Proprietorship, LLP or private limited: choosing a structure
· 6 min read
A proprietorship costs nothing to start but offers no liability protection. An LLP protects the partners with modest compliance. A private limited company is the only structure outside investors will fund. Pick for where the business is going, not where it is.
The structure decides your liability, your tax rate and how much compliance you carry every year. Changing it later is possible but rarely painless, so it is worth a few minutes now.
Sole proprietorship
There is no separate entity. You and the business are the same person in law, which means unlimited personal liability — a business debt can reach your personal assets.
Income is taxed at your individual slab rates. There is no registration as such, though you will need GST registration and possibly a trade licence.
It suits a freelancer or a small local trader testing an idea. It does not suit anything with meaningful contracts, employees or borrowing.
Limited liability partnership
An LLP is a separate legal person, so the partners' liability is limited to their agreed contribution. It is taxed at a flat 30% plus surcharge and cess.
Compliance is real but modest: Form 8 and Form 11 every year regardless of turnover, and audit only above ₹40,00,000 turnover or ₹25,00,000 contribution.
It suits professional practices and partnerships between people who know each other — architects, consultants, agencies. Outside investors generally will not fund an LLP.
Private limited company
The most compliance and the most credibility. Separate legal person, limited liability, and the only one of the three that can issue shares — so it is the structure venture funding requires.
Corporate tax rates are 22% plus surcharge and cess for most companies, or 15% for a new manufacturing company meeting the conditions, which can be materially lower than an LLP or a high-slab proprietor.
Against that: annual ROC filings, board meetings, statutory audit regardless of turnover, and director KYC every year.
The practical test
Ask where the business will be in three years. If the answer involves raising money, taking on significant liability, or hiring beyond a handful of people, start as a private limited company — converting later means fresh registrations, new GST numbers and transferring contracts. If it is genuinely a one-person service business, a proprietorship is fine and you can convert when the need appears.