Difference in taxation in Private Limited Company & LLP

1. Taxes that are levied on a Private Limited Company

A private limited company is liable to pay tax on the income of the corporate. The rate of Income tax that is levied on a private limited company is 30%.

It is, however, is subjected to dividend distribution tax when it is required to pay the dividend. Under the Income Tax Act, the Dividend distribution tax is charged at the rate of 16%.

The third kind of tax that is applicable to a company is the Minimum Alternate Tax. Many companies charge depreciation in their books on a straight line method. Thus, the profit which is shown is higher in the accounts that are maintained for the company law purposes and thus they can also declare the dividend. However, for the income tax purposes, they charge depreciation on the basis of written down value which is higher. Thus, for the income tax purpose, they may either show the low profit or even show the loss. These companies are called as zero tax company. Since these companies show higher profits in their balance sheets, such kind of profit is called as book profit.

Under Pvt limited company is required to pay MAT on its book profit if the income tax that is payable on the total income as is calculated under the Act which is less than the minimum. According to the latest Finance Act, MAT is accessed at the rate of 18% from April 2011.

1. Taxes that are levied on a Limited Liability Partnership

Taxation structure for LLP is, however, simpler. LLP is only subjected to Income tax and the Alternative Minimum Tax. Dividend Distribution tax is though not applicable on LLP. Once the profit is declared and tax is paid by the LLP, the distributed income becomes tax-free in the hands of the partners. However, Tax is levied on the firm at the rate of 30%.

LLP is now subjected to Alternate Minimum Tax which took place from the assessment year 2012-2013.  The purpose behind the implementation of this tax is to rationalise taxation of the LLP’s with the companies. However in  order to avail tax benefits many companies have converted into LLPs, hence, the Union Budget 2011 had introduced a new Chapter XII-BA under the Income Tax Act 1961 which provided for Alternate Minimum Tax (AMT) at the rate of 18.5% and this was on the adjusted total income of the Limited Liability Partnership. According to the new rule, when the regular income is tax payable by an LLP for a particular financial year which is less than the corresponding alternate minimum tax that is computed at the rate of 18.5% on its adjusted total income; such an alternate minimum tax shall be deemed to be the income tax liability of such kind of LLP.

Thus in spite being subjected to AMT, LLP registration also offers lesser tax liability in comparison to a private limited company. Hence, it is, however, preferable for a freelancer and sometimes a startup to set up their business in the form of LLP rather than a private limited company.