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Proprietorship Firm vs. Private Limited Company : The Important Differences

Proprietorship Firm vs. Private Limited Company

Before starting a business, an individual explores all the options and calculates the pros and cons of every type of company. Although a private limited company is the most preferred one, some individuals might want to go for another entity like a partnership firm or a proprietorship firm. Having sufficient knowledge about various entities will help them avail all the benefits. This article will help clarify the potential startups by comparing Proprietorship firms and Private limited companies. 

Proprietorship Firm 

Meaning

A sole proprietorship firm is an unincorporated entity run and owned by a single individual without creating a separate legal entity from its owner, i.e., The identity of the owner and the company are identical. The rights and liabilities of both the owner and the company are the same. It is one of the easiest and inexpensive business forms and is very popular among small businesses, sole owners of companies, self contractors etc.

Advantages of Proprietorship Firm

Following are the advantages of a proprietorship firm :

  • A proprietorship firm is the easiest and simple type of company in terms of incorporation and operation.
  • There is no distinction between the owner and the business, which rules out the idea of the board of directors and shareholders. 
  • This type of business is very convenient for sole business owners and small businesses as it does not involve rules and regulations related to the board of directors and shareholders. The compliances are relatively lesser in this type of business.
  • The firm must file for a single income tax return since the owner and company are same. 
  • The owner holds no accountability to anyone except the authorities and rules established by law.

Private Limited Company 

Meaning 

A private limited company is owned privately with a maximum of 200 shareholders and no transfer of shares to the public. The liability of shareholders is limited to the extent of their shares.

Advantages of Private Limited Company

Following are the benefits of a private limited company:

  • Upon incorporation and proper registration, a private limited company becomes a separate legal entity with perpetual succession.  It also separates the rights and liabilities of the shareholders, directors and members from a company. 
  • The shareholders have limited liability that can be limited by share, guarantee etc.
  • Since there is no transfer of shares, the chances of public interference are very low.
  • Since a private limited company has a separate legal status, such an entity has a right to sue and be sued.
  • There is no minimum paid-up capital requirement, and the Companies Act, 2013, governs all the procedures relating to a private limited company.

Key Differences between a Proprietorship Firm and a Private Limited Company 

Following are some of the key differences between a proprietorship firm and a private limited company:

Basis of classification Proprietorship firm Private limited companies 
Incorporation No formal incorporation procedure.  Incorporation is mandatory under the Companies Act,2013
Name Approval There is no requirement for name approval.Name approval is compulsory while incorporation.  Every private company’s name must end with ” Pvt. limited “.
Legal StatusA proprietorship firm has no separate legal status. A private limited company is a separate legal entity. 
Liabilities The owner is liable for the company The liability of shareholders is limited by shares. The liability of the director is different from those of a company. 
MembersThere is only one member, i.e., the owner of the company. The minimum number of members required for a private limited company is two, and the maximum number of members is 200.
Transferability of sharesThere is only one member, so there is no concept of shares in the case of a proprietorship firm. The shares are non-transferable to the public.
Existence of the companyThe existence of the proprietorship firm is entirely dependent on the owner.A registered private limited company has perpetual succession, and thus the existence of the company is separate from its members.
Ownership by a non-resident of India A proprietorship firm is owned by a single person. Such a person shall be a resident of India.Some of the directors or members can be non-resident of India. 
Compliances and regulations The Companies Act, 2013 does not provide compliance rules for a proprietorship firm.  The Companies Act,2013, governs a private limited company.
Taxes leviedThe owner of the proprietorship firm must report all of their income details along with the business profits and losses. The firm, per se, does not have to pay separate taxes.The taxes on a private limited company and its directors are separate. 

Conclusion 

An individual must be cautious before choosing the kind of entity. They should be very careful and analyze all the options in front of them. Every company has some pros and cons. If individuals want less accountability, simple procedures, fewer tax burdens, they should go for a Proprietorship firm. Still, if the individual is ready to face credibility, transparency, strict compliance, they can opt for a private limited company.  It also depends on the long-term goal of the individual; if they want to expand their business in the future, then it’s always better to start a registered private limited company under the Companies Act, 2013[1]. Still, if the goal is to run a small business with less burden and formality, a proprietorship firm is the best option for them.

Read our article:Registration Of Private limited Company Under The Companies Act, 2013: An overview

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