Starting a Business can be exciting and challenging at the same time. There are a lot of essential points to be considered that can affect your Business’s efficiency. One of those critical points is choosing the right business structure for Business.
As the Indian legal structure offers multiple options, it is crucial to choose the right one. Out of all options, business owners always struggle with choosing the right one from Proprietorship and a Private Ltd Company.
So we have decided to help you out with a simple yet effective explanation of the difference between these two structures. Let’s understand the difference, starting from the basic definition.
Private Ltd Company
Private Ltd Company is a business structure that is owned & operated by private owners and shareholders. A Private Ltd Company offers limited liabilities to its shareholders and protects their interests. The liability of each shareholder is directly proportional to his/her contribution to the company.
Sole Proprietorship
It’s a Business Structure owned, operated, and managed by a single individual who is a Citizen of India, residing in India. It is the simplest form of business registration in India and is preferred by thousands of Micro and Small Businesses in India. The incorporation of Sole Proprietorship is simple & easy as there are minimal legal formalities. But, a Sole Proprietorship has unlimited liabilities.
Comparing a Private Ltd Company and Sole Proprietorship
| Parameters | Private Ltd Company | Sole Proprietorship |
| Registration | The registration process is of a Pvt Ltd Company has to be done under The Companies Act, 2013. | There is no need to have any type of registration for incorporating a Sole Proprietorship Business. |
| Structure | It’s a legally registered structure that has to follow all the norms laid down as per the company’s act. | It’s one of the simplest business structure and has to follow minimal rules and regulations. |
| Capital required | To start a Pvt Ltd Company, a minimum Authorized Capital is mandatory. Apart from the Authorized Capital, specific Government fees have to be paid during and after the registration. So the capital requirement for a Pvt Ltd Company is substantial. | There is no need for any minimum Authorized Capital or any other such investment to start a Sole Proprietorship business. Due to this reason, it is a perfect option for all those who want to start their Business but have a very low or zero budget for investment. |
| Legal Name | A prior application has to be made on the Ministry of Commerce website through their Reserve Unique Name (RUN) service before incorporating the Business. You have to choose a unique name for your Pvt Ltd company that does match any registered business. | You can choose any name of your liking that does not match with any other business or brand. But you won’t have to apply and get approval for selecting the name for your Business. |
| Decision-making process | A Pvt Ltd Company is managed and operated by Shareholders and Directors. So for any Pvt Ltd Company, the decision making process involves passing a resolution during the board meeting. This might slow down any action. | A sole proprietorship is managed by and operated by a Single owner. There is no need to get permission, so the decision-making process is quick and seamless. |
| Profit-Sharing | The profit is disbursed amongst the Shareholders at the end of every financial year in the form of Dividends. In short, the higher the number of shares, the higher the profit. Similarly, the liabilities in the form of debts and unpaid taxes are also limited to Shareholders’ number of shares. | As a Sole Proprietorship is owned and operated by a single person, the whole profit is reaped by him/her. As there is no one to share the profits, there is no one to share the losses. Hence, the liabilities in the form of any debts and unpaid taxes have to be borne by the Proprietor. |
| Public Information | A Pvt Ltd Company has to submit all the financial reports with the Registrar of Companies. | All the financial records stay with the Sole Proprietor and have not to be submitted to any authority. |
| Legal Compliances | A Pvt Ltd Company has to follow all the rules and guidelines laid down by the Company’s Act 2013, so many legal compliances have to be followed. To conduct business operations, a Pvt Ltd Company has to furnish regular returns, financial statements, hold regular board meetings, and follow multiple other compliances. | As a Sole Proprietorship is not established under any specific Act or law, there are no specific legal compliances to follow. The legal compliances depend on the type of Business registration that the Proprietor gets for the Business. E.g., if the Sole Proprietorship business is registered under the Shop and Establishment Act, it has to follow compliances related to it. |
| Taxation | As the Pvt Ltd Company enjoys a separate legal status, it’s mandatory to pay Corporate tax according to the Income Tax act 1961. Also, a regular Income Tax Return has to be filed for a Pvt Ltd Company. All other taxes are to be paid as per the existing norms, registration, and nature of Business. | For a Sole Proprietorship, the income of a Proprietor is considered as the income of the Business. So there is no need to file a separate Income Tax Return. But if there is any other type of registration like GST, the tax depends on the transactions. |
| Perpetual Existence and Termination | A Pvt Ltd Company can exist perpetually even in case of death or incapacity of any or all shareholders or members. A Pvt Ltd Company can be terminated by following due process as per the Companies Act 2013 | For a sole proprietorship, there is no question of perpetual existence in the absence of the owner. The termination process is also quick and straightforward. |
Final Thoughts
After delving deep into the comparison between these two business structures, it’s easy to observe the fundamental difference. I hope this piece of information has offered some help to clear your confusion in choosing the right business structure.
Although both structures are well suited for Micro, Small, and Medium Businesses, the final decision depends on your Business nature, Capital investment, Business Goals, and target customer base.
But if you need any other assistance with your Business or have some more questions, please reach us.
We will surely help you out!
Probal Consulting Group is a leading Taxation, Accounting, and Compliance firm that helps individuals, MSMEs, and other businesses manage their accounting, taxation regulatory compliance affordably.
