When forming a company in India, many business owners initially choose sole proprietorship for the overall simplicity, low cost and straightforward setup of what’s practically a one-man business.
As a sole proprietor, you don’t need designated partners, complicated legal compliances or company tax registration. All you need is GST registration and to pay applicable professional taxes as an individual taxpayer. It works as a good start for most people who are looking to transition from self-employed” to a formal business status.
When the business starts to grow, however, sole proprietors would typically consider LLP or Ltd. company formation eventually. The most important reason is to separate their business liabilities from personal finances. Many other benefits practically help individuals transition from the role of an entrepreneur to a business owner.
At MPVD & Associates, we are among the top 20 CA firms in Kolkata offering bespoke company formation services across India. This blog is aimed at helping all the sole proprietors out there who are looking to grow their businesses confidently.
LLP or Ltd Company Formation? Best Option to Convert from Sole Proprietorship
Before we explain to you the differences between LLP and Pvt. Ltd. to convert from a sole proprietorship, we must inform you that it is not exactly a “conversion.” When you are forming a company in India, it will be a fresh registration. With this, you are leaving your sole proprietorship status.
Now, let’s explore the different types of limited liability companies in India. There are different types of companies, but generally for sole proprietors looking to incorporate, the standard options are Limited Liability Partnership (LLP) and Private Limited (Pvt. Ltd.), so we will focus on that to keep things simple.
- Private Limited (Pvt Ltd) Company: A Pvt. Ltd company is meant for businesses that have less than 200 members, including employees, directors and shareholders. Ltd. company formation in India requires a minimum of 2 company directors and a maximum of 15. The shares are non-transferable. The minimum paid-up capital is Rs. 1 lakh, and the company is liable to statutory audits. This setup is best suited for IT service companies, small to medium manufacturers, financial service providers and other types of SMBs.
- Limited Liability Partnership (LLP): The formation of an LLP in India is meant for businesses that don’t have a specific turnover and don’t need investors. Law firms, consulting firms, medical clinics, and bootstrapped startups are some of the ideal businesses to go for it. While it can have all the inherent advantages of a Pvt. Ltd., the key difference for LLPs is that they need no minimum paid-up capital, the company is not liable to statutory audits, and there are no limitations on the number of company directors there can be. The partners in an LLP will have no accountability or responsibility for the activities, debts or litigations of another partner.
To make things simple, below is a breakdown of all the features and key aspects to state a proper comparison between sole proprietorship, LLP and LTD company formation in India.
| Feature | Sole Proprietorship | Limited Liability Partnership (LLP) | Limited Company (Ltd) |
| Ownership Structure | Owned by a single individual | Owned by two or more partners | Owned by shareholders |
| Legal Status | No separate legal entity | Separate legal entity | Separate legal entity |
| Liability | Unlimited liability (personal assets at risk) | Limited liability (personal assets protected) | Limited liability (personal assets protected) |
| Registration | No formal registration required | Must be registered with the Ministry of Corporate Affairs (MCA) | Must be registered with the MCA |
| Compliance Requirements | Minimal compliance | Moderate compliance (annual filings, tax returns) | High compliance (annual filings, audits, tax returns) |
| Taxation | Taxed as an individual (personal income tax) | Taxed as a partnership (taxed at LLP level) | Taxed at corporate tax rate |
| Management | Single owner manages all aspects | Partners manage as per the LLP agreement | Managed by directors and governed by shareholders |
| Profit Distribution | The owner keeps all profits | Profits shared as per LLP agreement | Profits distributed as dividends |
| Transfer of Ownership | Difficult to transfer ownership | Easier to transfer with mutual consent | Shares can be easily transferred |
| Capital Contribution | Limited to owner’s personal funds | Flexible, can include contributions from all partners | Can raise capital through issuing shares |
| Perpetual Existence | Not perpetual; ends with the owner’s death | Perpetual existence (continues regardless of partner changes) | Perpetual existence |
| Funding Options | Limited funding options | Limited funding options | Easier access to funds through equity raising |
Step-by-Step Procedure for Converting Sole Proprietorship to Formation of LLP in India
As we mentioned earlier, you are practically forming a company in India from scratch. The concept of “converting” here is a bit of a fallacy. Now you know it, so let’s get on with “closing your sole proprietorship” first to get started. Below is a step-by-step guide to the entire process.
- Close proprietorship: All you have to do is cancel the trade licenses and GST registration that you did as a sole proprietor. While proprietors are not liable or answerable to anyone before they are closed, make sure you meet all your business obligations and terminate all agreements to avoid any future complications.
- Documents: For forming a company in India, you will need the documents;
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- Pan Card of all company directors
- Adhaar Card of all directors for identity verification
- Address proof documents, like electricity bills or bank statements
- Copy of a cancelled check
- Electricity bill of registered office—it could be a home, office or workshop
- No-objection certificate from the landlord if there is a rented office establishment
- Obtain the following credentials:
- Digital signature certificate (DSC)
- Director Identification Number (DIN)
- Register business name as LLP or Ltd.
- Partnership agreement
- Filing the Incorporation Application
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- Once you have all the required credentials in place, it is time to file the documents and MCA for registration. Once your application is approved, you will get a registration certificate, formalising the legal incorporation.
Get All The Assistance You Need for Forming a Company in India as a Sole Proprietor
Transitioning from a sole proprietor to forming a company in India could involve several anomalous and unprecedented situations. No matter how well-researched your journey is, it could be overwhelming for the unsavvy. Especially when it involves more people and resources for the formation of LLP in India.
We highly recommend you embark on the path with the professional guidance of MPVD & Associates. Have a cohesive solution, save money, save time and have complete confidence in having fulfilled all the compliances there is to an LLP or Pvt. Ltd company formation in India. You are welcome to contact us. Our initial consultations are free. Talk to our expert chartered accountants to get the perfect roadmap to setting up your business.