When you are starting your business, the most important question would be whether you should start your business as a #Proprietorship, as a #Partnership, as a #LimitedLiabilityPartnership (LLP) or as a #PrivateLimitedCompany.
This video clearly explains the difference between Proprietorship, Partnership, LLP and Private Limited Company and how you can choose between them.
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Difference between Proprietorship vs Partnership vs LLP vs Pvt Ltd Company
If you have been thinking about starting a business in India then you have four options to choose from,
1.Proprietorship,
2.Partnership,
3.Limited Liability Partnership
4.Private company.
Proprietorship
A proprietorship is also known as a sole proprietorship, sole meaning single or individual. In a sole proprietorship, you are the only person running the business. A sole proprietorship is very easy to start. All you need is government registration in the name of the sole proprietorship. Let's say for example you are running a food business and you want to name the business as ‘Rajesh foods’, in that case, all you need is a government registration in the name of ‘Rajesh Foods’. This government registration could be a shop and establishment registration, a sales tax registration or a service tax registration. The moment you take any registration in the name of your proprietorship, your proprietorship is considered to be registered.
Partnership
In a partnership, you have more than one person running the business, as partners. A partnership business is very easy to start. All you need is a partnership agreement. Once the partnership agreement is drafted the partnership is said to be ready. Registration of a partnership is not mandatory.
Even though a partnership or a proprietorship is very easy to start, they come with a very high risk. The risk in legal terms it's called unlimited liability. What that means is that if the business gets into legal trouble and is required to provide compensation of Rs. 10 Lakhs to the opposite party. Then if the company bank account has to have that much or more money to be able to make the payout. If not, then the business owner or owners will have to sell various personal properties or assets to pay for the compensation. That's why they say the liability in a proprietorship and in a partnership are unlimited! Hence, it is strongly advised to stay away from a proprietorship or a partnership. And that's the main reason why more and more startups today are looking at and cooperating on a limited liability partnership or a private limited company. It is incorporated under the Ministry of Corporate Affairs.
Limited Liability Partnership
A limited liability partnership (LLP) is just another partnership with liability limited. For example, let's say you have contributed Rs.10000 to start your limited liability partnership and if your LLP gets into any legal trouble, you are only required to pay Rs. 10,000. So your liability is limited to the extent of your contribution to the LLP, and not more than that. Hence, your personal assets and property are safe. An LLP is a very new concept in India, just about 3-4 years old, and not many people know about it. The government fee is just over Rs. 2000 to start a limited liability partnership. Hence, you must strongly consider a limited liability partnership as one of the legal structures for starting your business. In a limited liability partnership, the only problem is that if you want to go global or want to bring in investments in return for equity or stake, or you want to open your business for public investment, it is not possible with an LLP. In such cases, you will have to go for a private limited company.
Private Limited Company
The concept of a private limited company has been in existence in India for about five decades or more. It's a very well structured concept. In a private company, the liability of its members is limited to the extent of their contribution. Their personal assets and property are safe in a private company. A private limited company brings with it a lot of trust and credibility to your business. If you are looking at investments and funding in return for equity or stake in your company then a private limited company is your best option. It is incorporated under the Ministry of Corporate Affairs.
To recap, the first option is a proprietorship. It's very easy to start. All you need is some government registration in the name of the proprietorship. That's it! The next option is a partnership where two or more members join together to start their business to start a partnership. All you need is a partnership agreement.