"Proprietorship vs private limited" is the first Google search of most Indian founders, and the answer has shifted in recent years: a 15%/22% corporate tax rate, MCA's SPICe+ single-form incorporation, and investors who won't touch anything else make Pvt Ltd cheaper and easier than it used to be — while the new tax regime made proprietorship tax-free up to ₹12 lakh of income.
The comparison
| Sole proprietorship | Partnership / LLP | Private Limited (OPC / Pvt Ltd) | |
|---|---|---|---|
| Legal identity | Same as you | LLP: separate; partnership: not | Separate |
| Liability | Unlimited — personal assets at risk | LLP: limited to contribution | Limited to share capital |
| Income tax | Individual slabs (new regime: nil to ₹12 lakh) | 30% flat + cess (partnership & LLP) | 22% + surcharge & cess (25.17% effective); 15% for new manufacturing cos. |
| Tax on drawing profits | None (it's your income) | Partner's share exempt; remuneration/interest taxed in partner's hands | Dividend taxed in shareholder's hands at slab; salary to directors deductible |
| Setup cost | ₹0–2,000 (GST/Udyam/shop licence) | LLP ≈ ₹6,000–12,000 | ≈ ₹8,000–15,000 (SPICe+, DSC, DIN, stamp duty) |
| Setup time | 1–7 days | 7–15 days | 5–10 days |
| Annual compliance | ITR; GST if registered | LLP: Form 8, Form 11, ITR; audit above ₹40 lakh turnover / ₹25 lakh contribution | AOC-4, MGT-7, ADT-1, board meetings, statutory audit always, ITR |
| Annual compliance cost | ₹0–10,000 | ₹10,000–25,000 | ₹25,000–60,000 |
| Raising equity | Not possible | Difficult | Standard — ESOPs, VC, angel |
| Bank credit | Personal credit score | Firm + partners | Company + directors' guarantees |
| Credibility with large clients | Low–medium | Medium | High |
| Exit / sale | Sell assets only | Transfer partnership interest | Sell shares |
Tax, worked at ₹30 lakh profit
- Proprietorship (new regime): ≈ ₹5.4 lakh tax (income ₹30 lakh, no 44ADA). With 44ADA (profession, receipts ₹60 lakh, 50% deemed) ≈ ₹5.4 lakh on ₹30 lakh… but only if receipts fit the scheme.
- LLP: 30% + 4% cess = ₹9.36 lakh, but partners' remuneration (within Section 40(b) limits) is deductible and taxed at their slabs — the effective rate can be brought close to individual slabs.
- Pvt Ltd: 25.17% = ₹7.55 lakh at company level; then dividend taxed again at your slab when withdrawn, or pay yourself a salary (deductible for the company, taxed at your slab under the new regime).
For profits under ~₹15 lakh, proprietorship almost always pays the least tax. Above ₹25–30 lakh, a Pvt Ltd that pays founders a reasonable salary and retains the rest often wins. Run your personal numbers in the income tax calculator.
Choose proprietorship if…
You're a freelancer, consultant, or single-location shop; profit under ₹15–20 lakh; no plans for investors; comfortable with personal liability (mitigate with insurance).
Choose LLP if…
Two or more partners; a services firm (CA, law, agency, consulting); you want limited liability without the Companies Act overhead; no equity fundraising planned. Note: LLPs cannot issue ESOPs and many VCs won't invest.
Choose Private Limited if…
You plan to raise money, offer ESOPs, sell to large enterprises or government (many tenders require a company), build a brand you might sell, or profits will exceed ₹25 lakh and you'll reinvest them.
OPC (One Person Company) gives one founder a Pvt Ltd shell; it converts to a full Pvt Ltd when you add shareholders.
Converting later
Proprietorship → Pvt Ltd is common: incorporate, transfer assets/business under a takeover agreement, apply for new GST, close the old one. Capital gains on the transfer are exempt if conditions of Section 47(xiv) are met (proprietor holds ≥ 50% for 5 years, all assets transferred). Budget 4–8 weeks and ₹20,000–40,000 in professional fees.
Setup checklist (any structure)
- PAN (individual or entity)
- Udyam registration — free, unlocks MSME benefits (guide)
- GST if turnover/inter-state supply requires it
- Current account (banks want Udyam/GST/incorporation docs)
- Shop & Establishment licence (state)
- Trade-specific licences: FSSAI (food), drug licence, trademark
- Letterhead, invoice format and email on your domain — letterhead and invoice tools set the basics in minutes
FAQ
Is a proprietorship registered anywhere?
There's no registration for the entity itself; GST, Udyam, Shop Act and the bank account together establish it.
Can a Pvt Ltd have one director?
It needs at least two directors and two shareholders; an OPC needs one member and a nominee.
Do I need a CA for a Pvt Ltd?
Statutory audit by a CA is mandatory regardless of turnover. For proprietorships, audit applies only above ₹1 crore turnover (₹10 crore if 95% digital) or ₹50 lakh professional receipts.
What about a Section 8 or a trust for social enterprises?
Different vehicles for non-profits; they cannot distribute profits. Most social businesses that need revenue use a Pvt Ltd or LLP.