Incorporation:

Pvt ltd: More Expensive and more time taking compared to LLP

LLP: Less Expensive and Less time taking compared to Pvt Ltd Company

Board & AGM Meeting:

Pvt Ltd: 2 Board of Director Meeting and 1 General Board Meeting is Mandatory

Partners Meeting: No such Mandatory, partner can conduct if required

Normally, Family or within friend groups or connected people owned private limited companies will not conduct any meeting; they need to prepare the documents and get them signed and it’s an expensive cost-wise,

But in the case of LLP, no such cost and no such meeting requirement, if the partner(s) are needed they can conduct.

Audit,

Pvt Ltd: For Private Limited companies it’s mandatory to conduct an Audit every year even without any turnover,

LLP: For LLP, It’s mandatory if turnover is more than 40Laksh or Total contribution or capital is more than 25 Lakh.

MCA Returns,

Pvt Ltd: For Pvt ltd, it’s mandatory to file 3 to 4 forms every year, if missed, then the penalty is huge, sometime it will be more than 1L

LLP: There are 2 forms that need to be filed if the missed penalty is very less compared to Pvt Ltd.

Director Salary or Partners remuneration

Pvt Ltd: For the amount of the director’s salary is restricted based on profit and should be paid out and it’s taxable in the hand of the director. If not paid to employees tax should be paid

LLP: Partners’ remuneration is also restricted based on the profit and it’s not mandatory to pay that money to the partner and it’s taxable in hands of the Partner.

Remunerations restriction is as below

First 3 Lakh of book profit – up to 90%

Balance book profit 60%

Can be treated as remuneration and can reduce the profit for the LLP for income tax purposes,

Normally, this section will be used to reduce the tax in the hand of the LLP

Interest on Capital

Pvt ltd: No interest on capital will be provided to the shareholder

LLP: Yearly interest of 12% will be provided on the capital amount

Normally, it will be used to reduce the tax in hand of LLP subjected to the partner’s total income.

Fund Withdrawal

Pvt Ltd: Director or shareholder will not be allowed to withdraw or take any fund for personal use (Other than, as Salary & Dividend-Both is taxable in the hand of share holder) If taken any fund that will be considered as “Demand Dividend” it will taxable at 30% in the hand of share holder and not able to claim that as expenses in companies books.

LLP: Partners can take funds as required, and should be named as “Partners Drawings” that too without paying tax in hands of Partners and without any restrictions from the department.

Loan to other Corporate and Individuals

Pvt Ltd: To give corporate loans or loans to individuals is restricted in Pvt ltd, to do this, companies should get approval majority share holder, and it’s should be approved by the department.

(Again compliance cost to get approval from the department)

LLP: With the consent of all the partners, LLP can give a loan to any corporate or individual without any restriction or need not any get any approval from the department.

Tax Benefit

Pvt Ltd: Tax rate of Pvt ltd is 25% on Net profit as per income tax act 1961. (It’s after the director’s salary)

LLP: Tax rate is LLP is 30% of net profit as per income tax act 1961, (it’s after partner remuneration & interest on partners capital)

Looking, at the tax rate, it feels that, Pvt ltd is taxed at a lesser rate, but there is a catch,

In LLP, in the net profit, simply we can make the provision for remuneration and interest on partner’s capital without transferring the fund to partners. But in the case of Pvt ltd, yearend adjustment is not possible. The majority of profit will be moved to the personal partner’s hand, minimum profit will be taxable in the firm’s hand at a rate of 30%

Withdrawal of Profit

Pvt Ltd: Only option to withdraw the profit from Pvt ltd is paying the dividends, as per the company act 2013, there are restrictions on the payment of dividends and the dividend amount is taxable in the hand of the Shareholder.

LLP: Partners can take the fund at any time, without paying any tax in the hand of partners and without any approval from any department; in that accounting language it will be called “Partner Drawings”.

Now, we should think like “Marwadi**”

Assume, we gain the profit by putting our time and brain, now, we want to use that money to buy shares, MF, House, land, or any such type your Personal Name, for that we need money. It’s there in companies account, we need to take that fund as a “Dividend” from the company and pay the income tax again on the dividend, which does not make any sense.

We are paying income tax on the same income which we have earned in the name of the company as Profit and tax in the hand of shareholders as dividends.

Is that not double-taxed technically? Think and comment below

** Disclaimer : Reader should not get offended looking at the word “Marwadi”, I personally admire them. In my opinion, if anyone wants to learn the business they have to have a good connection with Marwadi. He will teach you how to run a profitable business at a low cost, it’s better than any MBA degree or any degree from any business school. Above comparison is the personal opinion of the writer. It will not constitute any legal document. The opinion may change from case to case.

Thanks for reading, For queries, feel free to write back to us, Udaya@beyondvp.com

Author Bio

Qualification: CMA
Company: N/A
Location: Bangalore, Karnataka, India
Member Since: 20 Apr 2018 | Total Posts: 3

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2 Comments

  1. Udayakumar1994a@gmail.com says:

    Hi Niket,

    Your Point is correct, if individual personnel are already under 30% it will not help him to reduce the tax.

    But

    In the same case for Pvt Ltd, you will take a salary, right? that will also be taxable at 30% Right?

    The above idea works for normal middle-class individuals,

  2. Niket says:

    Great Article! Though if a person individually is assessed at 30% rate, LLP based Establishment used to transfer funds as remuneration to reduce profits of LLp will not be a helpful solution. In such cases, Pvt Ltd looks like a better solution.

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