Advantage Taxation – Limited Liability Partnerships OR Private Limited Company?

From the time LLP has come into existence we keep getting query as to How LLP is different from Private Limited company from the point of Taxation.

In this article, we have tried to address this issue with the analytic flow-chart and mathematical example, as to how these two entities are different from each other.

General overview of Limited Liability Partnerships and Private Limited Company:

The Limited Liability Partnership Act 2008 was published in the official Gazette of India on January 9, 2009 and has been notified with effect from 31 March 2009. However, the Act has been notified with limited sections only. The rules have been notified in the official gazette on April 1, 2009. The first LLP was incorporated in the first week of April 2009.

• In India, An LLP is treated like any other partnership firm.
• No partner would be liable on account of the independent or unauthorized actions of other partners & there is no joint liability created by other partners.
• LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession.
• Indian Partnership Act, 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm where the maximum number of partners can not exceed 20.
• LLP Act makes a mandatory statement where one of the partners to the LLP should be an Indian.
• Provisions have been made for corporate actions like mergers, amalgamations etc.
• The Act also provides for conversion of existing partnership firm, private limited company and unlisted public company into a LLP by registering the same with the Registrar of Companies (ROC).

A private limited company is a voluntary association of not less than two and not more than fifty members, whose liability is limited, the transfer of whose shares is limited to its members and who is not allowed to invite the general public to subscribe to its shares or debentures. Some advantages & disadvantages are mentioned below-

• The liability of its members is limited
• The shares allotted to its members are also not freely transferable between them.
• It enjoys continuity of existence i.e. it continues to exist even if all its members die or desert it.
• Shares are not freely transferable
• Open invitation to public to subscribe to its shares does not allow

Certainly LLP model is much more tax advantageous compared to a private company, which we have tried to explain by way of a mathematical example.

To Conclude – Thus, there is no doubt that a LLP structure has better tax planning options, however, that should not be only criteria for a startup while selecting the best legal entities.

You can also check our other article on this topic -What’s best for your Startup? LLP or Limited Company? An Accountant’s Perspective

Startups and other businesses feel free to visit Taxmantra.com for comprehensive accounting, legal, regulatory, taxation and other compliance related assistance. Alok can be reached out at [email protected].