These companies benefit from:

• A well-established regulatory structure
• Access to institutional credit
• Operations in sectors with predictable cash flows

The MCA's Annual Report for 2023–24 highlights a decrease in the average time required for voluntary business closures, from 195 days in FY23 to 93 days in FY24. This improvement is attributed to the implementation of the Central Processing for Accelerated Corporate Exit (C-PACE) system, which streamlined processes and reduced closure times. While the report does not specify the exact annual closure rate, the reduced closure time suggests a more efficient and supportive environment for businesses opting for voluntary exits. However, traditional firms face challenges in adapting to technological disruptions and evolving market demands. The COVID-19 pandemic was a stark reminder of this, where many legacy businesses struggled to pivot digitally, unlike agile startups that quickly shifted operations online.
 

Government Policy Support for Startups in India

The Government of India has implemented several initiatives to foster a conducive environment for startups, such as:

• Atal Innovation Mission (AIM): Promotes innovation and entrepreneurship through:
  • Atal Tinkering Labs (ATLs) in schools
  • Atal Incubation Centres (AICs) for early-stage startups
• Startup India Seed Fund Scheme (SISFS): Provides financial assistance for:
  • Proof of concept
  • Prototype development
  • Product trials
  • Market entry
  • Commercialization
• Credit Guarantee Scheme for Startups (CGSS): Offers collateral-free loans to reduce investment risk.
• Abolition of Angel Tax (July 2024): A major reform to attract investors and reduce burdens on startups.

These initiatives collectively demonstrate the government's commitment to creating a nurturing environment for startups, addressing challenges related to funding, taxation, infrastructure, and skill development.
 

Future Outlook

India's corporate landscape is poised for significant transformation, driven by technological advancements, regulatory reforms, and evolving market dynamics. Regulatory Reforms and Reverse-Flipping: The Indian government's efforts to streamline compliance processes have made it more attractive for startups domiciled abroad to return and list in India. Notably, the time taken for a reverse merger has been reduced from 12–18 months to about 3–4 months, encouraging startups like Razorpay and Pine Labs to consider domestic listings.

Abolition of Angel Tax The removal of the 'angel tax' in July 2024 has been a significant relief for startup investors, eliminating a major hurdle in early-stage funding and fostering a more conducive environment for innovation

Technological Integration in Corporate Law: The future will witness
increased integration of technologies like blockchain and Al in corporate operations, necessitating updates in legal frameworks to address new challenges and opportunities.
Global Expansion and Legal Complexity: As Indian companies, both startups and traditional, expand globally, they will need to navigate diverse legal systems, making international corporate law more complex and necessitating robust legal strategies.

Conclusion
The evolving dynamics between startups and traditional companies in India reveal a vibrant, diverse corporate ecosystem shaped by innovation, resilience, and regulatory reform. Startups, with their agility, government-backed incentives, and focus on disruptive innovation, represent the forward momentum of India's economic future. On the other hand, traditional companies provide a bedrock of stability, structure, and long-term sustainability, contributing significantly to India's industrial and financial foundations.

Indian Company Law, while historically tailored for conventional businesses, has shown commendable adaptability in accommodating the unique needs of startups—evident in streamlined compliance mechanisms, tax exemptions, and funding initiatives. The government's active role in reforming outdated norms and encouraging digital transformation further ensures that both business models can not only coexist but thrive.

As India continues to rise as a global economic force, the balance between the dynamism of startups and the dependability of traditional companies will be crucial. A well-calibrated legal framework that supports innovation without compromising on corporate governance will determine the success of India's corporate future. Ultimately, this comparative legal landscape illustrates that while the paths may differ, both startups and traditional companies are indispensable pillars of India's economic growth story.