Hey folks, Regarding the topic of legal entity structure in Indian for contract roles from outside India: It is interesting that on RI, I keep seeing suggestions for a proprietorship. Is this with the idea that this is only always going to be a single person hire?

Hello Sumit, Setting up an LLP/Pvt limited is good for people who are into freelancing/consulting and have some significant revenue. As you said it will help them to expand in the future by hiring people. Not sure but seems that most of the posts created here are by folks who are looking for remote jobs. They are hired by the company full-time but legally will be paid as contractor. For them, it is better to have fewer legal and tax compliances. In future, they may switch job and get hired on payroll by the company.

This is a good point to keep in mind. Some level of expansion is still possible with Proprietorship (I have 4 people working for me as contractors), but to grow more, a Pvt Ltd would definitely help. I guess many people are hired "informally" as an employee, so no scope of growth + much easier to get started. Moreover, all these will be very overwhelming for most people (Personal experience). Even after getting advices, people who are starting out don't have enough understanding to take the best decision. But once we've set everything up, processed few payments, we'll get the hang of it. Then it's much easier to make an Informed decision.

Yeah, as the business grows new compliances come up like TDS and tax audits. So, better to set up a legal entity.

TDS is mandatory if we're paying someone. Doesn't matter what type operation we're running. Tax audits are needed for proprietorship once we cross the 50LPA mark I think. The importance of legal entity comes when we are planning to hire from outside our trusted network. Then we can absolve ourselves from any personal lawsuits.

IIRC Deducting TDS is not mandatory on payments to contractors till 50LPA revenue in the proprietorship. In case there was no tax audit in the previous financial year. Going above 50 LPA open up a number of new compliances so better to set up an entity.

I wasn't aware of the 50LPA limit for TDS. I thought it was for paying anyone >50k/year. Crossed the limit anyway 😂

Forgot to mention the benefit of 44 ADA (Presumptive taxation) in the case of Proprietorship and <50LPA revenue. 44ADA is not applicable to LLP/Pvt limited.

Pvt. Ltd. makes sense only when you have multiple partners. You can hire employees even in a proprietorship.

I have run a 7 person entity as a proprietorship including selling the “entity”. There is no limit on the number of people you can hire as a proprietorship provided you are compliant with labour laws, etc. I have started 3 Pvt Ltd companies and 1 LLP (only 1 pvt ltd company is still operational). For me, I would only incorporate if: 1. I am doing something which would expose me to liability. (My software job / company does not do that — so I don't bother there). 2. You are in the “middle” of a fund raise. Not even at the start. Companies and LLPs can be started within 3 week's nowadays (my latest company was incorporated in 15 days sitting at home for 20k). So, only if you are taking something up which might expose you to liability, incorporate. Or if you are dealing with other companies who will deal only with companies (I don't think this applies to most folks here). Being a director adds a lot of red tape to your life and when the time comes to shut down the entity, it may take upto 3 years. (My first company took 3 years to wind down, my LLP took 2). I would not recommend incorporating unless you know exactly what you are doing. As the famous Eagles song goes: you may check in anytime you want, but you may never leave 😬

As i wrote in the other thread and @loud-glass-33663 has captured it, always think of liability first to think of the risks and how to manage them. OPC or sole prop liability is unlimited but thats only because it doesnt separate the individual from the company (at least in the eyes of the taxman). For most, its about earning their livelihood and not really starting a company or expanding their business. As said here, if we want to expand, your suggestion to switch to other company structures make a lot of sense but each has its pros and cons and that can be made only if you want to go to that level with expert advise. Most dont want that because they know the hassles of the Indian tax system, which still persists despite enough developments to simplify it.

@loud-glass-33663 Pvt. Ltd. does not pay "salary" to directors though. But I do see the other points you mentioned. I guess in my case I started off with consulting (+ team) many years back. Now I am not sure I will build teams anytime soon, I am happy with job roles. So I will read if it makes sense to switch to proprietorship. Many of my expenses are paid by my Pvt. Ltd. though, so there are benefits there. All my international trips (since I work on trips) are fully paid through my company for example.

For 44ADA, you need to get audited if your revenue crossed the 50LPA limit. For 44AD, you don't need to get audited if your revenue is below the 2CrPA limit. Above 2cr, you can't use 44AD The 10cr limit is for businesses that are not going to opt for presumptive taxation. I'd recommend reading this article to get a clarity on when you need to get your accounts audited: https://cleartax.in/s/tax-audit-section-44ab

@wide-carpet-65149 how do you take money out though? Do you take out different amounts every month? Does your company deduct TDS when you take out money? Just curious. Because in all my companies, we have paid directors “salaries” deducting TDS when required. Stumbled upon this article Which is similar to what my CA has also explained to me.