As a business owner, it is your responsibility to choose the right form of business structure that works best for your business and you get maximum benefits. In this article, we will discuss the proprietorship and a private limited company.
Did you know that there are majorly 9 different types of companies you can consider while starting your business in India? These are as follows:
- Proprietorship
- Partnership
- Private Limited Company
- Public Limited Company
- Unlimited
- HUF
- Cooperative
- Limited Liability Partnership (LLP)
- Non-Government Organization (NGO)
Considering the ease of choice, you might go ahead either with a sole proprietorship or a private limited company based on factors like capital, tax deductions, nature of business, profits, etc. Continue reading to gain clarity about both options.
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Proprietorship
A proprietorship is a form of business entity formed by a single person. The sole proprietor owns, manages, and controls the business operations.
Advantages of Proprietorship Firm
1- No Minimum Capital: You can start your sole proprietorship with bare minimum capital and there’s no restriction on that.
2- 100% Profits: As you are the only person involved in the business you will enjoy all the profits without having to share them with anyone. As you have invested the entire capital you will take the entire profits as well.
3- Own Decisions: You will have complete control over the business activities and can make your own decisions. According to your knowledge and expertise, you can make the right decisions accordingly
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Challenges of Proprietorship Firm
1- Unlimited Liability: You will bear all the liabilities of the business as you are the only person involved in it. In case your business goes under losses your assets and properties will be held liable to pay off the debts.
2- Lack of Expertise in Multiple Segments: Due to a lack of knowledge and expertise in every operation of the business, you might fail to run the business smoothly. Therefore having a team gives the expertise in different fields and makes it easy to run the business.
3- Raising Capital: You will have to invest the entire capital on your own. Therefore it is challenging to start a business that needs a huge investment. Business loan approval is difficult. It is comparatively difficult in getting approval for a business loan as a proprietor.
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Who Can Choose Sole Proprietorship?
- Retail traders
- Consultancy Services (Legal, marketing, etc)
- Freelancers (Content writing, Social media marketing, Blogging, graphic designing, video editing, etc.)
- Tutors (Online or offline)
- Healthcare and clinics
- Food catering, etc
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Private Limited Company
A registered entity that has a separate legal existence backed with limited liability is known as a private limited company. Registration under the Companies Act in India makes the business entity a company. It is governed by the Ministry of Corporate Affairs (MCA), commonly referred to as MCA.
Advantages of Private Limited Company
1- Limited Liability: You will only bear the liabilities of the business to the extent of shares that you hold. In case the business goes under losses, the personal assets and properties of shareholders and directors will not be held liable to pay off the company’s debts.
2- Tax Deductions: You can claim your office expenses, salaries, rent, registration cost, etc. can be shown as an expense to the company and thus reduce the tax payment.
3- Good Reputation: Owning a private limited company helps gain credibility and a good name in the market. It builds a sense of trust amongst customers, clients, suppliers, banks, etc.
4- Bank Loans: Unlike a sole proprietorship, you can access bank loans with the least compliance procedures.
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Challenges of Private Limited Company
1- Registration Process: The private limited company takes 10-15 days and costs between Rs. 6,000 to Rs. 30,000 depending upon various factors.
2- Compliance Procedures: Registered companies must follow compliance procedures, hold board meetings and general meetings, have their accounts audited, and maintain a statutory register, and file annual returns with the Ministry of Corporate Affairs.
Regardless of the type of business entity or company you own, it is mandatory to comply with tax and labor laws as part of the corporate compliance formalities.
3- Closure of the Company: The process of winding up a company can be time-consuming, costly, and complex, as compared to winding up an unregistered partnership.
Who can choose a Private Limited Company?
- Manufacturers (cosmetics, food packs, hair/skin care products, home decor, etc.)
- Traders
- Digital Marketing
- Startups
- Coaches
- Consultants
- Interior Designing
- Restaurant or Cafe, etc.
Proprietorship vs Private Limited Company
Members:
- An individual can begin a proprietorship firm. There is no need to add more people to start it.
- For a Private limited company, a minimum of 2 members need to be present and a maximum of 200 people cab could be there. So, it is important, you ensure that you fulfill this requirement.
Minimum Capital:
- There is no restriction on the minimum capital for a Proprietorship firm.
- Private limited capital must have minimum Authorised capital and Subscribed capital of Rupees 1 lakh. This is a mandatory requirement of the company.
Tax Slab:
- For a Proprietorship firm, the same slab rates levied on an individual will be applicable.
- A Private limited company with revenues under 400 crores is taxed at 25%. Over 400 crores in turnover trigger a 30% tax.
Legal Requirements:
- There are no mandatory legal formalities needed to start a sole proprietary business. However, registration and licenses might be formalities needed to start a sole proprietary business.
- For a Private Limited Company, You need to follow several steps to register your company. Firstly you need to Apply for a DIN (Director Identification Number). You must check for the name availability of your company. You need to File the E-MOA and E-AOA to register your private limited company. Once the MOA and AOA are approved, apply for the PAN and TAN (Tax Collection Account Number) of your company. You will receive the Certificate of incorporation issued by RoC along with PAN and TAN. Create a current account in the name of the company.
Liability:
- In the case of a Proprietorship firm, the liability is unlimited. Somewhere it is a disadvantage to running a proprietorship
- For a Private Limited Company, The liability is limited to the number of shares owned by the shareholders.
Tax Advantage:
- For Proprietorship, the entire profits of your business come under the tax basket.
- In the case of a Private Limited, You can save money by claiming expenses such as – Salary to the founder or directors, Preliminary expenses (Initial cost to get started), Rent expenses, and Depreciation on assets purchased.
Name:
- There are no such requirements in proprietorship. You can run your small business even without a specific name.
- For company, at the end of a company’s name, a private limited company should mention “private limited” or “Pvt. Ltd”.
Registration Cost:
- There is no requirement of such cost for a proprietorship. If there is a requirement for any specific license or certificate for your business, then in that case you may need to pay the required fees.
- For a Private limited company, there is a cost that might range between Rs. 6,000 to 30,000 depending upon the number of members, directors, share capital, and professional fees.
Essential Documents:
- Some basic documents are required to start a proprietorship firm.
- In the case of a Private company, there is a series of requirements. these are Identification documents, such as passports, voter IDs, driving licenses, and passport-size photographs, for shareholder and director identities (PAN, Aadhaar, and nationality proofs). The addresses of the member shareholders and directors (electricity bill, mobile bill, bank statement, etc.) should be provided. DSC (Digital Signature Certificate) and DIN(Director identification. A copy of the DIR-2, INC-9 and the declaration from the First Subscribers & Directors is required. The proof of business address must include a rent deed, lease agreement, electricity bill, and no objection letter from the landlord.
For more detail, you can visit the site of the Ministry of Corporate Affairs.
Conclusion
Before choosing among both the options, you should list down a factor such as the Nature of the business, expected turnover of your business, Vision, and mission of your business, Quantum of workload and clientele, etc.
After analyzing them, now you can choose the best fit for you between sole proprietorship and private limited company business models. You should analyze all the possible pros and cons, strengths and weaknesses before finalizing the business model.
You can choose sole proprietorship as your business model if you are a service-based business with minimal business operations and can handle the entire business single-handedly.
On the other hand, you can choose the private limited company as your model of business to enjoy several tax benefits, ease of access to business loans, claim dedications for business expenses and maintain the goodwill of your business.
If you are thinking of starting a new business that involves manufacturing, huge turnover, product based, etc. go ahead with a private limited company. It helps you gain better opportunities for growth in the long run.
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