How to Choose the Right Business Structure: Proprietorship vs LLP vs Private Limited

Choosing the right business structure in India is one of the most important starting points for truly establishing an enterprise. It alters absolutely everything, from liabilities to taxation, avenues for investment, and even ease of doing business. Well, there are proprietorships, LLPs, private limited companies-thus how does one choose among these? 

Let's go ahead and boil down each so we can try to find out which fits best with your idea.

What Is a Sole Proprietorship?

A Sole Proprietorship is the simplest form of business. It is held and managed by a single individual. There exists no distinction between the owner and the business.

Advantages of Proprietorship

• Easy and cheap to start
• Minimal compliance
• Full control of business
• Direct tax filing as personal income

 Disadvantages of Proprietorship

• Unlimited personal liability
• Hard to raise capital
• Not scalable or preferred by investors
• Cannot be transferred easily

What Is an LLP: Limited Liability Partnership?

An LLP is a combination between an ordinary partnership and a private company. It gives you partnership-like flexibility while limiting liability as a company would do.

Advantages of LLP

• Limited liability to the partners
• Separate legal entity
• Lower compliance than a private limited
• No need to audit below turnover of ?40 lakh

Disadvantages of LLP

• Fewer funding options
• Cannot issue equity shares
• Too complicated a structure for very small businesses

What is a Private Limited Company?                                                                                                                                                   The private limited company, which has shareholders and directors, stands as a legal entity in its own right. It is thus the most popular corporate form adopted by startups looking for investment.

Private Limited Advantages

• Limited liability.
• Easy to raise funds (VC, Angel investors).
• Perpetual succession.
• Instills confidence in clients and vendors.

Private Limited Disadvantages 

• More compliances and documentation.
• Annual audit has to be done.
• Higher registration cost.
• Binds directors to duties and restrictions.

When Should You Choose a Proprietorship?

Select proprietorship if:

• You are just starting as a freelancer, trader, or setting up a small shop
• The risk involved is low and you want full control over the business
• You do not intend to go for external funding

When Should You Opt for an LLP?

Choose LLP if:

• You are a service provider or professional (say CA, lawyer, architect)
• Lower level of compliance but limited liability is what you want
• You have a partner but don’t need to raise the equity 

When Should You Choose a Private Limited Company?

Choose a private limited company if

• You are planning to scale and raise investments
• It gives creditworthiness with clients and vendors
• Targeting startups, tech, and export markets

Final Thoughts

There really isn't a "one-size-fits-all" solution. The choice of business structure depends on your goals and future considerations. If you want a vehicle that will take you on a pleasant journey, think of your selection like choosing between a scooter, a car, or a truck, depending on how far and fast you intend to go.

If you are just trying things out, start small with proprietorship. If you are going to be working with a partner and want legal protection, then LLP is the way to go. But if it is long term and big dreams, then the private limited route is the way to go.