It is best to decide the business structure before starting of a business. Every business setup must deal with a challenge to identify the most beneficial business entity registration type.
There are several options but two of the most common considerations are Partnership Firm and Private limited company. Most of the Startup founders are in dilemma whether they should choose Partnership Firm or Private Limited Company.
This article discusses the tax provisions applicable for a Partnership Firm and a Private Limited Company with the registration process requirements.
A. Rate of Tax
1. PARTNERSHIP FIRM:
The rate applicable for a partnership firm is flat 30%.
Surcharge: 12% of tax where net income > Rs. 1 crore. (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).
Education Cess: 4% of tax plus surcharge.
2. PRIVATE LIMITED COMPANY
Option has been given to pay concessional effective tax @25.168% to existing domestic companies & @17.16% to new domestic manufacturing companies without availing any tax incentives/exemptions. (Under Section 115BAA or Sec 115BAB)
| SI No | Nature of domestic company | Current Tax Rate(%) | Tax Rate if option exercised (%) |
| 1. | Existing Domestic Companies | Sec 115BAA | |
| a) Turnover > Rs.400 Crore during the FY 2017-18 | |||
| Income ≤ Rs.1 crore | 31.20% | 25.168%* | |
| Income > Rs.1 crore ≤ Rs.10 crore | 33.38% | 25.168% | |
| Income > Rs.10 crore | 34.94% | 25.168% | |
| b) Other domestic companies ( in existence on or before 30-Sep-2019) | |||
| Income ≤ Rs.1 crore | 26% | 25.168% | |
| Income > Rs.1 crore ≤ Rs.10 crore | 27.82% | 25.168% | |
| Income > Rs.10 crore | 29.12% | 25.168% | |
| 2. | New Domestic Manufacturing Companies incorporated on or after 01-Oct-2019 | Section 115BAB | |
| Income ≤ Rs.1 crore | 26% | 17.16%** | |
| Income > Rs.1 crore ≤ Rs.10 crore | 27.82% | 17.16% | |
| Income > Rs.10 crore | 29.12% | 17.16% |
All the tax rates above are inclusive of Surcharge (wherever applicable) and Education Cess.
* Tax Rate: 22%, Surcharge : 10%, Education Cess: 4% – 25.168%
**Tax Rate: 15%, Surcharge : 10%, Education Cess: 4% – 17.16%
For Companies the MAT Rate has been reduced from 18.5% to 15%. (plus applicable Surcharge and Education Cess).
Applicable surcharge:
For Existing Companies (Not Exercising the Option)
7% of tax where total income exceeds Rs. 1 crore
12% of tax where total income exceeds Rs. 10 crore
For Companies Exercising the Option
The rate of surcharge in case of a company opting for the above option shall be flat 10% irrespective of amount of total income.
Applicable Education cess:
4% of tax plus surcharge for All Companies.
Conditions to be fulfilled if Option Exercised by the Assessee
- This option is applicable w.e.f. FY 2019-20.
- Assessee is not eligible for any incentives / exemptions.
- No requirement for MAT.
- Option has to be exercised one time on or before the due date of filing of Income Tax Return. (First tax return for new manufacturing Company).
- Option once exercised can’t be withdrawn.
- For new manufacturing Companies exercising the option, has to commence manufacturing on or before 31.03.2023.
3. Registration Process
Private Limited Companies need to be registered Companies Act, 2013 and is registered with Registrar of Companies.
The Partnership firm is registered under the 1932 Indian Partnership Act. There can be registered or unregistered partnerships. Both are considered as legal entities. However, it is suggested to opt for registered partnership.
Above I have discussed tax provision and registration require for both Private Limited Company. While comparing the Tax benefits Private Limited Companies have an upper hand. But below I am mentioning some benefits for Partnership firms.
Advantages a Partnership has over a Company:
1. A simple agreement between two or more people is the only pre-requisite to start a partnership firm. For the Company, there are a few procedural formalities to be fulfilled.
2. A company is managed by the directors and members with actions governed by organizations like RBI, MCA, SEBI etc. While it is only the partnership agreement that governs the partners. This is why the flexibility and freedom to take decisions is higher.
3. Termination of a partnership firm is easier than the Company. It is so because of the agreement which is valid only between the partners regarding the closure is enough. Company closure will require everyone to follow a proper winding up procedure has to be followed.
4. The company holds a greater amount of credibility compared to other business structure due to its high compliance requirement. Moreover, it is governed by statutory bodies like MCA and SEBI that keep a check upon the business from time to time. Raising funds is easier internally and even from external sources.
Conclusion: The above article is only for information basis. It depends upon the efficiency of the Person to make the Partnership Firm or Private Limited Company Successful. With efficient Partnership Firm Compliance or Pvt Ltd Company Compliance and planning, both the business entity types can be made favorable.
Author Bio
Are fund withdrawals in Private Limited Company restricted to a certain percentage of Profit and above that is taxed under loans advances at maximum rate of Income tax of 42%.
Nice article. congratulations, keep writing.
Please comment on DDT. When profits are distributed in a partnership firm it is exempt in the hands of the partners where as in the case of a company, when the profits are distributed it is taxed in the hands of the shareholders.
Yes dividend is taxable in the hands of shareholder
Will it not double suffering of tax, when private limited company profit is subject to Income Tax (Corporate Income Tax) and thereafter when the profit after tax is shared in the form of dividends by the share holders? Please Clarify