Proprietorship to Private Limited: When Should Online Sellers Move?

Move from a proprietorship to a private limited company when you need what only a company gives: protection of personal assets, a way to bring in partners or investors, or the standing a large buyer or lender asks for. Do not move for tax alone. Below roughly Rs 50 lakh of yearly profit, a proprietor usually pays less tax.

Is your business ready for this?

You already know the basic differences. If not, our comparison of proprietorship, LLP, OPC and private limited lays them out. The harder question is timing. Here are the signals that matter for an online seller.

What does the tax look like in rupees?

Take a seller with no other income, using the rates on the Income Tax Department's pages for FY 2025-26 (assessment year 2026-27, Income-tax Act, 1961). The proprietor is on the new regime. The company has opted for 22% under section 115BAA, which with 10% surcharge and 4% cess comes to about 25.17%.

Why does the company lose at Rs 30 lakh? An individual climbs through slabs and pays 30% only above Rs 24 lakh. A company pays its rate on every rupee. On these numbers the lines cross a little above Rs 52 lakh, where the individual surcharge of 10% begins.

And that is the best case for the company. The money still sits inside it. When you take it out as dividend, you pay tax on it again at your slab. Take it as salary and the company's profit falls, but you pay slab tax on the salary. The saving is real only on profit you put back into stock, ads and growth.

For tax year 2026-27 onwards the Income-tax Act, 2025 applies. The rates are reported as unchanged, but check the current figures before you decide.

What changes on the day you move?

There is no button that turns a proprietorship into a company. In practice you incorporate a new company, and it takes over your business under a written agreement. Everything tied to your PAN has to be redone in the company's name.

• GST. The company needs its own GSTIN. The GST portal lists "change in constitution of business leading to change in PAN" and "transfer of business" as grounds for cancelling the old one, and the company must already hold a valid GSTIN when you apply to cancel.
• GST credit. Unused input tax credit in your ledger does not have to lapse. You file Form GST ITC-02 on the portal with a certificate from a practising chartered accountant or cost accountant saying the business was transferred with a specific provision for transfer of liabilities. The company accepts it on the portal and the credit lands in its ledger.
• Marketplace accounts. Your seller accounts are linked to your PAN, GSTIN and bank account. Each marketplace has its own process for a change of legal entity. Ask seller support in writing, before you move, what happens to listings, ratings and pending settlements.
• Capital gains. Passing your business assets to the company is a transfer. Section 47(xiv) of the Income-tax Act, 1961 keeps it out of capital gains tax if conditions are met. As commonly summarised: all assets and liabilities move to the company, you hold at least 50% of the voting power for five years, and you receive nothing except shares. Get this checked before signing.
• Everything else. A new current account, new Udyam registration, a new import export code if you import or export.

The order to do it in

1. Pick a date. 1 April is the cleanest, because both sets of books then cover full years.
2. Incorporate the company. Our guide to the registration process covers the forms. A sole owner can look at a one person company.
3. Get the company's GSTIN and bank account.
4. Sign the business transfer agreement listing the stock, assets and liabilities that move.
5. Set up the marketplace accounts in the company's name, following each marketplace's process.
6. File ITC-02 from the old GSTIN and accept it in the new one.
7. Close the old GSTIN. File the pending returns, then apply for cancellation. For a cancellation you ask for, the portal expects the application within 30 days of the date the registration became liable to be cancelled.

A worked example

Sneha sells home decor on two marketplaces. Her profit is Rs 14 lakh a year. She has no loans and no partner. If she moves to a company and leaves the profit inside, tax goes from Rs 93,600 to about Rs 3,52,000, and she adds an auditor's fee and yearly company filings. Nothing in her business needs a company yet, so she waits.

Rohan sells electronics accessories and makes Rs 60 lakh a year. He imports stock on a bank limit of Rs 40 lakh and his brother wants to invest. On tax alone the company saves him about Rs 68,000 if he keeps the profit in the business. His real reasons are Rs 40 lakh of debt in his personal name and a brother who needs shares. He should move, from 1 April.

The mistake people usually make

They form the company and keep selling on the old GSTIN for months, because the marketplace accounts still work. Now the sales belong to one legal person and the stock and bank account to another. Unwinding that is slow and costly.

The second mistake is cancelling the old GSTIN before filing ITC-02, which can strand the credit. The third is incorporating for a tax saving that does not exist at their profit level. The yearly costs are set out in our note on company registration cost.

Should you do this yourself?

Incorporation needs a practising professional to certify the form, and ITC-02 needs a CA's certificate. So this is not a do-it-yourself job. The thinking is yours, though: write down your reason for moving. If the only line is "save tax", stay a proprietor for now.

Frequently asked questions

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