Tax advantages of an LLP over a company

The provisions are those of the Income-tax Act, 1961, as in force when the paper was set (it has since been replaced by the Income-tax Act, 2025).

Taxed once, as a firm. An LLP is a "firm" for income-tax (section 2(23)). Its income is taxed in its own hands, and a partner's share in the total income of a firm separately assessed is exempt in the partner's hands (section 10(2A)). The profit is therefore not taxed a second time when the partners take their share. A company, by contrast, paid tax on its profits and, when it distributed them as dividends, paid dividend distribution tax on the amount distributed (section 115-O, in force when the paper was set), so distributed company profits bore tax at two levels.

Partners' remuneration and interest. A working partner's remuneration and interest to partners, authorised by the partnership deed, are deductible in computing the LLP's income within the limits of section 40(b): interest up to twelve per cent simple interest per annum, and remuneration up to Rs. 1,50,000 or 90 per cent of the first Rs. 3,00,000 of book-profit (whichever is more) and 60 per cent of the balance. Within these limits, working partners can draw part of the profit as remuneration that reduces the LLP's taxable income.

Tax-neutral conversion from a company. The transfer of a private company's or unlisted public company's assets to an LLP on its conversion under the LLP Act, and of the shareholders' shares, is not treated as a taxable transfer (section 47(xiiib)), subject to the conditions the clause lays down.

Conclusion. Compared with a company, the LLP's main tax advantages are that its profit is taxed only once, with no second tax when it reaches the partners, and that a company can convert into an LLP without the conversion being taxed; the deduction for partners' remuneration and interest, within the section 40(b) limits, adds flexibility in drawing out profit.