Category: General

When starting an enterprise, most fundamental and preliminary questions raised by an entrepreneur is which kind of business entity to incorporate, private limited company or limited liability partnership? which would be most suitable to the enterprise? This article discusses the options that an entrepreneur should consider while forming an enterprise.

It is important to evaluate as to which entity is better from a tax and non-tax perspective – company or an LLP.

Hence, the objective of this analysis is two-fold:

• From a pure tax perspective, which entity is beneficial – Company or an LLP
• Considering other non-tax aspects like the regulatory hassles, the flexibility available, etc. what are the pros & cons of a company vs an LLP

Tax Aspects

Earlier, the tax rate for companies and LLPs was 30%. Then, it was clear that LLPs are favorable compared to companies since companies has to additionally bear tax on distribution of dividend.

Eventually, the tax rates of companies were reduced to 25% for a large category, which now has fallen to 22% and dividend distribution tax being removed. Additionally, under the 22% tax regime, there is no MAT. Tax rates for LLPs is 30% and additional 12% of tax has to be paid as surcharge if income exceeds Rs.1 Crore.

Further, sale of company’s share is subject to capital gains tax, whereas in case of LLP, it may be possible to achieve a change in ownership without resulting in any tax outflow.

Non Tax Aspects

The Companies Act is detailed and has a lot of governance requirements, like comprehensive norms for directors, raising capital, reducing capital, holding board meeting, holding shareholders’ meeting, protection for the minority, etc. This leads to the following broad conclusions:

• Companies have to adhere to strict standards, leading to a strong governance
• Companies have a high compliance burden

Certain disadvantages of an LLP are as follows:

• Even a minor change in the LLP constitution will result in lapse of the attributable LLP losses. In case of companies, only substantial change in shareholding will lead to the losses getting lapsed.
• There are a few provisions, like weighted deduction for in-house R&D, which is applicable only to companies.

Conclusion

We have discussed the various factors which should be considered for choosing company vis-à-vis an LLP. There are variety of factors relevant and the ultimate decision will depend upon the facts of the case. However, put simply, in case the entity is eligible to claim benefit of section 115BAB (being 15% tax rate for new manufacturing companies), from a tax perspective, a company generally will make more sense.

The conclusion will vary based on the following factors:

• Income level of the shareholders & type of shareholders (nonresident, corporate, non-corporates, etc.)
• Eligibility to claim the reduced tax rate of 15%
• Need for foreign investment
• Number of investors involved
• Ability to structure the shareholders/LLP agreement v. adopting the standard provisions

Further, it is important to note that there are various tax optimization strategies. Such strategies may be explored, and the same will tilt the decision. For free consultation contact us

Up to date accounting is key to knowing where your business is at and where it is going. It’s a vital part of the business, but that doesn’t mean it has to take up your weekend with haphazard spreadsheets and boxes of receipts. That just takes you away from building the business and achieving revenue growth. 5 reasons why you shouldn’t waste your time with DIY accounting module

1. It’s not your area of expertise, so get a SME or a start up accounting expert who can do more than just accounting

Whilst you may be able to handle the basics, an expert can bring you way more than just some boring reports. They can give you business advice on streamlining sales and collections and many more, reason being they have been there and seen it before. Accounting may be just interpreted as simple debit and credit but, know how of where to debit or credit lies with the accounting expert. 

2. Your time isn’t “free”

Early on you may have time to do the accounts, or the volume may be so low that you don’t think it’s worth getting someone else involved. But as you get busier every hour spent on accounting, is the time not spent on the rest of the business. That is a cost to the business now, and the future income that work could bring in. It is likely that cost of missing a business opportunity may exceeds the cost of hiring an expert, without even factoring in the incremental benefits they can bring.

3. Distractions happen, but accounts are needed on time every time

Your time is needed to close that sale, go visit the factory, fix the code, meet the investors, etc. When accounting slips, it becomes a bigger and potentially messier task. By getting an expert it will “just happen”. The reports will appear in your email and they will answer your questions so you have the timely information to help manage your business. With tech-enabled professional service company like buoyanci finpro you can access reports anytime and from anywhere – to answer business critical matters.

4. Outsourced accounting expert will save you money

As an outsourced firm you have the benefits of scale of services without investing in infrastructure to house them and people to manage them and cover their holidays, etc. 

5. An outsourced accounting team gives you more efficiencies and more reliability

Whilst many firms will have a Financial Controller or a CFO, Outsourced model brings in experienced accounting expert at economical fees, thus bridges gap between need of experienced and affordability of the company. 

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