Starting your business as a private limited company might seem like the professional choice but investment banker Sarthak Ahuja says it’s often a costly trap, especially for new or small-scale entrepreneurs.
In a detailed LinkedIn post, Ahuja warns that the perceived legitimacy of private limited companies comes at a steep price in three key areas: taxation, transparency, and compliance.
First, taxation. While a private limited company pays 25% tax on profits — seemingly lower than the 30% rate for partnerships and LLPs — the actual tax burden can be much higher.
In a partnership or LLP, partners pay 30% tax on profits and then can freely distribute those funds to themselves tax-free. But in a private limited setup, once the company pays tax, any distribution of profits as dividends to shareholders is taxed again at individual slab rates.
According to Ahuja, this double taxation can result in as much as 50% of the profits being lost if shareholders withdraw funds for personal use, such as buying a home or making other investments.
Second, private limited companies are subject to public financial disclosures. Each year, they must file audited financials on the Ministry of Corporate Affairs (MCA) portal, which anyone — including competitors, family members, or acquaintances — can download for ₹100.
“Not everyone is comfortable sharing this information,” Ahuja says, pointing out that partnerships are not required to make such disclosures. “I know partnership firms that do over ₹1000 crores of revenue and still no one knows of their financials other than the bank or the tax department,” he adds.
Third, the compliance burden. Private limited companies face mandatory audits, annual MCA filings, and even incur costs when shutting down — whether or not they do any actual business. Ahuja estimates the average annual compliance cost to be around ₹50,000, significantly higher than what partnerships or LLPs typically incur.
So what should founders do? Ahuja advises sole proprietorship for side hustles, partnerships for small teams, and LLPs when limited liability is needed. He recommends private limited status only if you’re planning to raise external funding. “If you are unsure,” he concludes, “just start as a partnership firm or LLP, and convert to a private limited when you are certain you need external investors.”
