Proprietorship vs LLP vs Private Limited in India — Cost Compared

The structure decision is usually argued on liability and prestige. The recurring compliance cost is more concrete, and more likely to decide whether the structure survives.

The usual advice is to pick a structure based on liability protection and the ability to raise investment. Both matter. But the figure that decides whether a structure is sustainable is the one nobody quotes at the start: what it costs to keep compliant every year, whether or not the business makes money.

Sole proprietorship

Not a separate legal entity. The business is you, and its income is your income, taxed at your slab rate.

Recurring obligations: an income tax return; GST returns if registered; TDS returns if you deduct. No ROC filing, no audit unless turnover crosses the section 44AB thresholds, no separate books required if you use the presumptive scheme.

Typical annual cost: ₹8,000 to ₹25,000 for a professional to handle filings, depending on whether GST is involved.

The real cost: unlimited personal liability. A business debt is your debt, and personal assets are reachable. Raising outside investment is effectively impossible.

Suits a consultant, a freelancer, or a small trading business with limited counterparty risk. The presumptive scheme makes the tax side genuinely simple at this size.

Limited liability partnership

A separate legal entity with limited liability for partners, taxed at a flat 30% plus surcharge and cess. No dividend distribution tax — profit share in the hands of partners is exempt, which is a real advantage over a company for a business that distributes most of what it earns.

Recurring obligations: Form 11 by 30 May, Form 8 by 30 October, an income tax return, DIR-3 KYC for each designated partner. Audit only if turnover exceeds ₹40 lakh or contribution exceeds ₹25 lakh.

Typical annual cost: ₹15,000 to ₹40,000.

The real cost: institutional investors do not invest in LLPs. Converting later is possible but expensive and takes months. Penalties under the LLP Act for late filing are ₹100 per day per form with no ceiling, which has produced some genuinely large bills for dormant LLPs nobody closed.

Suits professional firms and businesses with several working partners that do not expect external equity.

Private limited company

A separate legal entity, limited liability, and the only one of the three that institutional money will invest in. Taxed at 25% where turnover is within the prescribed limit, or 22% under section 115BAA without most exemptions — both below the LLP rate.

Recurring obligations: statutory audit regardless of turnover; AOC-4 and MGT-7A with the ROC; at least four board meetings a year with minutes; an annual general meeting; statutory registers; DIR-3 KYC; DPT-3; income tax return; plus GST and TDS where applicable.

Typical annual cost: ₹35,000 to ₹1,00,000, of which audit is the largest component and is unavoidable.

The real cost: taking money out. Salary is deductible but attracts TDS and payroll obligations. Dividends are taxable in the shareholder's hands at slab rates, on profit already taxed in the company — the effective burden on distributed profit can exceed 45%. A director's loan is subject to deemed dividend provisions.

Suits a business that intends to raise equity, hire meaningfully, or retain profit for growth rather than distribute it.

The comparison that matters

A business earning ₹30 lakh of profit, distributing all of it:

Proprietorship — taxed at slab rates on your total income. Compare the regimes, since the new one often wins here.
LLP — 30% plus cess at entity level, around ₹9.4 lakh. Profit share to partners is then exempt.
Private limited — 25% plus cess, around ₹7.8 lakh, then dividend tax in the shareholder's hands at their slab rate on what is distributed.

For distributed profit, the LLP usually comes out ahead. For retained profit, the company does. The structure question is therefore mostly a question about what you intend to do with the money.

Practical guidance

Start as a proprietorship if you are testing something and revenue is uncertain. The cost of being wrong is low and conversion is straightforward.

Choose an LLP if there are working partners, liability matters, and outside equity is not in the plan.

Choose a private limited company if you will raise money, or if you need to retain profit at the lower corporate rate.

And whichever you pick — close it properly if you stop. A dormant LLP or company that stops filing accrues penalties indefinitely, and strike-off costs far less than the arrears that build up while it is ignored.