A private limited company (PVT Ltd) and a proprietorship are two distinct business structures with fundamental differences in legal status, liability, and operational requirements. A key distinction is that a PVT Ltd is a separate legal entity, while a proprietorship is not.
Key Differences Explained
The following table highlights the core differences between these two business structures:
| Feature | Private Limited Company (PVT Ltd) | Proprietorship |
|---|---|---|
| Legal Entity | Separate legal entity, distinct from its shareholders. | Not a separate legal entity; owner and business are the same. |
| Liability | Limited liability; shareholders are liable only to the extent of their shares. | Unlimited liability; owner is personally liable for all business debts. |
| Ownership | Owned by shareholders. | Owned by a single individual (the proprietor). |
| Management | Managed by a board of directors. | Managed solely by the proprietor. |
| Continuity | Perpetual existence; continues even if shareholders change. | Ends with the death or incapacitation of the proprietor. |
| Registration | Requires formal registration with the relevant government authority. | Requires minimal registration, depending on the location and nature of business. |
| Taxation | Taxed as a separate entity; subject to corporate tax rates. | Income is taxed as personal income of the proprietor. |
| Compliance | Higher compliance requirements, including audits and annual filings. | Lower compliance requirements compared to a PVT Ltd. |
| Fundraising | Easier to raise capital through equity financing (issuing shares). | Difficult to raise capital; limited to personal funds or loans. |
Further Breakdown
- Separate Legal Entity: A PVT Ltd can own property, enter into contracts, and sue or be sued in its own name, independent of its shareholders. A proprietorship cannot; all business activities are directly linked to the proprietor.
- Liability Implications: In a PVT Ltd, if the company incurs debt or faces legal action, the personal assets of the shareholders are generally protected. In a proprietorship, the owner is personally liable for all business debts and obligations, potentially putting their personal assets at risk.
- Complexity and Cost: Setting up and maintaining a PVT Ltd involves more paperwork, legal requirements, and ongoing compliance costs compared to a proprietorship.
- Scalability: PVT Ltd structures are generally more suitable for businesses planning for growth and expansion, as they offer better options for attracting investment and scaling operations.
Example
Imagine Sarah wants to start a bakery. If she chooses a proprietorship, she's personally liable for all debts. If the bakery goes bankrupt, her personal savings could be at risk. If she forms a PVT Ltd, only the company's assets are at risk, protecting her personal finances (subject to any personal guarantees she might have provided).
