Establishing an LLP structure for a business owner gives benefits that might be suited to the nature of the business in which they are running and as well as there are multiple considerations, that they need to consider one of these is the taxing structure as well as implication that are business owners need to keep in their minds. Generally, as per knowledge among people who do not associate themselves, in detail with the taxing terms generally know over the surface that there are Taxes in LLP which benefits in running a business and this is true, these structures depend upon the business structure in which the business operates. The Indian economy has changed significantly due to an increase in the start-up culture, the government allows some taxing benefits to give businesses certain benefits by encouraging them to run business activities which in the longer term would help them boost the economy of the nation.

Taxes in LLP & benefits associated with it

Taxes in LLP have same structure as that of a partnership business. Following are the features of the Taxing structure of these kinds of businesses, as well as the benefits arising from these taxing structures.

a) Pass-through taxation feature

LLPs are not taxed at the entry level, instead, they are taxed based on profit-loss made, this taxing structure “passes through” to the individual partners, and they report these in their taxing reports. This structure potentially reduces overall taxing liability towards individual partners. If the LLP is not making any profit or is at par with the expenses then, it need not pay any taxes, it just has to get IT( Income Tax) returns filed annually.

b) Tax on partner’s share of income

Partners are taxed based on their income, bonus, salary and profits they made while being associated with the LLP they are partners of. How much income, bonus and profit-sharing structure of the LLP is decided as per the terms of the LLP Agreement, which is a crucial document while registering the LLP as a business structure. Hence, partners need to optimise their distribution of profits as well as other partners to achieve an efficient and beneficial taxing structure.

c) Tax deduction and allowances

LLPs can avail of deductions and allowances as per the Income Tax for business-related expenses, investments and contributions. For any purchase made for a business, the bill can be generated in the name of the business., one of the biggest features of an LLP is a separate legal entity, different from those of its partner, it is capable of renting, owning and buying properties be they movable as well as immovable. 

d) Goods and Service Tax( GST)

LLPs may be eligible to register themselves under the GST structure, it can be done once they reach the required turnover as prescribed (which of annually 20lakhs as per the GST Act). Hence, businesses need to monitor the turnover regularly as well as ensure compliance to avoid paying penalties.

e) Capital Gains Tax

Capital Gains Tax may be charged upon an LLP when there is profit from the sale or transfer of capital assets such as an investment in the LLP, and it is very much eligible since it is a separate legal entity. Hence, the sale of assets needs to be planned strategically to reduce the burden of taxes on the LLP, this strategic planning may include- deciding when they sell the asset, how long to retain it, whether to categorise it as Long Term Capital Gains or Short Term Capital Gains.

f) Tax on Distributed Profits

The Partners in an LLP may be subject to tax based on their profits without the payment of tax. Hence, the profit distribution needs to be carefully stated in the LLP Agreement, to minimize the burden of tax on the partners.

g) Compliance with Transfer Pricing Rules

If an LLP transacts, with multiple parties, hence business owners and partners need to be aware of the price of the transfer and the market value to as to ensure that they are taxed fairly based on the price of the transaction.

h) No Dividend Distribution Tax(DDT)

This taxing structure is mainly used in businesses or corporations that have chosen the private limited business structure, the shareholders or the company is taxed on the annual dividends they show in their books of account. Hence, in an LLP business structure, there is no Dividend Distribution Tax

Conclusion

Hence, an LLP has many taxing benefits and considerations that need to be considered by the business owners. The feature of LLP, which makes it a separate business entity and gives a separate legal identity gives many advantages to the business owner like the ability to own, buy and rent properties be they movable or immovable, when anything is purchased or transacted in the name of the business to tax benefits they are entitled to taxing benefits. For the ease of operating a business, an LLP does not require minimum capital to start a business, nor does it need to pay taxes until it makes a profit by actions like- sales, transfer of assets or reaching a certain turnover. All of these benefits and provisions are in accordance with the Income Tax Act.

FAQs-

1. How are LLPs taxed in India?

LLPs in India are taxed differently from big corporations to provide benefits of running a business, LLP partners who are running an LLP are taxed at an individual level based on the revenue they generate by operating the LLP.

2. What is the pass-through taxing structure of an LLP?

A pass-through taxing structure means an LLP is not subjected to paying taxes, instead, partners who are running the business are taxed individually as per their income from the LLP, or the shares of the profit they have as per the LLP Agreement. 

3. Are LLP exempted from Dividend Distribution Taxes?

Yes, LLPs are exempted from paying Dividend Distribution Taxes, unlike other corporate entities where the business or the shareholders are taxed as per the dividend they have filed.

4. Does LLP pay income tax at the entity level?

No an LLP is not taxed at the entity level, it is taxed individually at the partner level depending upon the share of profit and loss made by each partner.

5. Minimum turnover for an LLP to be taxed?

There is no minimum turnover for an LLP to be taxed, they are taxed at the individual partner level, but an LLP may be liable to GST depending upon once they reach a minimum turnover as prescribed which is 20 lakhs annually.

6. The difference in the taxing structure of an LLP and a Partnership?

The taxing structure of an LLP and Partnership are the same, they are together different from that of a Private Limited Company.

7. Taxation process of an LLP, during the process of dissolution?

During the process of dissolution an LLP maybe liable to settle any outstanding tax liabilities, settle any debt or file any left-out Income Tax Returns, there is tax for just dissolution of an LLP.