Business Setup guide
Choosing a business structure: proprietorship, LLP or private limited
7 min readUpdated
The four common structures
Proprietorship — no separate legal identity. Fastest to start, taxed at your personal slab, unlimited personal liability. Right for a solo service business testing the market.
Partnership firm — a deed between partners, optionally registered. Simple, but every partner is jointly and severally liable for the firm's debts.
LLP — a separate legal person with limited liability and lighter annual compliance than a company. Well suited to professional practices and small partnerships not raising equity.
Private limited company — a separate legal person, limited liability, shares that can be issued to investors and employees. Highest compliance load, and the only structure institutional investors realistically fund.
What actually decides it
- Liability — if the business carries credit risk, inventory or client claims, limited liability is worth the compliance cost.
- Tax — a proprietor pays slab rates; companies pay a flat corporate rate, with a lower band available to eligible new manufacturers. High personal income plus retained profits usually favours a company.
- Compliance cost — proprietorship costs the least each year; a company carries audit, ROC filings, board meetings and DIR-3 KYC.
- Funding — angel and VC money needs equity, so a private limited company. Bank credit is available to all structures, priced on financials.
- Closure — winding down a proprietorship is quick; striking off a company takes months and unfiled returns must be cleared first.
The first-year compliance you are signing up for
A private limited company must appoint an auditor within 30 days, file INC-20A within 180 days of incorporation, complete DIR-3 KYC for every director by 30 September, and file AOC-4 and MGT-7 after the AGM. An LLP files Form 8 and Form 11 annually regardless of turnover — including nil years, where penalties accrue per day with no cap.
Choose the structure you can maintain, not the one that sounds most impressive.
Frequently asked questions
- Can I convert a proprietorship into a company later?
- Yes. Conversion or a slump sale of the business into a new company is common, though it needs planning around asset transfer, GST registration and existing contracts.
- Is GST registration automatic on incorporation?
- No. GST is a separate registration, though it can be applied for alongside incorporation through the SPICe+ AGILE-PRO form.
- Does an LLP need an audit?
- Only above the prescribed turnover or contribution limits, which is why LLPs are cheaper to run than companies at small scale.
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