What are the Differences Between Private Limited Company and Sole Proprietorship ?

Private Limited Company is an old concept in India and Sole Proprietorship is relatively new. The structure of both differs in materiality. In case of a Private Limited Company the entity forms a corporate structure however, in the case of Sole Proprietorship the entity as the name suggest forms a Partnership. We will discuss the differences between Private Limited Company and Sole Proprietorship in greater detail as below:

1. Governing Law

A Private Limited Company in India is governed by Companies Act, 2013 and the Sole Proprietorship is not governed by any such law

2. Name

Words “Private Limited” are used after Private Limited Company’s name however, there is no such requirement for a Sole Proprietorship’s name.

3. Legality

Private Limited Company is a separate legal entity before the law however, a Sole Proprietorship is not considered separate from the proprietor.

4. Liability

Since Private Limited Company is a separate legal entity before the law in India the liability of the directors is limited to their shares in Private Limited Company.

In case of Sole Proprietorship the liability is unlimited and the entity is not separate from its founder(s).

5. Funding

Private Limited Company is ideal for taking funding. This is one of the major advantages that a Private Limited Company has over most of the other structures. Sole Proprietorship cannot take funding.

6. Conversion

A Private Limited Company can be easily converted to either a Public Limited Company or a Limited Liability Partnership. In case of Sole Proprietorship there are no such legal provisions.

7. Structure Recommended for

Private Limited Company is recommended for startups and SME’s including those in the IT sector however, Sole Proprietorship is recommended for single owner small traders.

8. Registrations

A Private Limited Company needs to be registered with Registrar of Companies. In case of Sole Proprietorship such registration is not required.

9. Fines & Penalties

There are heavy penalties for contravention of legal provisions of Companies Act,2013 for Private Limited Company. Such provisions are not applicable to a Sole Proprietorship.

10. Minimum number of Directors

Atleast 2 directors are required in Private Limited Company. For Sole Proprietorship as the name suggests only one person is required.

11. Annual Filing

There are requirements of filing of Annual Returns in case of a Private Limited Company which is not required in case of Sole Proprietorship.

12. Registration Costs

The incorporation cost of a Private Limited Company is higher than a Sole Proprietorship because in case of Sole Proprietorship as such there is not statutory requirement to get registered.

13. Audit

Audits are compulsory in the case of Private Limited Company but in the case of Sole Proprietorship audit is not a mandatory requirement.

Conclusion

Depending upon the nature of your business you can select the type of entity you would want to form. Normally if the business can undertake compliance of Registrar of Companies and requirement of Audits then Private Limited Company formation can be more helpful for a business in the long term.

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