Ours is small Proprietorship Ice Cream Manufacturing firm , operating since 2011. This year we are breaking even and are becoming Rs. One Crore Brand ( CremeFresh) . My wife is the Proprietrix and i am the CEO of the Firm.
Now , from this FY onwards the Karnataka Govt. has started giving industrial land in our area and also subsidy of 20% for particular area and for women entrepreneur. So far we have invested around Rs.50 Lakhs , and are planning to invest another Rs.50 Lakhs in 2015-16. Now its a proprietorship concern. We are thinking of making it Private Ltd. Company. Wanted to know the advantages and disadvantages of making a Propship Firm to Pvt.Ltd.Company. Is there any advanatage ? Our vision is to make this Ice cream brand a Rs.20 Crore brand by year 2020. Please suggest.
asha chaudhry
hi kiran,
you might want to link your website so folks can check you out. it always helps people to connect the dots 🙂
Bhavesh Goswami
Hey Kiran!!
I am not an expert in this filed, so you might want to invest in 1 hour consultation with someone. but here is what I think the differences are (from my experience co-founding two startups).
In Proprietorship, you are the company. Basically if your firm owes me money, I can come after your personal assets and take your to court to get my money back. Also taxes are simple, as you and your company are same entity, so there is only one taxation on the income.
As a private limited firm, your firm has its own identity. So if your Pvt. Ltd. company owes me money, and is unable to pay me, your personal assets are safe from being confiscated to pay the debt. Think how when Kingfisher Airlines went bankrupt, vijay maliya’s personal assets, and other kingfisher companies, are still safe. But the drawback is double taxation.. you are taxed on your companies profits, and again when your pay yourself from those profits.
If you have bigger plans for your company, and want to keep your personal property safe from being collateral, in worst case that your company goes bankrupt, I suggest you start a private limited company. Also most VCs will only invest in Pvt. Ltd. Companies, so that is one more thing to consider.
Rahul Ramchandani
There are several advantages as well as disadvantages. Firstly with the advantages:
Advantages:
1) You can raise equity capital from family friends and relatives, In proprietorship you can only raise loan funds not equity capital. This is the most fundamental advantage.
2) Raising capital you can still retain effective management control by having you and your wife as Board of Directors and majority holding at least 75% or at least 51% shareholding.
3) You will have limited liability i.e. once you subscribe and pay fully to the share capital you will have no other monetary liability in your personal capacity with respect to your company (at least from a legal standpoint)
4) Later you may raise capital from Angel Investors, VC, and much later even from an IPO when you finally decide to go public.
Disadvantages
1) Lot of statutory compliances get added to your headache annual Statutory Audit, RoC filings etc. All these have a monetary cost.
2) Dividend Distribution tax: Whenever you want to take profits from your company to yourself you shall have to declare dividend. And your company will have to bear a DDT @ 20%. Mind you this is paying tax after your company has paid normal income taxes on its profit. Yes it is in a way double taxation. But then you have to treat yourself and your company as different entities.
3) A lot of Companies Act compliances : Board Meetings, Restriction on loans from Directors and shareholders without regulatory interference, restrictions in related party transactions
I may suggest to you to also look at LLPs as an effective organisation form for housing your business. Read more about it here