How Your Business Structure Is Impacts The Taxes You Pay

If there is one thing that bugs every entrepreneur out there, it’s the taxes. While they choose their business entity for various reasons; from easy access to funds to limited liability, tax models are one thing that they don’t consider. Are they really wrong in this? Just take a look at the business incorporation proceedings in India. The procedure is so nuanced that tax matters would be the last thing on your mind.

However, once your company is registered, you start to worry. You start to think about the financial plan that didn’t take into account these nuanced tax models. Well, no more! We present you this article is to teach you about the tax models associated with different business structures. Once you are through reading it, you can confidently choose and manage the business entity that suits you best.

LLP and Partnership Firm

Both kinds of partnerships; LLP or a simple partnership firm are taxed as separate entities. Based on certain restrictions, salaries, bonus, commission and remuneration paid to the partner can be deducted. Upon paying interest to the partner, the firm can claim a deduction of that interest. The partner is allowed a maximum interest rate of 12%.

Tax Rate

LLP and Partnership firms are taxed at a flat rate of 30% plus additional surcharge:

1. If the income is less than INR 1 Crore: No surcharge
2. If the income is more than INR 1 Crore: 12% surcharge

Cess

Health and education cess are calculated at 4% of the income tax and surcharge.

Minimum tax to be paid

LLP and Partnership cannot pay taxes of less than 18.5%.

Private Limited Company

A company is a separate legal entity from its director and members from the start. It’s the most popular business entity in India. The tax model divides companies into two types: Foreign and Domestic

Tax Rate

For the domestic companies, the tax rates are as follows

1. If the annual turnover is not more than INR 250 Crore: 25%.
2. If the annual turnover is over INR 250 Crore: 30%

For foreign companies, the tax rates are as follows

3. If the government is the client: 50%.
4. If there are other sources of income: INR 40%

A surcharge is applicable at the following rates:

1. Domestic companies:
   1. Income not more than INR 1 Crore: No surcharge
   2. Income more than INR 1 Crore, but less than INR 10 Crore: 7%
   3. Income more than INR 1 Crore: 12%
2. Foreign companies
   1. Income not more than INR 1 Crore: No surcharge
   2. Income more than INR 1 Crore, but less than INR 10 Crore: 2%
   3. Income more than INR 1 Crore: 5%

Cess

Health and education cess are calculated at 4% of the income tax and surcharge.

Minimum tax to be paid

A private limited company cannot pay taxes of less than 18.5%.

One Person Company

 A One Person Company encapsulates nearly all the perks of the company with only a single member and director. It’s meant for solo entrepreneurs among you who want to create a good business infrastructure on your own. It’s a separate legal entity from its director and therefore is taxed as such.

Tax Rate

Like a private limited company, a one person company (OPC) is incorporated under Companies Act. And, it is recognized the same as a private limited company by the Income-tax department. Therefore, the income tax rates for an OPC are the same as a private limited company.

Sole Proprietorship

A sole proprietorship is a business entity owned by a single individual and not recognized as a separate legal entity. It’s an informal structure and therefore, the tax model is the same as an individual.

Tax Rate

A Sole proprietorship firm is taxed as same as an individual. Therefore, the rebate is the same as the individual i.e. if the income is not more than INR 5, 00, 000/-, there is 100% tax rebate.

Surcharge

The surcharge is as follows:

1. Income less than INR 50 lakhs: No surcharge
2. Income between INR 50 lakhs and INR 1 Core: 10%
3. Income more than INR 1 Crore: 15%

Cess

Health and education cess are calculated at 4% of the income tax and surcharge.

Minimum tax to be paid

A non-corporate body cannot pay taxes of less than 18.5%.

Conclusion

Your business structure decides how you much tax you are going to pay. With the knowledge we have given you, I hope that you are now more than ready to start your own business.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.