How to Start a Business in India: Proprietorship vs. Private Limited Company
Starting a business in India is an exciting journey, but it requires careful planning, legal compliance, and a clear understanding of the business structure you choose. There are two business structures in India which are very common, one is Proprietorship and other is Private Limited Company. Each has its own advantages, disadvantages, and legal requirements. This article will guide you through the steps to start a business in India under these structures.
1. Understanding the Business Structures
Proprietorship
A proprietorship is the simplest and most common form of business structure in India. In this form of business, everything organized by a single individual, who is known as proprietor. This person has overall control over the entire business but he is also personally liable for all liabilities.
Key Features:
- Easy to start and manage.
- No separate legal identity; the proprietor and business are considered the same.
- Minimal regulatory compliance.
- Ideal for small businesses, freelancers, or solo entrepreneurs.
Private Limited Company
A Private Limited Company is a separate legal entity registered under the Companies Act, 2013. It offers limited liability protection to its shareholders, meaning their personal assets are not at risk in case of business losses.
Key Features:
- There are at least 2 shareholders and 2 directors.
- Limited liability protection.
- Funds are easily available.
- Suitable for medium to large-scale businesses.
2. If one has to choose to start a Proprietorship-
Steps to Start a Proprietorship in India
Starting a proprietorship is relatively straightforward. Here’s how you can do it:
Step 1: Choose a Business Name
Select a unique name for your business which should not be similar to any other existing trademarks.
Step 2: Open a Bank Account
Current bank account should be opened in company’s name. Most banks require a GST registration or a Shop and Establishment Act license to open a business account.
Step 3: Register for GST (if applicable)
If your business turnover exceeds ₹20 lakh (₹10 lakh for special category states), you must register for GST. Even if your turnover is below this threshold, GST registration is recommended for credibility.
Step 4: Obtain Licenses and Permits
According to business type, one may require additional licenses, such as:
- Shop and Establishment Act License (mandatory for all businesses).
- Registration in MSME (it is optional but beneficial for availing government schemes).
- Industry-specific licenses (e.g. FSSAI for food businesses).
Step 5: Start Operations
Once the above steps are completed, you can start your business operations. Maintain proper books of accounts and comply with tax regulations.
3. If one has to choose to start a Private Limited company-
Steps to Start a Private Limited Company in India
Starting a Private Limited Company involves more formalities but offers greater benefits. Here’s a step-by-step guide:
Step 1: Obtain Digital Signature Certificate (DSC)
Every director should have a DSC for filing electronic documents with the Ministry of Corporate Affairs (MCA).
Step 2: Application for Director Identification Number (DIN)
Every director must have a DIN, which can be applied for during the company incorporation process.
Step 3: Reserve a Company Name
File an application with the MCA to reserve your company name using the RUN (Reserve Unique Name) service. The selected name should be unique and naming guidelines must be complied.
Step 4: Filing of Memorandum of Association (MOA) and Articles of Association (AOA)
The MOA and AOA outlines the objectives, rules, and regulations of the company. These documents must be carefully drafted and signed by the shareholders.
Step 5: File for Incorporation
The application form should be filed along with incorporation documents such as MOA, AOA etc. to the MCA through the SPICe+ form. Requisite and stamp duty should be paid.
Step 6: Obtain Certificate of Incorporation
Once the MCA approves your application, you will receive a Certificate of Incorporation. This document legally establishes your company.
Step 7: Register for GST, PAN, and TAN
When incorporation is completed, application should be filed for Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN). Register for GST if your business requires it.
Step 8: Open a Bank Account
Open a current bank account in the company’s name using the Certificate of Incorporation and PAN.
Step 9: Comply with Ongoing Requirements
A Private Limited Company must comply with annual filing requirements, such as:
- Filing annual returns with the MCA.
- Conducting annual general meetings (AGMs).
- Maintaining statutory registers and records.
4. Taxation Benefits: Proprietorship Firm vs. Private Limited Company
Each structure has its own set of advantages and disadvantages, particularly when it comes to taxation. Understanding the tax implications of each can help you make an informed decision that aligns with your business goals and financial planning.
Ø Taxation of Proprietorship Firm
In a proprietorship firm, the business income is treated as the owner’s personal income. The taxation is as follows:
Income Tax Slabs: The income from the proprietorship is added to the owner’s other income (if any) and taxed as per the individual income tax slabs. For the financial year 2023-24, the tax slabs are as follows:
Up to ₹2.5 lakh: Nil
₹2.5 lakh to ₹5 lakh: 5%
₹5 lakh to ₹10 lakh: 20%
Above ₹10 lakh: 30%
Presumptive Taxation: Small businesses with a turnover of up to ₹2 crore can opt for presumptive taxation under Section 44AD of the Income Tax Act. In this scheme, the business income is presumed to be 8% (6% for digital transactions) of the turnover, and tax is calculated accordingly. This simplifies the tax filing process and reduces compliance burden.
No Dividend Distribution Tax: Since the income is directly taxed in the hands of the proprietor, there is no additional tax on dividend distribution.
Ø Taxation of Private Limited Company
A private limited company is work as a separate legal entity, so it is taxed as a separate entity. The taxation structure is as follows:
Corporate Tax Rate: For the financial year 2023-24, the corporate tax rate for domestic companies is 25% if the turnover is up to ₹400crore. For companies with turnover exceeding ₹400crore, the tax rate is 30%. Additionally, a surcharge and cess are applicable.
Dividend Distribution Tax (DDT): Dividends distributed to shareholders are taxed at the rate of 15% (plus surcharge and cess) in the hands of the company. However, shareholders receiving dividends are also required to pay tax on the dividend income as per their applicable income tax slab.
Tax on Profits: The Company’s profits are taxed at the corporate tax rate, and the after-tax profits can be retained within the company or distributed as dividends. Retained earnings can be used for business expansion or other investments.
Tax Deductions and Incentives: Private limited companies can avail various tax deductions and incentives under the Income Tax Act, such as deductions for research and development, export profits, and investments in certain sectors. The effective tax rate can reduce significantly by these incentives.
Ø Comparison of Taxation Benefits
| Aspect | Proprietorship Firm | Private Limited Company |
| Tax Rate | Taxed as per individual income tax slabs | Corporate tax rate of 25% or 30% |
| Dividend Distribution | No additional tax on dividends | 15% DDT plus tax in the hands of shareholders |
| Presumptive Taxation | Available for small businesses | Not applicable |
| Tax Deductions | Limited deductions available | Wide range of deductions and incentives |
| Compliance Burden | Low | High |
| Liability | Unlimited personal liability | Limited liability for shareholders |
Ø Which is better for Taxation Purposes?
The choice between a proprietorship firm and a private limited company depends on various factors, including the scale of operations, liability concerns, and long-term business goals.
Proprietorship Firm: Ideal for small businesses with low turnover and minimal compliance requirements. The tax burden is relatively lower, especially if the income falls within the lower tax slabs. However, the lack of limited liability and limited access to tax deductions can be a drawback.
Private Limited Company: Suitable for businesses with higher turnover and growth aspirations. The corporate tax rate may be higher, but the availability of tax deductions and incentives can offset the tax burden. Additionally, the limited liability protection and ability to raise capital make it a preferred choice for scaling businesses.
5. Key Considerations When Choosing a Business Structure
Liability: Proprietorships offer no liability protection, while Private Limited Companies provide limited liability.
Compliance: Proprietorships have fewer compliance requirements compared to Private Limited Companies.
Funding: Private Limited Companies are more attractive to investors and lenders.
Scalability: Private Limited Companies are better suited for scaling operations.
6. Conclusion
Starting a business in India as a proprietor or a Private Limited Company depends on your business goals, scale, and risk appetite. Proprietorships are ideal for small, low-risk ventures, while Private Limited Companies are better for businesses with growth ambitions and a need for liability protection. Whichever structure you choose, ensure you comply with all legal and regulatory requirements to build a strong foundation for your business.
With the right planning and execution, your entrepreneurial journey in India can be both rewarding and successful. Good luck!
Read here Corporate tax rates in India