Proprietorship vs Partnership vs Private Limited Company vs LLP: Which Structure Should You Choose?
Choosing the right business structure in India mainly depends on liability, compliance burden, funding needs and long‑term growth plans.
1. Quick Summary
- Proprietorship – Best for very small, owner‑driven businesses, lowest compliance, highest personal risk.
- Partnership firm – Suitable for small multi‑owner businesses where partners trust each other, still unlimited liability.
- LLP – Good for professional firms and SMEs wanting limited liability with moderate compliance.
- Private Limited Company – Best for startups and growing businesses wanting funding, brand value and structured governance, but with higher compliance.
2. Basic Definitions
- Sole Proprietorship: Business owned and controlled by a single person, not a separate legal entity; owner and business are legally the same.
- Partnership Firm: Two or more persons carry on a business under a partnership deed; firm is not a separate legal entity from partners under the Partnership Act, 1932.
- Limited Liability Partnership (LLP): Body corporate registered under LLP Act, 2008; separate legal entity with partners having liability limited to agreed contribution.
- Private Limited Company: Incorporated under Companies Act, 2013; separate legal entity with shareholders’ liability limited to unpaid share capital.
3. Side‑by‑Side Comparison (India)
| Aspect | Proprietorship | Partnership Firm | LLP | Private Limited Company |
|---|---|---|---|---|
| Legal status | Not a separate legal entity | Not a separate legal entity | Separate legal entity | Separate legal entity |
| Liability | Unlimited, personal assets at risk | Unlimited, partners jointly and severally liable | Limited to contribution | Limited to share capital |
| Owners | 1 | 2–20 partners (general business) | Minimum 2 partners | 2–200 shareholders (members) |
| Registration | No MCA registration; may need GST, Shops & Establishment, etc. | Optional registration under Partnership Act, 1932 | Mandatory registration under LLP Act with MCA | Mandatory incorporation with MCA |
| Tax rate | Taxed in individual’s hands at slab rates | Firm taxed at 30% plus surcharge and cess | LLP taxed at 30% plus surcharge and cess | Company taxed at corporate rates (for many companies 22% plus surcharge and cess if conditions of section 115BAA are satisfied) |
| Compliance | Very low; mainly ITR and GST, if applicable | Low; firm ITR, basic records, GST if applicable | Moderate; ROC filings (Form 8 & 11), ITR‑5, audit only after thresholds | High; ROC annual filings (AOC‑4, MGT‑7/7A), board/AGM, mandatory annual audit |
| Audit | Only if turnover exceeds tax audit limits | Tax audit subject to Income‑tax Act limits | Statutory audit if turnover > ₹40 lakh or contribution > ₹25 lakh (plus tax audit, if applicable) | Statutory audit mandatory every year irrespective of turnover |
| Fund‑raising | Mainly own capital and loans | Partners’ capital and bank loans | Limited to partners’ contributions and loans | Can issue shares, attract investors, ESOPs, easier VC/PE funding |
| Continuity | Ends with owner’s death/insolvency | Can dissolve on death/retirement unless deed provides otherwise | Perpetual succession | Perpetual succession |
4. Pros and Cons of Each Structure
Sole Proprietorship
Advantages
- Very easy and inexpensive to start (PAN, bank account, basic registrations).
- Minimum compliance – no ROC filing, only individual income tax return and GST (if applicable).
- Full control and quick decision‑making, ideal for very small or trial businesses.
Disadvantages
- Unlimited personal liability for all business debts and legal claims.
- Difficult to raise equity funding; mainly personal funds and bank loans.
- Business has no independent existence; generally stops with owner’s death or closure.
Best suited for: Freelancers, small shops, professionals starting alone and low‑risk activities.
Partnership Firm
Advantages
- Simple to start with a partnership deed, low registration cost if registered.
- Flexibility in profit‑sharing and management as per partnership deed.
- Compliance burden is low compared to LLP or company (no MCA filings, only firm ITR and GST, if applicable).
Disadvantages
- Partners have unlimited, joint and several liability; one partner’s act can bind all.
- Not a separate legal entity; firm’s and partners’ identities overlap.
- Limited perception among investors and larger clients; less suitable for scaling.
Best suited for: Family businesses or small joint ventures where partners fully trust each other and want simplicity.
Limited Liability Partnership (LLP)
Advantages
- Separate legal entity; partners’ liability limited to their agreed contribution.
- Compliance is lower than a private company: annual ROC filings (Form 8 – Statement of Accounts & Solvency, Form 11 – Annual Return), and statutory audit only beyond prescribed turnover/contribution limits.
- Flexible internal management through LLP agreement instead of rigid company law provisions, suitable for professional firms.
Disadvantages
- Fund‑raising from investors is difficult as LLP cannot issue equity shares.
- Sometimes perceived as less “corporate” than a private limited company by investors and lenders.
- Profits are taxed at LLP level at flat rate; cannot access certain company‑specific tax regimes.
Best suited for: Professional practices, local service firms, and SMEs wanting limited liability with manageable compliance and no major equity funding requirement.
Private Limited Company
Advantages
- Separate legal entity with perpetual succession and strong brand perception.
- Limited liability for shareholders; risk limited to unpaid share capital.
- Easier to bring in investors, co‑founders and ESOPs; preferred structure for startups and growth‑oriented businesses.
- Access to beneficial corporate tax regimes subject to conditions (for example, 22% plus surcharge and cess under section 115BAA).
Disadvantages
- Higher formation and annual maintenance cost (incorporation fees, professional fees, audit fees).
- Stricter compliance: board meetings, AGM, statutory registers, yearly ROC filings and mandatory statutory audit every year.
- More disclosure requirements and regulatory oversight compared to other forms.
Best suited for: Startups, growing businesses, technology ventures and enterprises targeting institutional investors or large customers.
5. How to Choose the Right Structure
Some practical points to help you decide:
- Number of founders
Only one owner, testing a small, low‑risk idea: start with a Proprietorship.
Two or more owners: consider Partnership, LLP or Private Limited Company. - Risk and liability level
High‑risk sector (large contracts, borrowings, potential claims): prefer LLP or Private Limited for limited liability.
Low‑risk, small‑ticket operations: Proprietorship or Partnership may be acceptable. - Compliance budget and bandwidth
Very low budget and minimal paperwork: Proprietorship or simple Partnership.
Ready for moderate compliance: LLP.
Comfortable with full corporate compliance and professional support: Private Limited Company. - Funding and growth plan
Only own funds and small bank loans, local scale: Proprietorship / Partnership / LLP.
Plan to raise funds from angels/VCs, issue shares, offer ESOPs: Private Limited Company is usually preferred. - Brand and client perception
For local retail and micro businesses, structure matters less.
For B2B, corporate or international clients, Private Limited (and to some extent LLP) gives better comfort.
6. Professional Guidance
Each business is different in terms of turnover, risk profile, industry and future plans. Before you finalise your business structure, it is advisable to discuss your case with a Chartered Accountant who can analyse your tax impact, compliance cost and funding requirements and recommend the most suitable option for you.
