What to choose: Proprietorship or Private Limited Company?

Published On: Jan 21, 2020Last Updated: Oct 14, 20235.6 min read

In India, a business entity can have different business structures like Proprietorship, Partnership, Company (Private company or Public company), etc. All structures have their pros & cons and legal requirements. Let’s understand the two types of entities: Proprietorship vs Pvt Ltd company:

1. Proprietorship vs Pvt Ltd company

Proprietorship Private Limited Company 
It is a business entity formed in the name of a single person. That person owns the business, manages it and controls its various operations. It can be created by any person who wants to start a business without going through various legal formalities. The Sole Proprietor must be a Citizen of India and a Resident of India. Private limited company registration enables a business entity to be held under private ownership. It provides legal protection to the shareholders who are the members, by limiting their liability to the number of shares held by them. It is formed under the Companies Act, 2013 after going through a few legal formalities.

2. Comparison Proprietorship vs Pvt Ltd company

Particulars Proprietorship Private Limited Company 
Form of business It is the easiest form of business, therefore can be started anywhere easily. It is a legal form of business, therefore cannot be started without going through legal formalities. 
Legal registration It does not require any mandatory legal registration. It only involves registration or licenses specific to the nature of business and based on the local laws applicable. It requires mandatory legal registration under the Companies Act, 2013, with a minimum of two shareholders and two directors. One person can act both as director and shareholder. The procedure to register is prescribed under the Act.
Name approval Possible to use any trade name that does not clash with any brand name. It does not require name approval or registry. Any trade name can be used here, that does not clash with any brand name and is as per the rules prescribed for name approval. It requires name approval before incorporation — [RUN – Reserve Unique Name service is used to apply for name approval through the MCA website].
Initial investment It can be started with a very minimal amount of investment in the initial phase. So, it is an excellent opportunity for those who want to set up a business with low funds as no minimum capital is prescribed for starting a proprietorship. It can start with a minimum authorised capital of ₹ 1 lakh. There’s no requirement for minimum paid-up capital.  Also, government fees are to be paid for the incorporation of the company.
Profit-sharing and liability Since there is the only person who operates and manages the whole business, so 100% of the profits belong to that person. No one shares a right in the profits earned. Also, the owner bears unlimited liability. The shareholders of Private limited companies get a share of profit in the form of dividends at the year-end. Also, the shareholders bear liability limited to the number of shares held by them.
Legal compliances Since any specific law does not govern it, the legal compliances are least. There is no pre-defined Certificate of Incorporation or Registration Certificate. So, the compliances depend upon registrations or licenses taken by a particular proprietorship concern. Like, if a proprietorship registers itself under GST law, then it will have to comply with the GST return filing, etc. There is no such requirement of uploading the Annual report or other reports on the MCA website. Since it is governed by the Companies Act, 2013, the legal compliances are stringent as per the Act. There is an annual requirement of furnishing return and financial statements, other legal requirements from time to time about meetings, appointment, removal of auditor, appointment and removal of directors and various other compliances to conduct business operations. These are to be uploaded on the MCA website.
Taxes Proprietor and the Proprietorship are the same for calculation of tax liability. The assets and liabilities of the Proprietorship are the assets and liabilities of the Proprietor post which he/she need to file a normal return and show the profits earned in the business in that return itself. Separate return is not required for the Proprietorship. Also, the tax is calculated at income tax slab rates applicable to an individual. Other tax liabilities like GST depend upon the nature of business. A private limited company is a corporate entity. So, the corporate tax applies to it as per the Income Tax Act, 1961. Along with a corporate tax, the company is also required to pay Dividend Distribution Tax (DDT) on the dividend distributed to its shareholders. It is necessary to file it’s income tax return mandatorily. Other tax liabilities like GST depend upon the nature of business.
Information made to a public The financial reports of Proprietorship remain in private hands. The financial reports of Private limited companies are filed with the Registrar of Companies (ROC) by uploading on the MCA website.
Decision making Since Proprietorship is managed and operated single-handed, there is no chance of a conflict of ideas or decisions. Since a Private limited company is managed and operated by its directors and shareholders, decision making depends on them. The decisions are made by passing resolutions in the meetings.
Audit requirement Proprietorship is not required to get its accounts audited each financial year under any specific law. The audit will depend upon the nature of business and the threshold turnover limits specified for the conduct of an audit. Like, a tax audit is required if the turnover/sales exceed ₹ one crores. Similarly, a GST audit is required if the turnover exceeds ₹ two crores. A private limited company is required to get its accounts audited by a Chartered Accountant, every financial year as per the Companies Act, 2013. The Auditor shall provide the Audit Report and the Audited Financial Statements to file it with the ROC. Further, a tax audit is required if the turnover/sales exceed ₹ one crores. Similarly, a GST audit is required if the turnover exceeds ₹ two crores.
Termination process It is easy to terminate without any liquidator. It is possible to terminate after following the procedure as laid down in the Companies Act, 2013. A liquidator is involved in the process.
Perpetual Succession It has no perpetual succession. It has perpetual succession. 


Both the forms of an entity have some advantages and disadvantages. The final decision to choose the structure depends on the following factors: 

  • Size of business
  • Nature of business  
  • Availability of funds 
  • Short term and long term goals 
  • The complexity of business operations, etc.

Generally, small businesses prefer Proprietorship registration rather than a Private limited company.

Share This Post:

CA Saba Naaz
About the Author

CA Saba Naaz

CA in practice, Partner at S. Saraf & Associates, Gurugram, also a blogger at indiantaxhub.blogspot.com. I am passionate about sharing knowledge by writing articles for students and professionals both. I deal in income tax, GST, corporate compliances, audit and accountancy.