When does a proprietorship stop making sense?
At the point where liability, credibility or tax turns against you. Liability first: as a proprietor you personally owe every business debt, so one bad contract or an injured customer can reach your savings and home. Credibility next: marketplaces, corporate buyers and foreign clients often insist on a company with a CIN and audited accounts, and many will not onboard a proprietor at all. Tax last: personal slab rates beat the 25% company rate up to roughly ₹20 to 30 lakh of profit, but above that the 30% slab bites and a company that reinvests profits pays less. If two of these three apply to you, it is time to incorporate.
How is a proprietor taxed compared to a company?
A proprietor's business profit is simply added to their personal income and taxed at slab rates. Under the new regime for FY 2026-27, that means nil tax up to ₹12 lakh after the rebate, 15% to 20% through the middle, and 30% only above ₹24 lakh. Small traders can also use presumptive taxation under 44AD, declaring 8% of turnover (6% for digital receipts) as profit with no books. A company pays a flat 25%, or 22% under 115BAA, on every rupee of profit, and when it distributes dividends the shareholder pays slab tax again. So a proprietor earning ₹15 lakh keeps far more than the same profit in a company, while at ₹80 lakh the company's rate is lower and the gap closes.
What does a Private Limited Company cost to maintain?
Plan on ₹20,000 to 50,000 a year in the market for the basics. The statutory audit is compulsory from year one whatever the turnover, and the auditor must be appointed within 30 days of incorporation. The company then holds an AGM by 30 September, files AOC-4 within 30 days of it and MGT-7A within 60 days, files DPT-3 by 30 June, and each director completes DIR-3 KYC. Late ROC forms cost ₹100 per day per form. Add GST returns if registered, TDS returns once you pay salaries or contractors, and ITR-6 by 31 October. A proprietor files one ITR by 31 July and, if registered, GST returns, so ₹2,000 to 10,000 usually covers a year.
How do you move from a proprietorship to a company?
You incorporate a new Private Limited Company and transfer the business into it; there is no conversion form because a proprietorship has no separate legal existence. Register the company through SPICe+ in 12 to 15 working days, then sign a business transfer agreement that moves assets, stock, contracts and staff. Section 47(xiv) exempts the transfer from capital gains if all assets and liabilities move, you receive only shares as consideration, and you hold at least 50% of the voting power for five years. Apply for fresh GST registration, cancel the old one after filing final returns, open a new bank account and inform clients. Do this at the start of a financial year to keep the books clean.
