Proprietorship Firm vs Private Limited Company : Difference

When we are about to start a new business we have to choose between many options that we have like Pvt Ltd Company vs Proprietorship vs Partnership vs LLP etc. Here we will discuss the difference between Proprietorship Firm and Private Limited Company & their advantages or benefits so as to have a clear understanding while making the choice between the two.

Proprietorship Vs Pvt Ltd Company

The private limited company is a company where shares of the company are owned privately and not offered for sale to the public. Its liability is limited to the extent of their shares. Shareholders either can manage the company on their own or hire directors to do the same. The limit on maximum no. of shareholders is 200. The advantages of Private Limited Company over proprietorship are:

  • Liability of shareholders is limited to the extent of their shareholding. Their personal assets are not acquired to repay the debts of the company except in the case of fraud.
  • As there cannot be public trading of shares there is restricted trade of shares. It lowers down the risk of hostile takeover.
  • It has perpetual succession and an independent identity that is different from its shareholders. The company will still exist even if shareholders die or cease to be a member
  • It has a separate and individual separate legal entity. It has its own assets and liability, it can be sued or can sue, dispose of property of the company.
  • Its procedures are governed by the Companies act 2013.
  • It has a lower tax burden and rates under the income tax act 1961.

Proprietorship advantages or benefits over pvt ltd company

A sole proprietorship is a business form where there is only one owner and there is no legal difference between the business and the owner.  Here one single person holds the control. His liability is unlimited as the business and the owner has no legal difference. The advantages of proprietorship are:

  • It is the simplest and easiest form of business
  • There is no legal distinction between the owner and the business so there is no need for the board of director or shareholders.
  • The owner is not answerable to anyone.
  • There are less legal compliances and regulation in comparison to company
  • Income tax is not paid twice as business’s income is owner’s income so the owner will have to pay only income tax.

Recommend : Disadvantages of sole proprietorship firm

Difference between Proprietorship and Private Limited Company

S. no. Point of difference Private limited company Proprietorship
1. registration It will be registered under the companies Act 2013 with the Ministry of Corporate Affairs. There is no formal registration.
2. Name of the business It must be approved by the Registrar of the company. It will end with words Private Limited Company. There is no need for approval before using the name.
3. Separate legal entity It is a separate legal entity under the companies act 2013 it does not have a separate legal entity and owner is personally liable for the liability of the business.
4. Liability Limited to the extent of their shares Unlimited
5. Minimum and maximum members Minimum- 2 members

Maximum- 200 memebrs

Minimum- 1 member

Maximum – 1 member

6. Foreign ownership In many sectors, it is allowed to invest in it under automatic approval route Not allowed
7. Transferability By way of transfer of shares Not transferable
8. Existence Independent of its members and directors Depends on the owner.
9. taxation Its profit are taxed at 30% plus surcharges and cess as applicable Under owner’s  income tax
10. Legal compliance Board and general meetings to be conducted. It has to file Annual Accounts and Annual return with the Registrar of the company every year. also, income tax return has to be filed for it. Not required to conduct any annual meeting. No need for filing an annual report with the registrar of the companies. it files income tax return on basis of income of the owner.