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Date: 01 March 2008

Compiled by : M. Sathya Kumar

Sole Proprietary or Partnership? How to choose your company’s legal avatar?

You are planning to start on your own. How do you choose the legal form you need to operate as?

Some of the parameters you need to consider are taxability, registration requirements, legal compliances, continuity, ownership and very importantly, liabilities.

The options range between a sole proprietary concern, partnership or a limited liability company. India does not have limited liability partnership yet and is still being debated as a concept. There are many other forms like the Hindu Joint Family business, registered society too.

Here is the feature comparison for different forms:

Features	Sole proprietary concern	Partnership firm	Limited liability company (includes Private limited and public limited companies)
Liability of business debts	Unlimited liability. Liability extends to the individual’s private property.	Unlimited liability. Liability extends to the individual’s private property for satisfaction of partnership debt.	Limited liability. Limited to the extent of shares held but not paid.
Minimum and maximum no. of people	One person	Minimum 2 but not more than 20.	In a private limited company the minimum is two and maximum is 50. In a public limited company the minimum is seven and no limit on maximum.
Separate legal entity status	No separate legal entity	It does not acquire a separate legal personality even if registered.	Has a corporate personality distinct from the individuals who are its members.
Charter documents	None	Partnership Deed	Memorandum and Articles of Association
Registrations required to start. Other registrations required are under the purview of separate legislations such as service tax, professional tax, PF, ESI etc. as applicable.	None.	Register the Partnership Deed with the Registrar of Firms.	Incorporate the company with Registrar of Companies
Termination / continuity	Dissolved on the death of the sole proprietor.	Dissolved on the death of a partner, unless there is a contract to the contrary. Can be terminated by voluntary action of dissolving the partnership.	Perpetual. Terminated through prescribed winding up processes.
Ownership of property	Property belongs to the individual.	The property of the firm belongs to the partners and they are collectively entitled to it.	Property belongs to the company.
Capacity to sue	Not a separate legal entity, hence the individual can sue or be sued.	Only a registered partnership firm can sue or be sued. Else, action may be brought in the name of the members either individually or collectively.	Since a separate legal entity, a company can sue and be sued in its own name.

The key differentiator between private limited and public limited company to consider while starting up, are the numerous legal compliances applicable to a public limited company even though the company may be closely held among just 7 members.

To mention a bit about the current income tax slabs applicable:

Sole proprietary concern	Partnership firm	Company
Taxed as an individual. Tax Slabs: Upto Rs. 1,10,000 : No tax Rs.1,10,000 to Rs.1,50,000: Taxed at 10% Rs.1.5 lakhs to Rs.2.5 lakhs: Taxed at 20% Rs.2.5 lakhs to Rs. 10 Lakhs: Taxed at 30%. No surcharge Above Rs. 10 Lakhs: Taxed at 30% + surcharge	Taxed as a partnership firm. The profits from partnership is not included in the partner’s (individual’s) tax return. Tax Slabs: Upto Rs. 1 crore: Taxed at 30% + cess Above Rs. 1 crore: Taxed at 30% + surcharge + cess	Taxed as a company. Dividend tax to be paid by the company. Tax Slabs: Upto Rs. 1 crore: Taxed at 30% + cess Above Rs. 1 crore: Taxed at 30% + surcharge + cess

Source: www.pluggd.in

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