For most people starting a business in India, the choice is between three structures. A sole proprietorship is the simplest and cheapest, but the owner is personally liable for every business debt. A limited liability partnership (LLP) gives partners limited liability with relatively light paperwork. A private limited company carries the most compliance, but it is the structure investors expect and the only one of the three that can issue shares and employee stock options.
This is a general explainer, not legal or tax advice. Which structure fits depends on your business, partners and plans, so check with a chartered accountant (CA) or company secretary (CS) before registering.
The three structures, briefly
Sole proprietorship
No separate law creates a sole proprietorship: it is one person doing business in their own name or a trade name. Business and owner are the same person in law, so personal assets can be used to settle business debts.
Nor is there a single registration. A proprietor usually relies on registrations the business needs anyway: GST once turnover crosses the threshold (explained in our guide to GST for small businesses), a state shops and establishments licence, a current bank account, and optionally Udyam registration as an MSME. Business profit is added to the owner’s other income and taxed at individual rates.
Limited liability partnership
An LLP is formed under the Limited Liability Partnership Act, 2008. It is a body corporate, separate from its partners, and a partner is not personally liable for the LLP’s obligations simply by being a partner. It needs at least two partners and at least two designated partners who are individuals, one of whom must be resident in India; since the 2021 amendment, “resident” means staying in India for at least 120 days in the financial year.
LLPs are incorporated online through the Ministry of Corporate Affairs (MCA) using the FiLLiP form. An LLP agreement sets out partners’ rights, profit shares and contributions.
Private limited company
A private company is formed under the Companies Act, 2013. It is owned by shareholders, whose liability is limited to any amount unpaid on their shares, and run by a board of directors. Section 149 requires at least two directors for a private company, and every company must have at least one director who stays in India for 182 days or more in the financial year.
Companies are incorporated through MCA’s SPICe+ web form, which bundles name reservation, incorporation, PAN, TAN and several other registrations.
And the one-person company
A one person company (OPC) is a private company with a single member, who must be a natural person and an Indian citizen. It needs only one director and must name a nominee. Budget 2021-22 allowed non-resident Indians to form OPCs, cut the residency requirement from 182 to 120 days, and removed the limits on paid-up capital and turnover that used to force a growing OPC to convert.
Side by side
| Sole proprietorship | LLP | Private limited company | |
|---|---|---|---|
| Governing law | No specific statute | LLP Act, 2008 | Companies Act, 2013 |
| Separate legal entity | No | Yes | Yes |
| Owner’s liability | Unlimited | Limited (to agreed contribution) | Limited (to unpaid share capital) |
| Minimum people | One | Two partners, two designated partners (one resident) | Two shareholders, two directors (one resident) |
| How it is registered | Through GST, shops licence, Udyam etc. | MCA, FiLLiP form | MCA, SPICe+ form |
| Main annual filings | Income tax return (plus GST returns if registered) | Form 11 (annual return), Form 8 (statement of account and solvency), income tax return | Financial statements (AOC-4), annual return (MGT-7 or MGT-7A), income tax return |
| Statutory audit | Not under company law | Required, with an exemption for small LLPs (see below) | Required for every company |
| Can issue shares or ESOPs | No | No | Yes |
| Closing down | Stop trading, cancel registrations | Strike-off application (Form 24) or winding up | Strike-off application (STK-2) or winding up |
On audit: under Rule 24(8) of the LLP Rules, 2009, an LLP whose turnover does not exceed ₹40 lakh in a financial year, or whose partners’ contribution does not exceed ₹25 lakh, is not required to have its accounts audited. A company’s accounts must be audited every year regardless of size. Separately from company law, any business, including a proprietorship, may need a tax audit under the Income-tax Act once its turnover crosses the limits set there.
Company compliance has eased slightly. From 1 December 2025, MCA raised the “small company” limits to paid-up capital of up to ₹10 crore and turnover of up to ₹100 crore, which brings more private companies under lighter filing rules, and from 31 March 2026 annual director KYC was replaced by an intimation once every three years, according to MCA’s 2025 year-end review. Voluntary strike-off applications are processed centrally by MCA’s Centre for Processing Accelerated Corporate Exit (C-PACE).
More change may come. The Corporate Laws (Amendment) Bill, 2026, which would amend both the Companies Act and the LLP Act, was introduced in the Lok Sabha on 23 March 2026 and examined by a joint parliamentary committee, which reported in August 2026. As of early October 2026 it had not been passed.
How each is taxed in FY2026-27
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, and FY2026-27 is its first “tax year”. The well-known company tax options carried over under new section numbers: the 22% option that was section 115BAA is now section 200, and the 15% regime for new manufacturing companies that was section 115BAB is now section 201.
The rates below are from the memorandum to the Finance Bill, 2026, for tax year 2026-27. A 4% health and education cess applies on top in all cases.
| Structure | Base rate | Surcharge |
|---|---|---|
| Sole proprietor | Individual slab rates; under the default regime (section 202), nil up to ₹4 lakh, rising to 30% above ₹24 lakh | 10% to 25% on higher incomes |
| LLP (taxed as a firm) | Flat 30% | 12% if income exceeds ₹1 crore |
| Private company, default | 25% if turnover in tax year 2024-25 was up to ₹400 crore; otherwise 30% | 7% above ₹1 crore, 12% above ₹10 crore |
| Private company, section 200 option | 22%, giving up most deductions and incentives | Flat 10% (effective rate about 25.17% with cess) |
| New manufacturing company, section 201 | 15% on manufacturing income | Flat 10% |
Section 201 is not open to new businesses: it covers only companies set up on or after 1 October 2019 that began manufacturing by 31 March 2024.
The headline rate is only part of the picture. A partner’s share of an LLP’s profit is generally not taxed again in the partner’s hands, and an LLP can pay partners salary and interest within limits set by the tax law. A company’s profit is taxed in the company, and dividends are then taxed again in shareholders’ hands. Your CA can work out which combination costs less at your expected profit level.
Raising money and sharing ownership
This is often the deciding factor. A private limited company divides ownership into shares, so it can sell a slice to an angel or a venture fund, issue preference shares or convertible notes, and grant employee stock options under section 62 of the Companies Act. Our startup funding guide explains why equity investors almost always ask for this structure, and ESOPs explained covers how stock options work.
An LLP has no shares. New partners can be admitted and capital contributed, but there is no clean way to grant stock options or to issue the instruments that equity investors typically use. A proprietorship cannot take outside equity at all: anyone putting money in is either lending it or becoming a partner in a new structure.
For government startup benefits, DPIIT recognition is open to private limited companies, LLPs, registered partnership firms and, since February 2026, cooperative societies, according to Startup India. Sole proprietorships are not eligible.
Which fits when
These are general patterns, not recommendations for your case:
- Testing an idea, freelancing or a small local shop: a sole proprietorship is often where people start, because it costs little to set up and close. The trade-off is unlimited personal liability.
- A professional firm or family business with two or more partners and no plan to raise equity: an LLP is commonly used, because it combines limited liability with lighter compliance than a company.
- A business that plans to raise venture capital, hire with stock options or scale quickly: a private limited company is the usual choice, because investors and employees can hold shares.
- A solo founder who wants limited liability: an OPC is an option, though it brings company-level filings.
Structures can be changed later, for example by converting a proprietorship or an LLP into a company, but each conversion has legal and tax steps, so it is worth choosing with the next two or three years in mind.
The point: A sole proprietorship is cheap and quick but puts your personal assets on the line. An LLP limits liability with moderate paperwork and suits partner-run businesses that don’t need outside equity. A private limited company costs the most to run but is the only one of the three that can issue shares and stock options, which is why funded startups use it.
Sources
- Memorandum Explaining the Provisions in the Finance Bill, 2026, Ministry of Finance, India Budget, February 2026
- Income-tax Act, 2025 comes into force from 1st April, 2026, CBDT press release, 1 April 2026
- Section 200 and Section 201, Income-tax Act, 2025, via Indian Kanoon
- Limited Liability Partnership Act, 2008, India Code
- Companies Act, 2013, India Code
- Rule 24(8), Limited Liability Partnership Rules, 2009, via Indian Kanoon
- FAQs on SPICe+ and linked filings and FiLLiP: incorporation of LLP, Ministry of Corporate Affairs
- Year-end review 2025: Ministry of Corporate Affairs, PIB
- The Corporate Laws (Amendment) Bill, 2026, PRS Legislative Research
- Key Highlights of Union Budget 2021-22, PIB, 1 February 2021
- Startup recognition, Startup India (DPIIT); Government Revises Startup Recognition Framework, PIB, February 2026