LLP (Limited Liability Partnership) is a flexible legal and tax entity that allows partners to benefit from economies of scale by working together by also reducing their liability for the actions of other partners. In some professions, you need something a little more customization than a Partnership Firm like a limited company type of structure. The LLP (Limited Liability Partnership) is a formal structure that requires a written partnership agreement and usually comes with annual reporting requirements.
Advantages
Advantages of this business structure
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Limited Liability Partnership (LLP) allows for a partnership structure where each partner's liabilities are limited to the amount they put into the business.
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Having business partners means spreading the risk, leveraging individual skills and experiences, and establishing a division of labor.
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Limited liability means if a partnership fails, then creditors cannot go after a partner's personal asset or income.
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LLPs are common in professional businesses like law firms, accounting firms, and wealth managers.
Taxation
Provisions under Income Tax Act, 1961
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Deduction for salary and remuneration paid to working partners: Any payment of salary, bonus, commission, or remuneration or by whatever name called to any partner shall be allowed as deduction in the hands of the firm subject to such conditions and limitations specified in the Act.
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Monetary Ceiling on Salary to Partners: The amount of salary to working partners shall not exceed 90% of the book profit or Rs 1,50,000 whichever is higher on the first Rs 3,00,000 of book profit or in case of loss and at the rate of 60% of the book profit on the balance of book profit exceeding Rs 3,00,000/-.
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Deduction for Interest paid to Partners: Where a firm pays interest to any partner, the firm can claim a deduction of such interest at a maximum rate of 12% p.a. according to the partnership deed. Interest paid in excess of the above shall be disallowed in the hands of the firm.
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Rate of Tax: Firms are taxable at a flat rate of 30%. Any long term capital gain shall be taxable at the rate of 20% and short term capital gains from shares\securities at the rate of 15%
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Taxation provisions are the same as applicable to Partnership Firm, however the benefits of Presumptive Taxation Scheme which was available to Partnership Firm not available for Limited Liability Partnership (LLP)