HomeJAGRUK ENTREPRENEURBUSINESS BASICSSole Proprietorship vs LLP vs Private Ltd. | Business Basics

Sole Proprietorship vs LLP vs Private Ltd. | Business Basics

The world of business is as enticing as it is complicated. While many dream of starting their own business someday, the beginning and sustenance of a business is not an easy task. Without the right guidance, it can turn into a blunder instead of a handsome profit. This article details various important subjects on the matter of starting one’s own business.

Which Designation should you pick for your business?

There are 5 different designations of business to choose from as follows:

Sole Proprietorship

Under Sole Proprietorship you get the designation of a Proprietor and it is also known as sole trader or a proprietorship. Sole Proprietary is a one man entity. There is no difference between the owner and the entity. All the liability is on the owner himself. Likewise, he takes all profit and losses himself. It is overall an unincorporated business that has just one owner and he pays personal income tax on the profits he earns from his proprietorship business. 

This is one of the simpler and easy businesses to establish or break down because there is no government regulation involved. Sole owners of business, individual self-contractors and consultants often run these types of businesses under their own name since creating a separate business or trade name is not a requirement.

Partnership Firm

Partnership is owned by two or more people where the ownership and share in profit and loss are split between the owners in a certain agreed ratio. The Partnership is established through the Partnership Agreement or Deed. Partners are collectively called firm.

It is basically an arrangement or understanding between different parties who are called the Business Partners, wherein they agree to cooperate for the advancement of their mutual business interests. The partners involved in the partnership may be individuals, businesses, schools, governments, interest-based organizations or combinations of these. 

Private Limited (Pvt. Ltd.)

It is a business entity formed under Companies Act 2013. A Private Limited business is a company which is privately held and formed with laws and regulations, where the shareholders have limited liability and restrictions on the ownership. The liability of members of Pvt Ltd firms is restricted to the number of shares they hold. Private Limited company shares cannot be traded publicly in the stock market. 

This is one of the most popular business registrations done in India. Since it provides limited liability protection to the shareholders, has the opportunity to raise equity funds and has a separate legal entity status, it is the most preferred type of business entity for the majority of small and medium businesses which are family owned or professionally managed. The minimum requirements for setting up a Private Limited Company are that there must be at least two Directors who are adults, one of them must be an Indian citizen and resident, the other director can be a foreign national. The company must also have two shareholders who can be natural persons or artificial legal entities. 

Limited Liability Partnership (LLP)

This is a business entity formed under Limited Liability Partnership Act, 2008 where the owner is called a Partner. It has a separate legal entity. A limited liability partnership (LLP) is a type of Partnership Firm where the partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.

But in an LLP, some of the partners may have the limited liability equivalent to the shareholders of the company. In some states, one partner has to be a general partner with unlimited liability meaning he is the one actually responsible for the debts of the business, and any lawsuits filed against them. As in a partnership or limited liability company (LLC), the profits of an LLP are allocated among the partners for tax purposes, avoiding the problem of “double taxation” often found in corporations.

One Person Company (OPC)

This is similar to Private Limited but with only one owner called the Director. One Person Company (OPC) means a company formed with only one person as a member, unlike the traditional manner of having at least two members. 

business

How to register for each business?

Sole ProprietorshipPartnership FirmPvt Ltd.LLPOPC
No registration is required. As an individual, your sole proprietorship already holds. You just require a government certificate such as GST or Shop & Establishment, to open a current account in a bank. You can also open the current account with the name of the business instead of your own.Registration is optional under the Partnership Act, 1932. Hence, there can be both registered and unregistered partnership firms. But a Partnership Deed or Agreement between all partners stating the division of business and business rules is mandatory. Registration for partnerships is necessary when owners want to purchase an immovable asset for it.It is registered with the Ministry of Corporate Affairs (MCA).It is registered with the Ministry of Corporate Affairs (MCA).It is registered with the Ministry of Corporate Affairs (MCA).

How to select the name of the business?

Sole ProprietorshipPartnership FirmPvt Ltd.LLPOPC
Can keep any name of your choice as long as it is not a trademarked term/name and does not have words such as “partnership”, “pvt ltd.”, “LLP”, etc. Similarly, for Partnership Firm, one can keep any name as they wish, keeping in mind the rules for sole proprietorship. Can only use names approved by the Registrar of the company from the MCA. It is not possible to get names which are already registered by other businesses. Additionally, a suffix is added to the name to distinguish it. Since there are already lakhs of businesses registered, it is difficult to get the name of your choice hence it is not necessary to keep your company and brand/product/service name the same. They both can be different.Can only use names approved by the Registrar of the company from the MCA. It is not possible to get names which are already registered by other businesses. Additionally, a suffix is added to the name to distinguish it. Since there are already lakhs of businesses registered, it is difficult to get the name of your choice hence it is not necessary to keep your company and brand/product/service name the same. They both can be different.Can only use names approved by the Registrar of the company from the MCA. It is not possible to get names which are already registered by other businesses. Additionally, a suffix is added to the name to distinguish it. Since there are already lakhs of businesses registered, it is difficult to get the name of your choice hence it is not necessary to keep your company and brand/product/service name the same. They both can be different.

What is the legal entity or liability of the business?

Sole ProprietorshipPartnership FirmPvt Ltd.LLPOPC
The promoter has unlimited liability. This means that the promoter is personally liable for the liabilities of the business and his own personal assets can be sold to recover losses in the business. The promoter has unlimited liability. This means that the promoter is personally liable for the liabilities of the business and his own personal assets can be sold to recover losses in the business. The promoter has limited liability, equal to their shareholding capacity of the company. The Directors and Shareholders of a Pvt Ltd company are not personally liable for the liabilities of the company.The promoter has limited liability, equal to their shareholding capacity of the company. The Partners of a LLP company are not personally liable for the liabilities of the company.The promoter has limited liability, equal to their shareholding capacity of the company. The Directors and Nominee Director of an OPC are not personally liable for the liabilities of the company.

What are the limitations on the members of the business?

Sole ProprietorshipPartnership FirmPvt Ltd.LLPOPC
Can have only 1 member who is the owner and called the Proprietor.There can be a minimum of 2 and maximum of 20 Partners in the partnership firm.There can be a minimum 2 Directors & 2 Shareholders, up to a maximum of 200 Shareholders. The Shareholder can be another Pvt. Ltd Company as well with shares of another Pvt Ltd with them.There can be a minimum 2 Partners but there can also be an unlimited number of Partners.There can be 1 Director and 1 Nominee Director, who will serve in place of the Director in case he becomes invalid/unavailable. 

What tax has to be paid for the business?

Sole ProprietorshipPartnership FirmPvt Ltd.LLPOPC
The owner is taxed as an individual, based on the total income of the Proprietor. No separate business PAN is required.Flat 30% tax payment and a separate business PAN is mandatory.Usually 30% tax payment, but in some conditions it becomes  25% or 22% based on the business turnover. Separate business PAN is mandatory.Flat 30% tax payment and a separate business PAN is mandatory.Usually 30% tax payment but in some conditions it is 25% or 22%. Separate business PAN is necessary.

Which entity is suitable for which business?

Sole ProprietorshipPartnership FirmPvt Ltd.LLPOPC
Suitable for business where less capital is required, lower tax rates,independent operations,unorganised structure,lower operational risk,and lower compliance requirements.Similar to Proprietorship, Partnership Firm is best for MVP trial of a startup (Example Qriyo). If the business turnover is increasing then also this is a good option to keep your personal income separate from business income. If there is no actual partner for the business, you can always add a family member as a silent partner who will not have a say in the daily running of the business.This is for businesses with a High Turnover, External Funding & Investment requirements, M&A, Large Loan for working capital requirements, Rapid Growth seeking, Risk taking, Subsidy Grant required, and International Expansion seeking. Everything which requires trust in the company.Service oriented businesses with limited capital requirements, that can be satisfied with partner capital/loan, and having multiple partners in the business.Suitable for Proprietor looking for limited liability and 100% control of the business. Moreover, when OPC has paid up share capital that exceeds Rs. 50 lakhs and the annual turnover is above Rs. 2 crores, then it is obligatory for them to convert into a Private Limited Company. 
Examples: Retail Trading, Home based business, Services, Manpower supply, contractors, Freelancing, Clinic, Consultancy, Repair & Paint, small IT Firms, Coaching ClassesExample: Manufacturing,  Financial services, E-commerce, Construction companies, Startups post MVP. Example: CA/Law/Management Firms, IT Companies. Manpower Supply, Sales Promotion, and Digital Marketing agencies.Example: Restaurant, Retail Store, and Franchise. 

Compliances, set-up and annual cost?

Sole ProprietorshipPartnership FirmPvt Ltd.LLPOPC
CompliancesLowLowHighModerateModerate
Set-up and annual costNoneLow: 3,000 – 5,000High: 15,000 – 20,000Moderate: 10,000 – 15,000Moderate: 10,000 – 15,0000

What is a Hindu Undivided Family (HUF)?

It is a business run by a family where each member has its own contribution towards running the business. In this case, the family can create a business entity called a HUF. It does not require any business registration although a deed is optional between family members. For taxation, HUF is seen as a separate entity, hence it gets the same rebates as an individual of no tax upto Rs 2.5 lakh and 80C deductions. A separate PAN is required for HUF. family members can be given salaries and deductions. But this is only applicable for Hindu, Skhs, Jain and Buddhists followers.

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