The choice between a sole proprietorship, a limited liability partnership and a private limited company is made in the first week of a business and lived with for years. Founders usually pick by what a friend did or what the cheapest registration website offered. The better approach is to answer four questions: how will the business be taxed, what will compliance cost, who is liable if something goes wrong, and will outside money ever come in.
The comparison
| Sole proprietorship | LLP | Private limited company | |
|---|---|---|---|
| Legal identity | None — the owner is the business | Separate legal entity | Separate legal entity |
| Liability | Unlimited, personal | Limited to contribution | Limited to share capital |
| Income tax | Owner's slab rates; presumptive schemes available | 30% plus surcharge and cess; partners' share exempt in their hands | 25.17% (22% plus surcharge and cess) under section 200 (115BAA of the 1961 Act) for most companies; dividends taxed again in shareholders' hands |
| Audit | Tax audit above ₹1 crore turnover (₹10 crore with under 5% cash) or ₹50 lakh receipts for professionals | Statutory audit only if turnover exceeds ₹40 lakh or contribution exceeds ₹25 lakh | Statutory audit every year regardless of size |
| Annual filings | Income tax return; GST if registered | Form 11, Form 8, income tax return | AOC-4, MGT-7/7A, ADT-1, board and general meetings, DIR-3 KYC, income tax return |
| Foreign investment | Not permitted for non-residents | Permitted under the automatic route in sectors with 100% FDI and no performance conditions | Permitted in all FDI-eligible sectors |
| Raising capital | Loans only | Partner contributions and loans; no share issue | Equity, preference shares, ESOPs, convertible notes |
| Set-up cost and time | Lowest; days | Low; one to two weeks | Moderate; one to two weeks through SPICe+ |
Where each one fits
The proprietorship suits a single professional or trader with modest turnover and no employees' liability to worry about. With section 58 (44AD or 44ADA of the 1961 Act) the income tax compliance is a single return with no books. The cost is unlimited personal liability and the difficulty of bringing in a partner or selling the business, and a bank or a large customer will sometimes not deal with one. It is the right start for many; it is rarely the right finish.
The LLP is the structure of choice for professional firms, consultancies and family businesses that will not raise outside equity. It combines limited liability with partnership taxation — profits taxed once at 30% and distributed to partners tax-free — and its compliance is a fraction of a company's. Its limitations are real: no share capital means no ESOPs and no venture investment, and conversion to a company later is possible but involves stamp duty and a capital gains analysis. An LLP with turnover under ₹40 lakh has no audit at all.
The private limited company is the structure investors, lenders and large customers expect. It can issue shares, grant ESOPs and take FDI in any sector. The 22% rate under section 200 (115BAA) is lower than an LLP's 30%, but profits distributed as dividends are taxed again at the shareholders' slab rate, so for a business that distributes all its profits to two founders the total tax can be higher than an LLP's. Compliance is the heaviest: annual audit, board meetings, ROC filings, and the directors' personal filings. Choose it when the business will grow beyond its founders' capital.
The tax arithmetic in one example
A consulting business earning ₹60 lakh of profit and paying it all out to its two founders: as an LLP, tax is about ₹18.7 lakh and the partners receive the balance tax-free. As a company under section 200 (115BAA), corporate tax is about ₹15.1 lakh and the remaining ₹44.9 lakh paid as dividends is taxed at the founders' slab rates — potentially another ₹10 lakh or more. Paying the founders a salary instead of dividends changes the answer again, since salary is deductible to the company and taxed once. The structure decision and the remuneration policy have to be made together.
Foreign founders and NRIs
A non-resident cannot run a proprietorship, and an NRI's investment in an LLP or company is FDI, reportable in Form FC-GPR or FDI-LLP within 30 days. A company with a resident director is required — at least one director must have stayed in India for 182 days in the previous year. For an NRI setting up an Indian business from Dubai, a private limited company with a trusted resident director, or an LLP with a resident designated partner, are the workable options.
Converting later
Proprietorship to LLP or company is a transfer of business, tax-neutral if the conditions of section 47 are met; LLP to company and company to LLP are both possible under the Companies Act and LLP Act, with their own tax conditions and stamp duty in Maharashtra. Starting with the structure the business will need in three years is usually cheaper than converting.
Incorporation with the tax plan attached
We register the entity, obtain PAN, TAN, GST and the professional tax registrations, and set up the remuneration and compliance calendar in the same engagement. Business setup in India or contact us.
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