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5 Steps for private limited company registration

The name of the company is the first and foremost decision that a person makes for new company registration. It is the first identity that goes out to consumers or investors that’s why it needs to be unique, desirable and one of its kind to make it stand out of the rest. Therefore, choosing a right name of new private limited company registration becomes extremely important and should be done meticulously.

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  • Post:CA Nayani Agarwal
  • May 20, 2020

Major differences between LLP and company registration

To provide boost to the economy, Government of India in the financial budget 2020-21 provided some of the measures, the most noteworthy was the cut in corporate income tax rate. Corporate income tax rate on the domestic companies was levied at 25% and 30% for turnover less than and more than 400 crores respectively. Under new framework, corporate income tax rate on the domestic companies has been reduced to 22%, irrespective of turnover.

Further to boost the manufacturing activities, corporate income tax rate on new company engaged in manufacturing activities has been reduced to 15%. However, reduction in corporate income tax rates requires some conditions to be fulfilled to avail tax incentives.

Background of LLP

To provide more organised structure to small businesses operating as sole proprietor or partnership, concept of limited liability partnership (LLP) was introduced. It provided the benefit of limited liability and separate legal entity which are available in private limited company registration . Liability of partners is restricted to the contribution made by the partners. For Income tax purpose, LLP is treated as partnership attracting income tax rate of 30%.

LLP gained popularity due to its distinct features of both company (legal aspects) and partnership (tax aspects). No dividend distribution tax (DDT) @ 15% is levied when it comes to LLP. The flexible features, far and far between compliances and exemption from DDT helped the form of business registration gain popularity and inspired substantial registration of LLP and conversion of huge number of companies in LLP.

Analysis of LLP Vs. Company registration under new framework

Prior to Union Budget 2020, Company and LLP incomes were taxed at same rate of 30%.Private limited companies had to pay additional DDT of 15% making the effective rate @ 20.55%.

Under new regime, income tax rate of companies has fallen to 22% along with additional clause of no Minimum Alternate Tax (MAT). Hence evaluation of entities -LLP Vs Company from tax perspective becomes even more salient. Additionally, non-tax aspects like regulatory norms, legal aspects, flexibility etc are also to be considered.

Comparison of LLP and Company registration:

  • Tax perspective – LLP Vs Company registration which one is more favourable
  • Non-tax perspective – Advantages & disadvantages of LLP Vs Company registration

Income of LLP is currently taxed at an effective rate of 31.2%. In case, total income exceeds 1 crore, surcharge of 12% is levied translating the effective tax rate at 34.32%.

Under new framework, private limited companies are taxed at 22% with a surcharge of 10% (irrespective of income) and health and education cess of 4% making the effective tax rate 25.17%.

For manufacturing companies tax rate is 15%on which surcharge of 10% (irrespective of income) and health and education cess of 4% is payable. Effective tax rate comes for private companies engage in manufacture companies is 17.17%.

Legal Structure Income level /Tax Rate Income level/Tax Savings
< 1 Cr. >1 Cr. < 1 Cr. >1 Cr.
Income examples 60 lacs 1.2 cr 60 lacs 1.2 cr
LLP 31.2% 34.3%
Pvt Ltd Co. 25.17%25.17% 3.6 lacs 10.95 lacs
Pvt ltd -Manufacturing Co. 17.17% 17.17% 8.42 lacs 20.56 lacs

Considering tax aspects Company registration pans out to better.

However, to avail the benefits of reduced tax rate under sec 115BAA (Reduced tax rate of 22%) and Sec 115BAB (new manufacturing company), company has to forego certain benefits like no additional depreciation, no set off of carried forward losses, no earlier MAT credit to be allowed, no special deduction for SEZ units etc.

Non-tax Perspective:

Points other than tax aspects which are to be considered are:

  • Flexible audit norms in LLP – Audit mandatory if capital contribution more than 25 lacs or Sale above 40 lacs.However, in company audit is mandatory irrespective of sales and capital contribution.
  • Companies have slightly higher compliance burden as compared to LLP.
  • Taxability of dividend income in hands of shareholders in the case of company.
  • FDI norms are more stringent in case of LLP. In company 100% FDI allowed under automatic route.
  • Business tenders usually allotted to register companies.
  • Employee stock options can be issued in the case of company only.
  • Conclusion:

    We have highlighted both tax and non-tax aspects in a comprehensively to make it easy for you to decide between private limited company registration and LLP. To put it simply, if entity can claim benefit of Sec 115BAA (22% tax rate for domestic private companies) and Sec 115BAB (15% tax rate for new manufacturing companies),company registration is a lucrative option. Tax saving is significant in private limited company registration which outweighs non tax aspects.

    Author is Chartered Accountant with all India rank holder of 24 and can be reached out [email protected]

    Over the years, Patron Accounting has emerged as one of the leading accounting firm in Pune which provides accounting services like Online GST Registration, Stock Audit, Company Registration in pune. Having an experience we always come with plan to lay out a smooth process that is effective and efficient. Owing to large networks across India, we tend to deliver your accounting needs simultaneously at mutilple location.

    Read more-How to Choose Name for New Company Registration

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