Author

T R Venkatesh Babu B.Com, FCA

Browsing

LLP or Private Limited Company? This is one of the most asked questions by new and old entrepreneurs. What’s the most suitable structure to start his/her business? A simple google search would yield thousands of results and tens of good articles on the subject. I would share some of the good ones with these entrepreneurs but nevertheless, a few questions remain unanswered in those articles. So, I thought of compiling a simple table, although not exhaustive, (with the least amount of legal and financial jargon) to address such unanswered questions.

LLP is the newest kid on the block. LLP structure was introduced with the passing of The Limited Liability Partnership Act, 2008, which came into effect in early 2009. This structure has been in the west for many decades. The traditional partnership businesses burdened the partners with unlimited liability, many times this burden induced by other partners with the “principle of agency” at play. One partner’s actions leading to a massive loss became all partners’ burden. It had the potential to bankrupt the partners of the firm. LLP structure addresses this point primarily by borrowing the concept of “limited liability” from the corporate structure. On the other side, a typical corporate structure would entail a long list of compliance costs which can be prohibitive to many businesses. The fusion of traditional partnerships and corporates is LLP.

Hope the readers find the table useful. If any doubt still persists, please feel free to write to me or leave your query in the comment section. We shall be happy to get back.

Income Tax

  S No  Particulars  Private Limited Company  LLP
  1  Rate of Tax  Tax Rate 25%   (If Turnover is less than Rs.400 Crore. However, the Companies can choose to pay taxes @ 22%, without any deductions)   Tax Rate @ 30 % (If Turnover exceeds 400 Crore)   Surcharge; Income 1 Crore to 10 Crores -7%              more than 10 Crores -12%   Health & Education Cess : 4 %      Tax Rate @ 30 %                   Surcharge; Income Exceeds 1 Crore – 12%     Health & Education Cess : 4 %  
  2MAT   (Minimum alternate tax)MAT -15%   On Book profitNot Applicable   AMT (Alternate Minimum Tax) 18.5% in special cases where there is deduction u/s 10AA/80IB etc.,
3Profit DistributionTaxable in the hands of Shareholders based on their tax slab  Profit distributed post tax is exempt from tax  
4Salary/Remuneration  to Directors/PartnersNo Restriction/Cap on payments to DirectorsAggregate of   90 % of the first Rs.300,000/-  Plus60 % of the Balance Profit In the case of loss maximum salary allowed as expense for tax purpose will be Rs.1,50,000/-  

Companies Act vs LLP Act

S No.ParticularsPrivate Limited CompanyLLP
 1Governing LawCompanies Act, 2013Limited Liability Partnership Act, 2008
 2NameMust contain suffix ‘Ltd’ or ‘Pvt Ltd’Must contain suffix ‘LLP’
 3Organizational StructureRigid & governed by Companies ActFlexible & governed by LLP Agreement
 4Loans & borrowings (Other than from Banks & Financial Institutions)Directors cannot borrow and lend money to CompanyThere is a Cap on shareholders lending to CompanyNo Restrictions. Governed by LLP Agreement
5Convening of MeetingsBoard Meetings are mandatoryAnnual General Meetings is Mandatory    No Mandatory requirement.   But however, the partners may decide to have periodical meetings and the same will be governed by LLP Agreement
6Intimating ROC regarding Creation of Charge Mandatory when a charge is created on assets of the CompanyNot Mandatory
   7  Maintenance of Statutory RecordsMany Registers are required to be maintained like Shareholders/Members Register, Directors RegisterNo such requirement  
    8Increase in CapitalRequire to Pass Ordinary resolution in General Meeting and file form SH-7.Only require to amend LLP Agreement and File e-form Form-3.
    9Annually form filling requirementThere are many E-forms  like AOC-4, Form –MGT-7  and E – form-ADT-1Only Two annual form E-form- 8, E-form-11
   10Disclosure of InterestRequire to Take disclosure from director under Section-184(1)No such requirement
   11Audit of AccountsAudit is Compulsory.Require only if Turn over above 40 lacs or Contribution more than 25 lacs.
   12Related Party TransactionsTransaction to be at arm’s length price only and as per provisions of Secton-188 of Companies Act-2013.No Restrictions. Governed by LLP Agreement
13Reporting Requirements- FDI-FEMASingle Master Form (SMF) has to be filed with RBI within 30 days from the date of allotment.   FLA Return – Annually before 15th JulySingle Master Form (SMF) has to be filed with RBI within 30 days from the date of receiving of Capital Contribution from Partner   FLA Return – Annually before 15th July

Other Statutes

S No.ParticularsPrivate Limited CompanyLLP
1Provident Fund On Salaries to Directors/PartnersDirector Remuneration is covered for the purpose of Provident FundDesignated Partner’s Remuneration is not covered for Provident Fund
2Labour LawsAs per labour laws a Whole Time Director is a employee and eligible for GratuityLeave encashmentLeave as per statuteDesignated Partners are not Employees and hence provisions of labour laws are not applicable

Others

S No.ParticularsPrivate Limited CompanyLLP
1Investment by Angel Investors/PEs/VCsPreferredNot preferred

The write-up is for general understanding. We suggest the readers to discuss with their consultants before deciding on choosing either of the structures.

The Government of India has introduced a new Section 115BAC in the Finance Act 2020. The memorandum to Finance Bill 2020 says it is an incentive to Individual and HUF (hereinafter referred to as taxpayers), which are in line with options given to the Corporates under Taxation Law Amendment Act,2019 (TLAA).

The Tax rates under the new regime and the existing regime ( Both are available)

Total Income New Slab RateTotal IncomeExisting Rate
Rs 2.5 lakh to Rs 5 lakh5%Rs 2.5 lakh to Rs 5 lakh5%
Rs 5 lakh to Rs 7.5 lakh10%Rs 5 lakh to Rs 10 lakh20%
Rs 7.5 lakh to Rs 10 lakh15%Above Rs.10 Lakhs30%
Rs 10 lakh to Rs 12.5 lakh20%  
Rs 12.5 lakh to Rs 15 lakh25%  
above Rs 15 lakh30%  
Two easy looking Choices – doesn’t mean easy to choose!

To avail the concessional tax rate a tax payer has to forego the following exemptions, deductions and benefits. There are approximately around 70 exemptions/deductions to which a tax payer is not eligible under the new regime and the most common one are;

  • Standard Deduction of Rs.50,000/- (available to Taxpayers having Salary Income under existing tax regime)
  • Professional Tax paid on employment – (available to Tax Payers having Salary Income under existing tax regime)
  • House Rent Allowance (available to Tax Payers having Salary Income under existing tax regime)
  • Children Education Allowance  (available to Tax Payers having Salary Income under existing tax regime)
  • Special Allowances like Uniform Allowance (available to Tax Payers having Salary Income under existing tax regime)
  • Meal Vouchers (available to Tax Payers having Salary Income under existing tax regime)
  • In the case of tax payer having business income
    1. Additional Depreciation
    2. Allowances for Scientific Research
  • Deduction from Family Pension
  • Interest on Housing Loan for Self occupied property or Vacant Property
  • Chapter VIA Deductions (80C, 80D, 80E and so on)
    1. Life Insurance Premium
    2. Children Tuition Fees
    3. Housing Loan Repayment
    4. Contribution to Provident Fund
    5. Contribution to Equity linked Saving Scheme
    6. Mediclaim (health insurance)
    7. Repayment of Education Loan
    8. Donation

The primary objective of introduction of the new tax regime for Individuals/HUFs was to simplify the tax laws, as tax laws are generally perceived as more complicated legislation, but however a tax payer has to do an herculean exercise to see whether the new tax regime is beneficial to him or not.

The following table gives an indication when the new tax regime is beneficial to him/her; (all in Rs.)

Taxable
Income
Break Even Point 
for
deductions
/exemptions
When is New Tax Regime
Beneficial?
When is Old Tax Regime Beneficial?
Up to
5,00,000
0No differenceNo Difference
5,50,00025,000If deductions/exemptions
are <=Rs 25,000.
If deductions/exemptions
> Rs 25,000.
6,00,00050,000If deductions/exemptions
are <=Rs 50,000.
If deductions/exemptions
> Rs 50,000.
6,50,00075,000If deductions/exemptions
are <=Rs 75,000.
If deductions/exemptions
> Rs 75,000.
7,00,000100,000If deductions/exemptions
are <=Rs 100,000.
If deductions/exemptions
> Rs 100,000.
7,50,000125,000If deductions/exemptions
are <=Rs 125,000.
If deductions/exemptions
> Rs 125,000.
8,00,000137,500If deductions/exemptions
are <=Rs 137,500.
If deductions/exemptions
> Rs 137,500.
8,50,000150,000If deductions/exemptions
are <=Rs 150,000.
If deductions/exemptions
> Rs 150,000.
9,00,000162,500If deductions/exemptions
are <=Rs 162,500.
If deductions/exemptions
> Rs 162,500.
9,50,000175,000If deductions/exemptions
are <=Rs 175,000.
If deductions/exemptions
> Rs 175,000.
10,00,000187,500If deductions/exemptions
are <=Rs 187,500.
If deductions/exemptions
> Rs 187,500.
10,50,000187,500If deductions/exemptions
are <=Rs 187,500.
If deductions/exemptions
> Rs 187,500.
11,00,000187,500If deductions/exemptions
are <=Rs 187,500.
If deductions/exemptions
> Rs 187,500.
11,50,000187,500If deductions/exemptions
are <=Rs 187,500.
If deductions/exemptions
> Rs 187,500.
12,00,000191,670If deductions/exemptions
are <=Rs 191,670.
If deductions/exemptions
> Rs 191,670.
12,50,000208,330If deductions/exemptions
are <=Rs 208,330.
If deductions/exemptions
> Rs 208,330.
13,00,000216,665If deductions/exemptions
are <=Rs 216,665.
If deductions/exemptions
> Rs 216,665.
13,50,000225,000If deductions/exemptions
are <=Rs 225,000.
If deductions/exemptions
> Rs 225,000.
14,00,000233,330If deductions/exemptions
are <=Rs 233,330.
If deductions/exemptions
> Rs 233,330.
14,50,000241,670If deductions/exemptions
are <=Rs 241,670.
If deductions/exemptions
> Rs 241,670.
15,00,000
& Above
250,000If deductions/exemptions
are <=Rs 250,000.
If deductions/exemptions
> Rs 250,000.
Long list of indifference points

How to opt for new tax regime;

  • A tax payer not having income from Business or Profession can opt for the new tax regime at the time of filing the tax returns for the respective assessment year.
  • A tax payer having income from Business or Profession can opt for the new tax regime before the due date for filing the tax returns and once opted same shall apply to subsequent assessment years.

How to exit from the new tax regime;  

  • A tax payer having only Income from Salary, House Property, Capital Gain and Other Sources can choose every year while filing the tax returns
  • A tax payer having income from Business or Profession can opt out of the new regime only once and there after the normal provisions of Income Tax Act will be applicable. He cannot choose the new tax regime as long as he is having Income from Business or Profession.

So how does one choose which regime is better ? To help you decide, we have already provided detailed list of indifference points and along with that following Rules of Thumb can be helpful.

#Tax PayerWhen is new tax regime beneficialRemarks
1Salaried EmployeesThose who have just taken up the employment and whose salary is more than Rs.600,000/- and staying in own house and not made sufficient savings like investment in PF/Insurance Premium during the year.    As the Tax payer has an option to opt for the new tax regime better to evaluate before filing the tax returns every year.
2Having income from business/ProfessionThose who are not paying interest on self-occupied property and not having sufficient savings like investment in PF/Insurance Premium during the yearExtreme caution to be exercised before opting for the new tax regime as there is only one time option to exit from the scheme.
Rules of Thumb for New Tax Regime

The write-up is for general understanding. We suggest the readers to discuss with their CAs before deciding on choosing either of the tax rates.