A side-by-side comparison of a private limited company and an LLP, including the tax on money the owners actually take out.
Most founders ask this question once, get a one-line answer, and live with it for the next ten years. The one-line answer is usually “a company pays 25%, an LLP pays 31%, so the company is cheaper.” That answer is correct only in a situation most owner-managed businesses are never in: where the profit stays inside the business and is never taken home.
The moment the owner wants the money, the ranking can flip. And it can flip by a very large margin. So the honest way to compare the two is not to compare the headline rate on profit. It is to compare the total tax paid from the point the business earns a rupee to the point that rupee reaches the owner’s bank account.
This article does exactly that.
How each one is taxed at the business level
A private limited company that opts for the concessional regime pays tax at 22%, which works out to about 25.17% once surcharge and cess are added. In exchange, the company gives up most incentive deductions. A company that stays outside this regime pays 25% where turnover is within the prescribed limit, or 30% otherwise, with surcharge and cess on top, and is also exposed to minimum alternate tax. New manufacturing companies that qualify enjoy a lower rate of 15%. Because the concessional 22% route is simple and predictable, that is where most owner-managed companies sit, and that is the rate used throughout this article.
An LLP pays a flat 30%, or about 31.2% with cess, rising to roughly 34.94% once income crosses the one-crore mark and surcharge applies. There are no slabs, no turnover-based concession, and no lower rate for smaller LLPs. An LLP that claims certain deductions can also be pulled into alternate minimum tax at 18.5%, and unlike individuals, an LLP gets no minimum-income shelter from that provision.
Read only that far and the company looks cheaper by about six percentage points. Now look at what happens next.
The part that decides the answer: how money reaches the owner
This is where the two structures stop resembling each other.
In an LLP, there are three ways money reaches a partner. Remuneration to working partners is deductible for the LLP, but only up to a statutory ceiling: the higher of ₹3,00,000 or 90% of the first ₹6,00,000 of book profit, plus 60% of the balance. Interest on partner capital is deductible up to 12% a year. Whatever profit remains after the LLP has paid its own tax can be distributed to partners with no further tax at all. That last point is the LLP’s single biggest advantage. Distributed profit is taxed once, at the LLP level, and never again.
In a private limited company, there are also three main routes, and they behave very differently. Director salary is fully deductible with no statutory ceiling, as long as it is authorised and commercially justifiable for the work performed. Rent and interest paid to a shareholder-director on genuine terms are deductible too. But anything left over and paid out as dividend is taxed a second time, in the shareholder’s hands, at that person’s own slab rate.
That second layer is what quietly destroys the company’s rate advantage. A profit taxed at 25.17% and then distributed to a shareholder in the top bracket suffers a further 30% plus surcharge and cess on what survives. Stack the two and the combined burden lands somewhere between 48% and 52%. An LLP distributing the same profit stops at about 31% to 35%.
Also worth noting: from the 2026-27 tax year, no deduction is available against dividend income at all, so the second layer now falls on the gross amount.
Side-by-side comparison
| Point of comparison | LLP | Private limited company |
| Tax on business profit | 30% flat (about 31.2% with cess; about 34.94% above ₹1 crore) | 22% concessional route (about 25.17%); otherwise 25% or 30% plus surcharge |
| Minimum tax exposure | Alternate minimum tax at 18.5% if certain deductions are claimed | No minimum alternate tax under the 22% route |
| Owner salary | Deductible, but capped by statute | Deductible with no statutory cap, subject to being reasonable |
| Interest to owner | Deductible up to 12% a year | Deductible at a commercially reasonable rate |
| Withholding on owner payments | 10% once payments to a partner cross ₹20,000 in the year | Salary taxed at slab through payroll withholding |
| Profit taken out | Fully exempt in the partner’s hands | Dividend taxed at the shareholder’s slab rate; 10% withheld above ₹10,000 |
| Combined tax on distributed profit | About 31% to 35% | About 48% to 52% for a top-bracket shareholder |
| Raising outside capital | Difficult; foreign investment needs approval in several cases | Straightforward; equity, preference shares, convertibles, employee options |
| Employee stock options | Not available | Available |
| Carry-forward of losses | Not affected by change in partners | Restricted if shareholding changes beyond the permitted threshold |
| Annual compliance | Lighter | Heavier: board meetings, statutory registers, more filings |
A worked example
Assume a business earns ₹1 crore of profit before paying anything to its two owners, and both owners are in the top personal bracket.
| Scenario | Tax at business level | Tax in owner’s hands | Total tax | Cash reaching owners |
| LLP, profit retained | ₹31.20 lakh | Nil | ₹31.20 lakh | Nil taken out |
| Company, profit retained | ₹25.17 lakh | Nil | ₹25.17 lakh | Nil taken out |
| LLP, everything taken out | ₹11.92 lakh | ₹12.63 lakh | ₹24.55 lakh | ₹75.45 lakh |
| Company, salary-led payout | Nil | ₹22.00 lakh | ₹22.00 lakh | ₹78.00 lakh |
| Company, dividend-led payout | ₹25.17 lakh | ₹14.61 lakh | ₹39.78 lakh | ₹60.22 lakh |
Computed on the concessional company rate and the current personal slabs, assuming maximum deductible remuneration in the LLP and no other income for either owner.
Three things jump out of that table.
First, if the money stays in the business, the company genuinely wins, and by about six percentage points every year. Compounded over a decade of reinvestment, that gap is substantial.
Second, if the money comes out as dividend, the company is the most expensive structure available to an owner-managed business. Nearly two-fifths of the profit is gone.
Third, and this is the point most comparisons miss, a company that pays its owners a properly justified salary can beat the LLP outright. The company has no statutory cap on owner salary; the LLP does. Once profits are large, the LLP is forced to leave 40% of its book profit inside the entity to bear the flat 30%, while a company can route more of it out as a deductible payment.
What this means in practice
The structure does not determine your tax bill. The payout policy does. A company run on a dividend-led payout is the worst of the five outcomes above; the same company run on a salary-led payout is the best.
That said, a salary-led company is not a switch you flip on paper. The salary must be supported by a board resolution, must be commensurate with the services actually rendered, and brings payroll obligations with it. A company reporting near-zero profit year after year while paying large director salaries also weakens its own position when it approaches a lender or an investor, and invites questions from the tax authority. There is a sensible middle, and finding it is a planning exercise rather than a formula.
Five things that quietly change the answer
Outside capital is the first. If you expect to raise equity, issue employee options, or accept foreign investment, the company is effectively the only workable answer, and the tax comparison becomes secondary.
Losses are the second. An LLP carries losses forward regardless of who the partners are. A company loses that right if its shareholding changes beyond the permitted threshold, which matters in a business expecting early-stage losses and a funding round.
Withholding on partner payments is the third. Since April 2025, an LLP must deduct 10% on remuneration, interest, bonus and commission paid to a partner once the yearly total crosses ₹20,000. Many small LLPs are still not doing this, and the resulting mismatch between the partner’s tax credit statement and the deductible amount is now a common notice trigger.
Exit is the fourth. Selling shares in a company is a clean, well-understood transaction with established capital gains treatment. Selling a stake in an LLP is messier and less attractive to buyers.
Conversion is the fifth. Moving between the two structures later is possible, but the relief conditions are strict and easily failed. Reorganising after the fact usually costs more than choosing carefully at the start.
Frequently asked questions
Does an LLP really pay less tax than a company? Not on profit alone. An LLP pays about 31.2% against a company’s 25.17%. The LLP becomes cheaper only once the profit is distributed, because that distribution carries no further tax while a dividend does.
Why is dividend so expensive? The profit is taxed twice. The company pays about 25.17% first, and the shareholder then pays personal tax on what is received. For someone in the top bracket, the combined effect approaches half the original profit.
Can I avoid dividend tax by taking a salary instead? Largely, yes, and this is the single most effective planning lever a company has. The salary must be authorised, reasonable for the role, and processed with proper payroll withholding. It cannot be a paper entry created at year end.
Is there a cap on what an LLP can pay its partners? There is a cap on what the LLP can deduct. The deed can authorise any amount, but only the higher of ₹3,00,000 or 90% of the first ₹6,00,000 of book profit, plus 60% of the balance, reduces the LLP’s taxable income. Anything above that is added back and taxed at 30%.
Does an LLP escape minimum tax? It escapes minimum alternate tax, which applies to companies, but it can be caught by alternate minimum tax at 18.5% if it claims certain deductions. Unlike individuals, an LLP has no income floor below which that provision is switched off.
Which structure suits a professional practice or a consulting firm? Usually the LLP. These businesses distribute most of what they earn, rarely need outside equity, and benefit directly from tax-free distribution.
Which suits a business planning to raise funds? The company, without much debate. Investor participation, employee options and a clean exit route all require it.
Has the new income tax law changed any of this? The rewritten law applies from the 2026-27 tax year, but it is largely a restructuring exercise. Section numbers have changed; the rates, the deduction limits and the underlying logic set out above have not.
How SRC Chartered Accountants can help
Choosing between an LLP and a private limited company is a decision about how you intend to be paid, not just about which rate looks lower on a chart. That is the part a generic comparison cannot answer for you.
At SRC Chartered Accountants, we work through it with numbers specific to your business. We model your expected profit over the next three to five years under both structures, factoring in how much you plan to withdraw and how much you plan to reinvest, and show you the total tax under each. Where a company is the right answer, we design a compliant salary, interest and dividend mix, document it properly through board resolutions and agreements, and put the payroll and withholding processes in place so the position holds up if it is ever examined. Where an LLP is the right answer, we structure the deed so that remuneration and interest are fully deductible, and manage the partner withholding obligations that many firms are currently getting wrong.
For businesses already operating in the wrong structure, we assess whether conversion is worth doing, map the conditions that must be met, and handle the process end to end. And for those weighing a funding round, we set out what each structure will cost you at the point of exit, not just this year.
If you would like a clear, numbers-first view of which structure leaves more in your hands, get in touch with SRC Chartered Accountants for a consultation.