Company vs LLP vs Proprietorship: Which to Choose?
- Sole proprietorship suits freelancers earning under ₹20L/year — zero setup cost but unlimited personal liability.
- LLP wins for professional firms and small partnerships: 30% flat tax, limited liability, far less compliance than a company.
- Private limited company is best when you plan to raise funding, hire employees at scale, or need investor-friendly equity structure.
If you are starting a business in India in FY 2026-27, the structure you choose on day one will follow you for years — it decides your tax rate, your paperwork burden, and whether a creditor can seize your house if things go wrong. The short answer: pick a proprietorship if you are a solo service provider earning under ₹20 lakh, an LLP if you are a professional firm or small partnership that wants limited liability without heavy compliance, and a private limited company if you need external funding or plan to scale headcount fast. Everything below explains exactly why, with numbers.
The Three Structures at a Glance
| Feature | Sole Proprietorship | LLP | Private Limited Company |
|---|---|---|---|
| Registration body | MSME / GST / Shops Act (no central registry) | MCA (Form FiLLiP) | MCA (SPICe+) |
| Minimum members | 1 | 2 designated partners | 2 directors, 2 shareholders |
| Income-tax rate (FY 2026-27) | Slab rates (same as individual) | 30% flat + surcharge + cess | 22% (existing) or 15% (new mfg.) + surcharge + cess |
| Liability | Unlimited — personal assets at risk | Limited to capital contribution | Limited to shareholding |
| Audit mandatory when turnover exceeds | ₹1 crore (business) / ₹50 lakh (profession) | ₹40 lakh turnover or ₹25 lakh capital contribution | Every year, no threshold |
| Annual ROC filing | None | Form 8 + Form 11 | AOC-4, MGT-7, DIR-3 KYC + more |
| Equity / ESOP possible? | No | No shares; profit-sharing only | Yes — full equity structure |
| Typical annual compliance cost | ₹5,000–₹15,000 | ₹15,000–₹40,000 | ₹40,000–₹1,20,000+ |
Tax Arithmetic: Same ₹18 Lakh Profit, Three Structures
Let us say your business earns a net profit of ₹18,00,000 in FY 2026-27. Here is what each structure pays in income tax (ignoring GST, which applies equally).
Proprietorship (individual slab, new tax regime)
Under the new default regime for FY 2026-27, income up to ₹12 lakh is effectively nil after the rebate under Section 87A (for resident individuals). For ₹18 lakh profit:
- ₹0 – ₹4,00,000: Nil
- ₹4,00,001 – ₹8,00,000: 5% → ₹20,000
- ₹8,00,001 – ₹12,00,000: 10% → ₹40,000
- ₹12,00,001 – ₹16,00,000: 15% → ₹60,000
- ₹16,00,001 – ₹18,00,000: 20% → ₹40,000
- Total tax before cess: ₹1,60,000
- Add 4% health & education cess: ₹6,400
- Total tax: ₹1,66,400
Note: The ₹12 lakh rebate wipes tax to zero only when total income does not exceed ₹12 lakh. At ₹18 lakh, the full slab tax applies — the rebate is not available.
LLP
LLP pays a flat 30% on its total income plus 4% cess (no surcharge if income is under ₹1 crore).
- 30% of ₹18,00,000 = ₹5,40,000
- Add 4% cess: ₹21,600
- Total tax: ₹5,61,600
However, the partners then draw their profit share tax-free in their own hands (Section 10(2A)). So the family or partners can split income and each pay slab rates, but the LLP entity itself pays more than the proprietor at this profit level.
Private Limited Company (domestic, Section 115BAA rate)
- 22% of ₹18,00,000 = ₹3,96,000
- Add 10% surcharge on tax: ₹39,600
- Add 4% cess on (tax + surcharge): ₹17,424
- Total tax: ₹4,53,024
But when you pay yourself a salary from the company, that salary reduces the company's profit (and hence its tax) and gets taxed as your personal income. This split can be optimised — a common reason founders prefer a company once profits cross ₹30–40 lakh.
Bottom line on tax at ₹18L profit: Proprietorship pays the least in absolute tax at this income level. LLP and company cost more at the entity level, but offer liability protection and structural flexibility that often outweigh the tax difference.
When a Proprietorship Makes Sense
- You are a freelancer, consultant, or solo trader with revenue under ₹20 lakh.
- You have no partners and no plans to raise investor money.
- You want the lowest possible compliance overhead — no ROC filings, no statutory audit below the threshold.
- Your clients do not demand a company contract or GST-registered entity.
The one hard risk: if the business is sued or takes a loan it cannot repay, your personal savings, car, and home are all fair game for creditors.
When an LLP Is the Smart Middle Ground
The LLP is genuinely underused in India. It combines the tax pass-through feel (partners are taxed separately on their salaries and interest, which are deductible in the LLP's hands) with the limited-liability shield of a company. Ideal for:
- CA firms, law firms, architect studios, or consulting partnerships.
- Two co-founders who want flexibility in profit sharing without rigid share structures.
- Businesses that will stay privately held and do not need venture capital or ESOPs.
Annual compliance is manageable: two ROC forms (Form 8 for financial statements, Form 11 for annual return), income-tax return, and audit only if turnover exceeds ₹40 lakh or capital contribution exceeds ₹25 lakh.
When a Private Limited Company Is Worth the Extra Cost
- You plan to raise angel or VC funding — investors insist on a company for equity stakes.
- You need to issue ESOPs to attract employees.
- You are building a SaaS product or e-commerce brand that may sell to enterprise clients who require a company PAN and audited financials.
- Long-term exit via acquisition or IPO requires a clean share structure.
The compliance load is real: annual ROC filings, mandatory statutory audit every year, board meetings, director KYC, and potential penalties for non-compliance that are significantly higher than for an LLP. Budget at least ₹50,000–₹80,000 per year in professional fees just for compliance. If you decide a company is right for you, start with KyaTax's Company Registration service to get incorporated correctly from day one.
Common Mistakes That Cost Founders Dearly
- Registering a company too early. First-year freelancers with ₹5–10 lakh revenue incorporate a Pvt Ltd because it "sounds serious," then pay ₹60,000+ in compliance for a business that could have stayed a proprietorship for two more years. Start simple; upgrade when you need to.
- Confusing LLP tax with individual slab rates. Many founders assume LLP profit is taxed at slab rates in partners' hands. It is not — the LLP pays 30% flat at the entity level. Only the partner's salary and interest drawn from the LLP are taxed at slab rates in their personal returns.
- Missing LLP Form 8 and Form 11 deadlines. Late filing of Form 8 (due 30 October) and Form 11 (due 30 May) attracts a penalty of ₹100 per day per form with no cap — a dormant LLP can accumulate lakhs in penalties if ignored for a few years.
- Not maintaining a separate bank account for the proprietorship. Mixing personal and business transactions makes GST reconciliation and income-tax audits a nightmare. Open a current account in the trade name the day you start.
- Choosing structure based solely on tax, ignoring liability. A proprietor who runs a construction business or takes large client advances is one lawsuit away from personal bankruptcy. The tax saving of ₹1–2 lakh per year is rarely worth that exposure once revenue crosses ₹15–20 lakh.
The Decision in Three Questions
If you are still unsure, answer these in order:
- Will you raise external equity funding in the next three years? If yes → Private Limited Company.
- Do you have a co-founder or business partner? If yes → LLP (or company if question 1 is also yes).
- Are you solo with revenue under ₹20 lakh and no liability risk? If yes → Proprietorship for now, review annually.
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Open Company Registration →Frequently asked questions
Can I convert my proprietorship to a company or LLP later?
Yes. A proprietorship can be converted into an LLP under Schedule II of the LLP Act, or into a private limited company under Section 366 of the Companies Act 2013. The conversion is not instant — it takes 4–8 weeks and involves MCA filings, stamp duty, and transfer of assets. It is cleaner to start as a company or LLP if you know you will need that structure within a year or two.
Which structure is better for GST registration purposes?
GST registration is independent of your business structure — a proprietorship, LLP, and company all register under the same GST Act once turnover crosses the threshold (₹40 lakh for goods, ₹20 lakh for services in most states, or ₹10 lakh in special-category states). The GSTIN is linked to the PAN of the entity. There is no GST advantage to choosing one structure over another.
Is an LLP or company better for a two-person tech startup?
If you plan to bootstrap and stay profitable without outside investors, an LLP is simpler and cheaper to run. If you plan to raise seed or angel funding within 12–18 months, register a private limited company from the start. Investors almost always refuse to put money into an LLP because equity cannot be issued — restructuring later is costly and disruptive.
What is the minimum paid-up capital required to start a private limited company in India?
There is no minimum paid-up capital requirement for a private limited company under current law. You can incorporate with even ₹1 as authorised and paid-up capital, though practical bank account opening and credibility considerations usually lead founders to start with ₹1 lakh. What matters more is having adequate working capital to run actual operations.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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