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.

After the announcements made in the Finance bill 2017 it is important to discuss the comparison between an LLP and Private limited company from a taxation point of view. In this article I am discussing the key differences between an LLP and Private Limited Company from taxation aspects and which structure seems to be more tax efficient after the proposed amendments by the finance bill 2017.

LLP vs. Private Limited Company – Taxation Comparison

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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. If the total Income of LLP has exceeded Rs 1 Crore, amount of Income Tax shall be increased by a surcharge at the rate of 12%. Education Cess @2% and SHEC @1% on income tax shall be chargeable.

♥ Private Limited Company:

  • If the total turnover or gross receipts of the previous year 2015-16 does not exceed fifty crore rupees- Rate of tax applicable will be 25%.
  • In all other cases- Rate of tax applicable, will be 30%.
  • Surcharge: If the total income of the company exceeds Rs 1 Crore but does not exceed 10 Crore, amount of Income Tax shall be increased by a surcharge at the rate of 7%. The surcharge at the rate of 12% shall be levied if the total Income of the company exceeds Rs 10 Crore.
  • Cess: Education Cess @2% and SHEC @1% on income tax shall be chargeable.

2. Dividend Distribution Tax:

♥ LLP: There is no such Dividend distribution tax applicable to LLPs.

♥ Private Limited Company: When companies distribute their profits there is levied an additional tax called the dividend distribution tax at the rate of 15% (Plus Surcharge and Cess) by way of grossing upon the amount of dividends as per provisions of Section 115-O. Thus the effective rate of dividend distribution tax comes around 20.9248%.This dividend distribution tax is not allowable as a deduction to the company or shareholder.

3. Taxability in the hands of person receiving the distributed profits:

♥ LLP: Distributed profits are exempt in the hands of partners as per Section 10(2A) of Income Tax Act’1961.

♥ Private Limited Company: Dividend on which company has paid dividend distribution tax is exempt in the hands of shareholders. However, as per Section 115BBDA if the amount of dividend received in aggregate exceeds Rs 10 Lakh such excess shall be chargeable to tax at the rate of 10%. That means shareholder has to pay additional tax on such dividend. It is important to note here that Finance bill 2017 has extended the scope of section 115BBDA to all resident persons with some exceptions, earlier this section was only applicable to individual, Hindu undivided family or a firm, resident in India.

Thus, every startup founder shall keep in mind above taxation 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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A passionate Chartered Accountant having practical work exposure in the area of Direct Tax. An organised and efficient person by nature who loves to take challenges of working with dynamic and fast paced environment with the help of knowledge and work experience. View Full Profile

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2 responses to “LLP v/s Private Limited Company – Taxation Comparison”

  1. 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.

  2. Kalyan Nandi says:

    Explain please with examples.

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