Company vs. Firm vs. Proprietor: Understanding the Basics

When starting a business in India, one of the first decisions you’ll need to make is the type of entity to register. Each structure—a Company, Firm, or Sole Proprietor—has its unique features, advantages, and tax implications. Let’s break them down.

Sole Proprietorship

What is it? A sole proprietorship is a business owned and managed by a single person. It’s the simplest and most common form of business in India.

Key Features:

• Single ownership.

• Easy to start and close.

• Full control and decision-making by the owner.

• No separate legal entity (the owner and business are the same).

Tax Rates:

• Taxed as per the individual’s income tax slab rates.

Advantages:

• Minimal compliance.

• Full control over profits.

• Ideal for small businesses.

Disadvantages:

• Unlimited liability (personal assets are at risk).

• Limited growth potential.

Partnership Firm

What is it? A partnership firm is a business owned and operated by two or more individuals who agree to share profits and responsibilities.

Key Features:

• Governed by the Indian Partnership Act, 1932.

• Partners share liabilities and responsibilities.

• Requires a partnership agreement.

Tax Rates:

• Flat rate of 30% on total income.

• Surcharge: 12% if income exceeds ₹1 crore.

• Health and Education Cess: 4% on the total tax.

Advantages:

• Shared responsibilities.

• More capital available compared to a sole proprietorship.

• Easier to start than a company.

Disadvantages:

• Unlimited liability for partners.

• Potential for disputes among partners.

• Limited scalability.

Company (Private or Public Limited)

What is it? A company is a separate legal entity registered under the Companies Act, 2013. It can be private or public, depending on its structure and ownership.

Key Features:

• Separate legal entity.

• Limited liability for shareholders.

• Managed by a Board of Directors.

• Higher compliance requirements.

Tax Rates:

• Domestic Company:

  • Turnover up to ₹400 crore (in the previous year): 25%.

  • Turnover above ₹400 crore: 30%.

• New Domestic Manufacturing Companies (under Section 115BAB): 15%.

• Surcharge:

  • 7% if income exceeds ₹1 crore but below ₹10 crore.

  • 12% if income exceeds ₹10 crore.

• Health and Education Cess: 4% on the total tax.

Advantages:

• Limited liability for owners.

• Easier to raise capital.

• Separate legal entity ensures perpetual existence.

Disadvantages:

• Higher compliance and operational costs.

• Extensive regulatory oversight.

• However, with us, the registration process and compliance become seamless and hassle-free. If you are with us, there is no disadvantage of choosing a company structure.