Key Differences Between Proprietorship, LLP, and Pvt Ltd

As a mutual fund distributor (MFD), it's exciting to launch a business and is quite normal to feel inclined to get your business registered as a company at some point. It is among the first legal decisions, so one should definitely do it. Registering a business formalises the activity and has other advantages, such as tax benefits and access to cheaper credit.

The mutual fund distribution industry is transforming, and many MFDs are re-evaluating their organisational structures. Each type, from the traditional sole proprietorships to more formal structures like Private Limited Companies (Pvt Ltd) and Limited Liability Partnerships (LLPs), carries its own benefits, responsibilities and operational implications.

The structure of a business can impact taxation, compliance, scalability, liability and succession planning. This article is a useful guide to help MFDs make well-informed business decisions by explaining key differences between proprietorships, LLPs and Pvt Ltd companies.

What is a Sole Proprietorship

From a legal standpoint, a sole proprietorship is an unincorporated business owned by a single individual (owner), who is responsible for paying personal income tax on profits earned from the business. A sole proprietorship can operate under the name of its owner or under an assumed trade name.

To put it briefly, a proprietorship is a business with a trade name that may be different from the name of the owner of the business. However, the trade name does not create a separate legal entity from the sole proprietor owner. Courts have held that a sole proprietorship is not a legal entity as per law, i.e., there is no separate legal status for a sole proprietorship. As a result, a sole proprietorship and its owner are one and the same person and have the same PAN (and hence the income of the sole proprietorship is taxed in the hands of the proprietor).

Further, when the partner in whose name the ARN is filed passes away, advisers working as partnership firms or sole proprietors face significant challenges. However, other formal structures, such as the LLP, are still able to function even if its partners change. Because LLPs have perpetual succession, they can operate without a partner.

AMFI’s Revised Rules for Proprietorship MFDs

According to the AMFI filing dated March 30, 2022, applicants for ARN under sole proprietorship were permitted to register/map the EUIN of another individual/employee to the ARN of the sole proprietorship, regardless of whether the proprietor holds an EUIN or a valid NISM certificate. However, AMFI identified more than 500 MFDs registered under the sole proprietorship category in which the sole proprietor lacked an NISM certificate. Although there is a separate category for HUF, it was also found that there are over 50 HUF ARN holders registered under the proprietorship category. 

Considering all this, it was decided that: First, the sole proprietorship will be treated/classified as an individual based on the PAN if the proprietor is an individual who is applying for ARN. (Since the ARN fees for ‘individuals’ and ‘sole proprietorship’ are the same, i.e., Rs. 3,000 plus 18 percent GST, there is no change in this regard.) As a result, the proprietor of a sole proprietorship applying for ARN shall need to have NISM certification and map his/her EUIN to the ARN of the proprietorship.

Second, the proprietorship will be treated/classified as an HUF based on the PAN if the application for ARN in the name of the proprietorship is a HUF. Consequently, the applicant shall be levied ARN fees applicable to the ‘HUF’ category.

According to current AMFI guidelines, in order for a HUF, which is a non-individual person, to get the ARN and start mutual fund distribution services, it must register at least one NISM-certified sales personnel/employee with a valid EUIN under its ARN. Hence, current HUF ARN holders who have registered as proprietorship concerns are unaffected, with the exception that they will now have to pay the ARN renewal fees that apply to the "HUF" category.

What is a Limited Liability Partnership

When two or more people decide to operate a business and split the profits and losses according to a predetermined ratio, a partnership firm is formed. On the other hand, a Limited Liability Partnership (LLP) is a blend of a private company and a partnership. It offers the flexibility of a partnership and the limited liability of a company. The LLP is a separate legal entity registered under the Limited Liability Partnership Act, 2008, with the Ministry of Corporate Affairs and is liable to the full extent of its assets.

LLPs are free from liabilities such as the business’s overall debts and legal issues, and each partner is required to participate in day-to-day business activities while having limited responsibilities.

Mutual fund distributors are converting to Limited Liability Partnerships (LLPs) from partnerships and sole proprietorships. As per the data of the Ministry of Corporate Affairs as of April 2026, there were 10,424 LLP incorporations and 4,86,585 LLPs operating throughout India.

The primary motivation for MFDs moving to the LLP structure is to protect themselves from liability in the event of client litigation. Advisors’ liability is limited to the capital they have infused by becoming LLPs. An LLP is a separate legal entity, so the owner is not personally liable for debt repayments and legal actions. Further, under Section (28) of the Limited Liability Partnership Act, 2008, the second partner in the LLP would not be automatically liable if one of the partners is found guilty of misconduct.

Step-by-Step Process

According to AMFI, an increasing number of individual MFDs are choosing to transform their mutual fund distribution business into a corporate format (like a Private Limited Company/LLP, etc.) due to multiple reasons, including careful tax planning, business continuation/succession planning, etc.

Here are the steps involved in this process, including the transfer of AUM to the newly established entity and the facility available to non-individual entities to apply for a ‘provisional’ ARN pending EUIN mapping:

i) Forming a new company or LLP, as the case may be. 

ii) Applying for an ARN in the name of the newly formed entity, along with the necessary documentation, such as the application for EUIN registration or mapping the EUIN of at least one employee with a valid EUIN to the ARN of the newly formed entity.

iii) Upon receipt of the ARN, empanel the new entity as a distributor with the respective individual AMCs.

iv) Requesting each AMC to transfer AUM in compliance with AMFI guidelines from their respective individual ARN to the ARN of the new entity.

v) Surrendering the ARN of the individual MFD for cancellation when the AUM is transferred. 

Typically, the entire process listed above takes at least a couple of months to complete.

As of March 21, 2023, AMFI has revised its guidelines on the transfer of AUM from one mutual fund distributor to another. Under clause 2(A) of the updated guidelines, a change in Distributor (ARN Code) is permitted upon request of an existing distributor in certain circumstances, for example, a change in the legal name or status of the distributor. This includes a case where an individual MFD converts his mutual fund distribution business to a partnership firm, a partnership firm changes over into a Limited Liability Partnership (LLP), a private limited company converts itself into a public limited company or vice versa.

The guidelines also cover situations involving mergers/demergers/acquisitions, business consolidation, transfer or dissolution of business, changes in partnership firms or LLPs, or issuance of a new code acquired by the distributors (ARN Holders).

Required Documents

In accordance with AMFI guidelines, the following documents are needed for Limited Liability Partnerships of MFDs: Certificate of Incorporation of LLP (form 16); A copy of the LLP Agreement; the names, addresses, and PANs of the Designated Partners; the names, addresses, and PANs of other partners (who are not Designated Partners); and any other individuals authorised to act on behalf of the LLP. Extra Records: AMFI Registered Employee and NISM Certified.

What is a Private Limited Company

A Private Limited Company is one of the most complex corporate structures in terms of regulations and is governed by the Ministry of Corporate Affairs under the Companies Act, 2013. It can have a minimum of 2 members and a maximum of 200 members.

A private limited company and its owners are two different legal entities. Private limited companies are just the bigger form of LLPs on paper. Both business types have similar benefits, like limited liability and a separate legal identity. The sole distinction is that private limited firms have higher levels of compliance.

According to Section 453 of the Companies Act, 2013, any person or persons using the terms “Limited” or “Private Limited” in its name without being legally incorporated as a company with limited liability can face penalties. The Act states that such misuse may attract a fine ranging from ₹500 to ₹2,000 for every day the name continues to be used improperly.

Shareholders, Directors, and Compliance

Shareholders (Owners): Under Section 2(68) of the Companies Act, 2013, a Private Limited Company will need a minimum of two and can have up to 200 members. They don't always oversee day-to-day operations, but they provide the capital.

Directors (Management): According to Section 149 of the Companies Act, 2013, every company must have a Board of Directors (BoD) made up of individuals who serve as directors. A public company must have a minimum of three directors, while a private company must have two directors. According to AMFI and SEBI regulations, the Principal Officer and all sales staff must hold a valid NISM Series V-A certification for a Mutual Fund Distributor (MFD) to have a Corporate ARN.

Compliance: The most "compliance-heavy" model is a Private Limited Company. The company must hold at least 4 Board Meetings a year (one per quarter) and an Annual General Meeting (AGM), maintain statutory registers, and undergo required audits by a chartered accountant in accordance with ICSI standards.

Mandatory Registration Rules

As per SEBI regulations regarding Certification and Registration of Intermediaries, outlined in Chapter 15 of SEBI Master circular no. SEBI/HO/IMD/IMD-PoD1/P/CIR/2024/90 dated June 27, 2024, all mutual fund intermediaries (distributors, agents, brokers, sub-brokers or called by any other name, whether individuals or of any other organisation structure) involved in selling and marketing of mutual funds units, (hereinafter referred to as “Mutual Fund Distributors” or “MFDs”) and any person/s employed or engaged by MFDs for selling and/or distributing mutual fund products are mandatorily required to:

(i) Pass NISM Series V-A: Mutual Fund Distributors Certification Examination conducted by the National Institute of Securities Markets (NISM); and 

(ii) Register with the Association of Mutual Funds in India (AMFI) and obtain AMFI Registration Number (ARN).

A non-individual entity applying for an ARN is required to have at least one employee/sales personnel who has passed the NISM certification examination and has registered with AMFI and obtained an Employee Unique Identification Number (EUIN) to be eligible for allotment of the ARN. Accordingly, the application for the grant of ARN in respect of a non-individual entity should compulsorily be accompanied by an application for registration of at least one NISM-certified employee for linking/mapping the EUIN under the applicant’s ARN.

This requirement also applies to an individual MFD who wants to convert his/her existing individual mutual fund distribution set up into a non-individual business entity such as private limited company or LLP, and who applies for ARN in the name of the newly established company/LLP, so that he/she can transfer the mutual fund clientele/AUM from his/her individual ARN to the firm’s ARN.

ARN Registration Fee Structure

For mutual fund distributors, the ARN/EUIN fee structure varies depending on the nature of business. According to the AMFI Guidelines of January 14, 2026, the amended registration fees are shown in the table below:

Required Documents

As per AMFI guidelines, documents required for a Limited Liability Partnership of MFDs are: Memorandum & Articles of Association, a copy of the Board Resolution, and a list of Authorised Signatories with a specimen signature. Additional Documents: NISM Certified & AMFI Registered Employee.

Proprietorship vs LLP vs Pvt Ltd Comparison

Selecting the right business structure for mutual fund distributors can have a huge impact on long-term scalability, taxation, liability, and compliance requirements. The business structure an MFD adopts can have a significant impact on the way it operates, how it adheres to regulatory requirements and its planning for future growth.

LLP and Private Limited companies are becoming increasingly popular among distributors who need more structured business models, while proprietorships are popular because of the ease and convenience of their formation. The decision is often influenced by things like continuity, scalability, legal limitations and personal exposure.

Each structure has a different balance of flexibility and responsibility, and MFDs should consider the practical pros and cons of each before selecting the best structure for their company.

Pros and Cons of Proprietorship, LLP and Pvt Ltd

Choosing the right business structure is an important decision for Mutual Fund Distributors (MFDs), as it can influence liability, compliance obligations, taxation, operational flexibility, and long-term scalability. While proprietorships are often preferred for simplicity, LLPs and Private Limited Companies offer additional benefits such as limited liability protection and structured business continuity. Each model comes with its own advantages and limitations, depending on the size, growth plans, and operational requirements of the MFD business. 

The table below highlights the key pros and cons of proprietorships, LLPs, and Pvt Ltd companies to help MFDs evaluate which structure best aligns with their business goals.

Choosing the Right Business Structure

For Mutual Fund Distributors (MFDs), choosing the right business structure is an important strategic decision since it can influence liability, taxes, operational flexibility, compliance requirements, and future scalability. For individual MFDs handling a smaller clientele, a proprietorship can be ideal; however, LLPs or Private Limited Companies might be more appropriate for expanding operations with several staff members, partners, or development goals. Before selecting a choice, a number of factors should be carefully considered, including business size, long-term growth goals, succession planning, risk exposure, and compliance readiness.

How Wealthy can help you?

For MFDs looking to transition or expand their business structure, Wealthy.in provides support through a structured onboarding and advisory approach. The platform works closely with MFDs to understand their current business setup, operational requirements, growth ambitions, and distribution model before suggesting suitable structuring options such as proprietorship, LLP, or Pvt Ltd. Based on the distributor’s scale, team structure, compliance readiness, and long-term goals, Wealthy.in helps recommend a business framework aligned with their needs. Additionally, the platform assists MFDs with operational guidance, business setup support, and developing a scalable distribution strategy that fits their preferred structure.

Mistakes to Avoid When Selecting a Business Structure

Choosing a business structure without considering long-term implications may result in operational and compliance challenges for mutual fund distributors.

Ignoring Long-Term Risks: One of the most common mistakes is selecting a structure just for ease of setup, overlooking such considerations as personal liability, scalability, tax implications and regulatory responsibilities. For example, many MFDs continue to operate as proprietorships, without considering the risks associated with succession limitations or unlimited personal liability.

Underestimating Compliance: Another mistake is to underestimate the compliance requirements. LLPs and Private Limited Companies have periodic filings, audits and governance-related responsibilities and need to be prepared administratively.

Lack of Growth Planning: MFDs should be cautious not to choose a structure without considering future growth plans for team expansion, partnership needs, or business goals. Distributors should not choose a cookie-cutter solution but rather analyse their current practice, growth goals and risk exposure, and then determine what is best for the structure of their practice.

Conclusion

As the mutual fund distribution industry continues to evolve, the choice of the right business structure has become an increasingly important decision for MFDs. LLPs and Private Limited Companies, while proprietorships are simple and easy to run, offer additional benefits of limited liability protection, business continuity, scalability and structured governance. But these advantages are offset by higher compliance and operational responsibilities.

In the end, the most suitable structure depends on factors such as the size of the business, growth ambitions, risk appetite, succession planning, team structure and compliance readiness. MFDs should carefully consider the long-term business objectives and operational needs before going for a structure and not just go for a structure for the sake of short-term convenience. The right business structure will help you run your business more efficiently and credibly, and grow in a more regulated and competitive distribution environment.

Start your MFD journey with Wealthy, India's platform for serious mutual fund distributors, built to help you grow from first ARN to a lasting, scalable practice.

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