It is the first question in the mind of Startup founders, i.e. which legal structure should they select?

Most of the Startup founders are in dilemma whether they should choose LLP or Private Limited Company. However, it is important to note here that both are eligible for recognition as Startup as per Startup India campaign of government of India.

In this article I am discussing the key differences between an LLP and Private Limited Company from taxation as well as registration aspects.

LLP vs. Private Limited Company – Taxation Comparison

Image Source- pixabay.

1. Rate of Tax

♥ LLP: The Rate of tax applicable to LLP is flat 30%. For income tax purpose, LLP is treated at par with partnership firms.

Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 12% of such tax, where total income exceeds one crore rupees. However, the surcharge shall be subject to marginal relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees).

Health and Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge

♥ Private Limited Company:

Income-tax rates applicable for assessment year 2020-21 and 2021-22 are as follows:

Domestic Company
Assessment Year 2020-21 Assessment Year 2021-22
♦ Where its total turnover or gross receipt during the previous year 2017-18 does not exceed Rs. 400 crore 25% NA
♦ Where its total turnover or gross receipt during the previous year 2018-19 does not exceed Rs. 400 crore NA 25%
♦ Any other domestic company 30% 30%

Add:

(aSurcharge : The amount of income-tax shall be increased by a surcharge at the rate of 7% of such tax, where total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of 12% of such tax, where total income exceeds ten crore rupees. The surcharge shall be subject to marginal relief, which shall be as under:

 (i)  Where income exceeds Rs. 1 crore but not exceeding Rs. 10 crore, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.

 (ii)  Where income exceeds Rs. 10 crore, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of Rs. 10 crore by more than the amount of income that exceeds Rs. 10 crore

(bHealth and Education Cess : The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge.

Special Tax rates applicable to a domestic company

The special Income-tax rates applicable for assessment year 2020-21 and 2021-22 are as follows:

Domestic Company
Assessment Year 2020-21 Assessment Year 2021-22
♦ Where it opted for section 115BA 25% 25%
♦ Where it opted for Section 115BAA 22% 22%
♦ Where it opted for Section 115BAB 15% 15%

Surcharge : The rate of surcharge in case of a company opting for taxability under Section 115BAA or Section 115BAB shall be flat 10% irrespective of amount of total income.

Health and Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge.

2. Difference in Registration Process:

Private limited company registration is done according to Companies Act, 2013 and is registered with Registrar of Companies. LLP registration is done according to the Limited Liability Partnership Act, 2008 and is registered with Registrar of LLP. A DIN (Director Identification Number) is mandatory for the registration of Private Limited Company. However, a DPIN (Designated Partner Identification Number) is mandatory in case of a Limited Liability Partnership. The other rules followed by both the companies are according to their respective Acts also.

3. Number of Members/ Directors / Partners Requirements:

Private Limited Company require at least two members, two shareholders and two directors for the incorporation of the private limited company and a maximum limit is fifteen directors and two hundred members. Whereas,  A minimum of two partners will be required for formation of an LLP. There will not be any limit to the maximum number of partners. Appointment of at least two “Designated Partners” shall be mandatory for all LLPs.

Thus, every startup founder shall keep in mind above aspects before choosing an appropriate legal structure for his Startup.

(Submitted by – CA Tarun Kumar (B.Com, ACA) Mobile: +91-888-282-8112- Email-ID: catarunkumar92@gmail.com)

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Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

(Republished with Amendments by Team Taxguru)

Author Bio

Qualification: CA in Practice
Company: Tarun Harish Kumar & Co.
Location: Delhi, New Delhi, IN
Member Since: 25 Apr 2017 | Total Posts: 42
A passionate Chartered Accountant having practical exposure of working with the Start-ups and NGOs. I also do have an interest in blogging and teaching. I am active blogger and authored various blogs on Taxation matters, that have been published in the print media and leading newspapers as well as w View Full Profile

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7 Comments

  1. Ritesh says:

    There is a factual error in the article. LLP does not require Two partners and Two Designated Partners. We can start an LLP with Two Designated Partners as well. No regulatory/statutory requirement to have Partner. In many cases the Partners themselves can act as Designated Partners.

  2. Chaitri Gathani says:

    The article reads well! but shouldn’t we even factor in the valuation angle? its more smoother to value a Company instead of LLP when someone plans to divest / get more infusion?

  3. JAINAM SHETH says:

    The Article is very much good and Well-Described. Can you just describe about the Impact of Indirect Taxes’ Comparison in both of the cases – LLP & Private Limited Company.

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