Proprietorship, LLP or Private Limited: the choice you make once and pay for every year

A founder with eighteen lakh of revenue and no employees asks a consultant what to register as, and is told “Private Limited — it looks credible.” It is not wrong about credibility. It is silent about the four things that actually differ between the structures, and three of them cost money every year for as long as the business exists.

Here is what actually changes when you pick.

The rule that decides it for most small businesses

Presumptive taxation is the simplest filing regime in Indian tax law. You declare a fixed percentage of turnover as profit — 8% for business, 6% on digital receipts, 50% for listed professions — pay tax on that, and you are excused from maintaining detailed books or getting a tax audit. No reconstructed P&L, no depreciation schedules, no auditor.

It is available to a resident individual, a Hindu Undivided Family, and a partnership firm. It is not available to an LLP, and it is not available to a company.

That single exclusion is the sharpest fork in the road, and almost nobody is shown it before they incorporate. The moment you become an LLP or a Private Limited you have permanently given up the cheapest compliance path available to a small Indian business, in exchange for benefits you may not need for years.

The thresholds are generous enough to cover most first businesses:

• ₹2 crore of turnover for a business, rising to ₹3 crore where cash receipts are 5% or less of gross receipts
• ₹50 lakh for a specified profession, rising to ₹75 lakh on the same cash condition

A note on numbering, because it will come up. These were Sections 44AD and 44ADA of the Income-tax Act, 1961. The Income-tax Act, 2025 took effect on 1 April 2026 and folded them into a single Section 58. The substance carried over unchanged — including the exclusion of LLPs — but your accountant will probably still say “44AD”, and you will both mean the same thing.

What each structure costs you in a year

Sole proprietorship

• Not a separate legal person. The business is you: your PAN, your income, your liability, without limit.
• No incorporation step. You come into existence through the registrations your activity triggers — GST, Udyam, shop and establishment, a trade licence.
• Profit is taxed once, at your individual slab.
• Presumptive taxation available.
• Nothing to file with the MCA. Ever.

Cheapest to run by a distance. Its one serious defect is unlimited liability, and how much that matters depends entirely on what you do — a consultant's exposure and a chemical trader's exposure are not the same risk, and pretending they are is how people over-structure.

Partnership firm

• Two or more people, with unlimited and joint and several liability — a partner's mistake is collectible from your personal assets.
• Registration under the Indian Partnership Act, 1932 is technically optional. Treat it as compulsory. An unregistered firm cannot file a suit to enforce a contractual right against a third party, so the day a customer refuses to pay is the day you discover you cannot sue them.
• Taxed at a flat 30% plus surcharge and cess — worse than the individual slab at low income, better at high income.
• Presumptive taxation available. A partnership firm qualifies; an LLP does not.

LLP

• Separate legal entity, liability limited to each partner's contribution. Registered with the MCA.
• Audit only above a threshold: turnover over ₹40 lakh, or partner contribution over ₹25 lakh. Below both, no auditor.
• Two annual MCA filings on fixed dates — Form 11 by 30 May, Form 8 by 30 October — whether or not you traded.
• Taxed at 30%, with no access to the concessional corporate rates.
• No presumptive taxation.
• No shares. You cannot issue equity to an investor and you cannot run an ESOP.

The LLP looks like a compromise and often behaves like the worst of both ends: company-grade filing obligations, partnership-grade tax rate, and none of the fundraising ability that would justify being a company. It earns its place when you need liability protection across several partners and will never raise equity — professional services partnerships, mostly.

Private Limited

• Separate legal entity, limited liability, minimum two shareholders and two directors.
• Statutory audit from the first rupee. Under Section 139 of the Companies Act, 2013 every company must appoint an auditor — within 30 days of incorporation — and have its accounts audited annually, irrespective of turnover, profit, or whether it traded at all. There is no small-company exemption. A company with zero revenue still pays for an audit.
• An annual filing set that runs well past the audit: AOC-4, MGT-7, auditor appointment, director KYC, board and general meetings with minutes to match.
• Corporate tax at 25% where turnover is within ₹400 crore, or 22% under the concessional regime (plus surcharge and cess) if you forgo specified deductions.
• The only structure that can issue shares. If you will raise angel or VC money, or grant ESOPs, this is not a preference — it is the only option.

The profit-extraction trap

This is the part that surprises owners who incorporated for the tax rate.

In a proprietorship or a firm, profit is taxed once and it is yours.

In a company, profit is taxed at the corporate rate and then taxed again when you move it to yourself. Dividend Distribution Tax was abolished in April 2020, which sounds like relief and is the opposite: dividends are now taxable in the shareholder's hands at their slab rate, with TDS at 10% on dividends above ₹5,000 to a resident. Corporate tax, then slab tax, on the same rupee.

The standard answer is to take money out as director's remuneration instead — deductible for the company, taxed once in your hands. It works. It also means payroll, TDS on salary, and a defensible reason why the remuneration is the amount it is. A solved problem, but not one you had before.

So when is each one right?

• Proprietorship — you are one person, the liability risk of your work is low or insurable, and turnover sits inside the presumptive limits. This describes a very large share of Indian small businesses and there is nothing second-rate about it.
• Partnership firm — the same, with partners you would trust with your personal assets, and you want presumptive taxation. Register it.
• LLP — you need liability protection across multiple partners, you will not raise equity, and turnover has outgrown the presumptive limits anyway.
• Private Limited — you will raise equity, grant ESOPs, carry genuinely large liability, or sell to buyers whose procurement will not onboard anything else.

That last clause deserves care. Some buyers — large corporates, certain tenders, some marketplaces — really do filter on entity type, and if that is your actual customer base then the compliance cost is a cost of sale rather than overhead. Find out before you assume it. A lot of owners incorporate for a procurement rule that turns out not to exist.

Changing your mind later

Conversion is possible in most directions — proprietorship to company, firm to LLP, LLP to company — and none of it is free. Expect fresh registrations, asset and contract transfers, a new PAN and GST registration, new bank accounts, and in some routes capital gains and stamp duty questions worth taking advice on.

That is an argument for choosing deliberately, not for choosing the largest structure defensively. Converting up when you actually need to is a normal, budgetable event. Paying for a company's audit and filings for four years because you might one day raise money is a slow leak with nothing at the other end.

The question is not which structure looks most serious. It is: will I raise equity, how much liability am I actually carrying, and am I about to give up presumptive taxation to buy something I will not use this year.

Rates, thresholds and section numbers all moved when the Income-tax Act, 2025 came into force. Check anything you are about to act on at incometax.gov.in and mca.gov.in, or have Vyavsay AI work it through against your turnover, your partners and your funding plans.

The figures above were current when this was written. Thresholds, corporate rates and filing requirements have all changed before and will change again — this is background for the conversation with your accountant, not a substitute for it.