Company, LLP, or Partnership? Picking the Right Structure

"Should I start a private limited company or stay a proprietorship?" We probably answer this question two or three times a week. And the honest answer is almost never "private limited by default". The right structure depends on how you plan to make money, how many people are with you, whether you are raising capital, and how much compliance you are willing to handle. A wrong choice at the start is not fatal, but it wastes time and money to fix later.

This post is the long-form version of the conversation we have with founders across the desk. Five structures, six dimensions, and a decision framework at the end.

The five options, briefly

Sole proprietorship

A proprietorship is the default if you start earning money under your own name without registering anything. There is no separate legal entity, no incorporation certificate, and no registrar. You register under GST, MSME, or local shop and establishment Acts as needed, but the business and you are the same person in the eyes of the law.

Partnership firm

Governed by the Indian Partnership Act, 1932, a partnership is formed when two or more people agree to share profits from a business. A partnership deed is drafted and, optionally, the firm is registered with the Registrar of Firms of the state. Registered partnerships get important procedural rights (they can sue third parties), while unregistered ones cannot.

Limited Liability Partnership (LLP)

Governed by the LLP Act, 2008, an LLP is a hybrid. It has the flexibility of a partnership but the liability protection of a company. It is a separate legal entity, can own property, can sue and be sued, and its partners' liability is limited to their contribution. At least two partners and two designated partners are required.

One Person Company (OPC)

Introduced by the Companies Act, 2013, an OPC allows a single individual to run a company with limited liability. It has most of the protection of a private limited company and is meant for solo founders who want to remain solo but still get corporate benefits. There are some restrictions (a nominee is mandatory, and an OPC converts to a private limited company once it crosses certain paid-up capital and turnover limits).

Private limited company

Also under the Companies Act, 2013, a private limited company needs at least 2 directors and 2 shareholders (up to 200). It is a separate legal entity, has limited liability, and is the default choice of almost every investor-funded startup in India. Compliance is heavier, but so are the advantages when you need to raise money or build a team.

Comparing across six dimensions

1. Liability

• Proprietorship: Unlimited. Your personal assets are on the line for business debts.
• Partnership: Unlimited and joint. Every partner is liable for the acts of every other partner.
• LLP: Limited to each partner's contribution. Other partners are not liable for one partner's wrongdoing.
• OPC: Limited to the member's share in the company.
• Private limited: Limited to each shareholder's subscription to shares.

If you are entering a line of business with meaningful financial or legal risk (manufacturing, trading in high-value goods, technology with data liability), limited liability matters a lot. If you are a solo writer or a consultant working from home, the risk is usually low enough that a proprietorship is fine.

2. Compliance burden

• Proprietorship: Lightest. ITR, GST if applicable, basic bookkeeping. No ROC filings.
• Partnership firm: Light. Partnership deed, ITR, GST. No ROC filings.
• LLP: Moderate. Annual returns with the MCA (Form 11 and Form 8), statement of accounts, and ITR. Audit only if turnover or contribution crosses specified limits.
• OPC: Moderate to heavy. Mandatory audit, board meetings (relaxed for OPC), ROC filings, and the full set of Companies Act requirements.
• Private limited: Heaviest. Statutory audit, board meetings, annual general meetings, annual return (MGT-7), financial statements (AOC-4), and multiple ROC filings. DIR-3 KYC for each director, every year.

3. Taxation

• Proprietorship: Taxed in the hands of the proprietor at individual slab rates. Can use presumptive taxation (44AD, 44ADA).
• Partnership firm: Flat rate of 30 percent plus surcharge and cess on firm's income. Partners' share of profit after tax is exempt in their hands under section 10(2A).
• LLP: Same flat 30 percent rate as a partnership, plus surcharge and cess. No dividend distribution tax, because partners take profits directly.
• OPC: Taxed as a domestic company. Current concessional rate of 22 percent under section 115BAA (without most deductions) or 25 percent at the standard rate depending on choice and turnover.
• Private limited: Domestic company rates. New manufacturing companies can opt for 15 percent under section 115BAB, subject to conditions. Dividends are now taxable in the hands of the shareholder.

4. Funding ability

• Proprietorship, partnership, and LLP: Cannot issue equity shares. Can take loans, bring in new partners with capital contributions. Not suitable for professional VC or angel investment.
• Private limited: Can issue equity, preference shares, debentures, convertible notes, and ESOPs. This is the reason virtually every VC-funded company in India is a private limited.
• OPC: Single shareholder. Not suitable for raising equity. Converts to private limited when it grows.

5. Credibility and perception

• Corporate buyers, banks, and large vendors generally treat a private limited company as the most credible counterparty, followed by LLP, then partnership, then proprietorship.
• For pitching to investors, a private limited is almost mandatory.
• For freelance work with individual clients, the structure matters much less.

6. Exit and succession

• Proprietorship: Dies with the proprietor. Succession happens through inheritance of assets, but the business itself does not continue as a legal entity.
• Partnership: Can dissolve on death or retirement of a partner unless the deed provides otherwise. Messy without a clean deed.
• LLP: Perpetual succession. Changes in partners do not end the LLP.
• OPC and private limited: Perpetual succession. Shares can be transferred (with private limited transfer restrictions) and the company continues regardless of shareholder changes.

A decision framework

Rules of thumb based on the most common founder situations we see:

If you are a freelancer or solo consultant

Start as a proprietorship. Register for GST if you cross the threshold, take an Udyam certificate, and keep clean books. If your earnings are within the 44ADA presumptive limits, tax filing is straightforward. Only move to an OPC or private limited if a specific client insists on working with a company, or if you have genuine liability exposure that personal risk cannot absorb.

If you are running a family-owned business with a few partners

A partnership firm with a well-drafted deed often suits traditional family businesses, small retail, and small manufacturing. An LLP is usually a better choice if you want limited liability, professional perception, and perpetual continuity, at the cost of slightly heavier annual compliance.

If you are bootstrapping a small startup with two or three co-founders and no immediate plans to raise money

An LLP is often the sweet spot. You get limited liability, a separate legal entity, lower compliance than a company, and clean profit distribution without dividend tax. If you later pivot to a VC fundraise, you can convert the LLP to a private limited company, though it takes time and planning.

If you are building a startup that you expect to raise external capital

Go straight to a private limited company. Every angel, every VC, every ESOP-eligible employee expects this structure. The extra compliance is a cost of doing business that you have to absorb. You can also look at DPIIT Startup India recognition to unlock the 80-IAC tax holiday and angel tax exemption.

If you are a single founder who still wants corporate status

An OPC works, but honestly, most solo founders are better off as a proprietorship until liability becomes a real concern, then converting directly to a private limited when bringing in a co-founder or an investor. OPCs have a smaller audience of service providers and a niche use case.

A note on changing structures later

Structures can be converted. A proprietorship can be turned into a partnership, LLP, or private limited. A partnership can be converted to an LLP. An LLP can be converted to a private limited. Each conversion has procedural requirements, tax implications, and timing considerations. The cleaner approach is to pick the right structure when the business is small, because the cost of migration grows with the business.

There is no universally correct answer. The best structure is the one that matches your liability profile, your compliance appetite, your funding plan, and how you want the business to look to the outside world. When in doubt, err on the side of starting simple and upgrading when you have a concrete reason.