Capital Gains Tax in India 2025: Rates, STCG, LTCG & Indexation
16 Jun, 2025
By Online Legal India
Published On 01 Sep 2022
Updated On 16 Jun 2025
Category Company Registration
Navigating the realms of business registration often brings you face-to-face with two popular structures: LLC and LLP. As you explore this article, you will uncover what is the difference between LLC and LLP in ownership, liability protection, taxation, and compliance requirements. You will also gain clarity on which model aligns best with your goals, from solo ventures to collaborative partnerships, all without overwhelming jargon. Ready to empower your decision with clear, actionable insights? Keep reading.
Discovering the right business structure starts with understanding what each entity truly offers.
A Limited Liability Company (LLC) is a business structure that wraps the flexibility of a partnership or sole proprietorship with the protection of a corporation. Owners, called members, don’t risk their assets if the business faces debts or lawsuits. Many choose an LLC for its ease of setup and versatile tax options.
A Limited Liability Partnership (LLP) is a partnership where partners can collaborate professionally while safeguarding personal assets from business liabilities. Each partner’s risk is limited to their actions or investment, making it ideal for professionals like lawyers or accountants working together
Understanding who can form these business types and what’s required lays the foundation for choosing the right structure.
A Limited Liability Company offers flexibility in ownership, as it can be formed either by a single individual, known as a single-member LLC, or by multiple individuals, creating a multi-member LLC. This makes it a suitable option for both solo entrepreneurs and small teams. On the other hand, a Limited Liability Partnership mandates a minimum of two partners for its formation. As a result, it is not an appropriate choice for someone looking to start a business alone.
A Limited Liability Company does not require a minimum number of members for its formation, just one individual is enough to create the entity. This makes it an ideal option for solo business owners. In contrast, a Limited Liability Partnership is legally required to have at least two partners. Depending on the jurisdiction, one of these partners may be designated to act as the managing or designated partner, responsible for overseeing the partnership’s operations.
Management & Control
In an LLC, the members have the flexibility to choose how the business is managed. It can be member-managed, where all members are involved in daily decisions, or manager-managed, where specific members or outside managers handle operations. This gives LLCs a lot of control over how they want to run the business.
In an LLP, management is usually handled by the partners themselves. Each partner typically has the right to participate in decision-making and daily operations unless stated otherwise in the partnership agreement. One partner may also be designated as a managing partner to oversee major responsibilities. This setup allows for shared control and responsibility among the partners.
When establishing a business, one of the most crucial decisions is selecting a structure that safeguards your assets from business-related liabilities. Here is a straightforward comparison of how various business entities protect personal assets and define liability.
If a member personally guarantees a business debt or loan, they become personally liable if the LLC defaults on that obligation. This is common when securing financing or entering into significant contracts. For example, if a member guarantees a lease for the LLC's office space and the LLC can't pay, the member is personally responsible for the unpaid rent.
Mixing personal and business finances can jeopardize the LLC's limited liability protection. If members treat the LLC's assets as their own, such as using business funds for personal expenses, a court may "pierce the corporate veil" and hold members personally liable for business debts.
Engaging in fraudulent or illegal activities under the guise of the LLC does not shield members from personal liability. For instance, if a member commits fraud or intentionally engages in illegal conduct, they can be held personally liable, regardless of the LLC's structure.
LLC members may be personally liable if they fail to deposit the taxes deducted from employees' salaries. This includes income taxes, Social Security, and Medicare taxes. Such failures can result in significant penalties and personal liability.
If an LLC is formed without sufficient capital to cover its foreseeable liabilities, courts may determine that the LLC was undercapitalized from the outset. This can lead to "piercing the corporate veil," making members personally liable for the LLC's debts.
Partners in an LLP are generally not personally liable for the partnership’s debts or obligations. Losses are typically limited to the amount each partner has invested in the LLP. This protection extends even if partners are actively involved in running the business.
A key advantage is that partners aren’t held responsible for the negligence or misconduct of their co-partners, safeguarding their assets.
Unlike limited partners in an LP, LLP partners may fully participate in the management and operations of the business without jeopardizing their limited liability. Governance is flexible and outlined in the LLP agreement.
Shareholders of corporations are not personally liable for the company’s obligations. Their risk is limited to the capital they have paid for shares or any unpaid amount on them, even if the corporation fails.
Creditors can pursue corporate assets only, not shareholders’ assets — this clear boundary encourages investment.
Shareholders do not manage daily operations. Instead, they elect a board of directors to oversee major policy and strategic decisions. The board, in turn, appoints officers for day-to-day management.
In India, LLPs are treated as distinct legal entities for tax purposes, much like private limited companies. They pay a flat income tax at the rate of 30% on their profits for the financial year 2024–25, with an additional 12% surcharge if their income exceeds Rs.1 crore, plus a 4% health and education cess. While the LLP itself pays tax on its earnings, the portion of profits distributed to partners is fully exempt in their tax returns under Section 10(2A). This means it is not taxed again. This creates a single level of taxation, similar in effect to the pass-through concept seen in some other jurisdictions, giving LLPs an edge by avoiding corporate-level tax followed by personal-level tax.
Running a business in India requires following specific legal steps to ensure compliance. Whether you are setting up a LLC or a LLP, you will need to handle registration, regular filings, and state-specific rules. Here is a clear explanation, with each topic broken down, to help you navigate these requirements under Indian law.
To get started, registering your business is the first step. For a Private Limited Company, you will work with the Ministry of Corporate Affairs under the Companies Act, 2013. Pick a unique name using the SPICe+ form on the MCA portal, get Digital Signature Certificates and Director Identification Numbers for your directors, and submit identity proofs along with your office address. You will also need to prepare a Memorandum and Articles of Association.
Once approved, you will receive a Certificate of Incorporation, and you might need to register for GST or PAN. This depends on your business. Setting up an LLP, under the LLP Act, 2008, is simpler and cheaper, making it great for small businesses or professionals like doctors or lawyers.
Choose a unique name, get Digital Signatures and Designated Partner Identification Numbers, and file an LLP Agreement with partner details and your office address using Form 2. After approval, you will get an LLP Identification Number and may need GST or PAN registrations too.
Once your business is running, you will need to keep up with regular filings to stay compliant. For LLCs, this means filing your financial statements Form AOC-4 within 30 days of your Annual General Meeting and an annual return Form MGT-7 within 60 days, plus submitting income tax returns ITR-6 by September 30 each year. You will also need to hold four board meetings and an AGM annually, and your accounts must be audited every year.
LLPs have it easier with fewer filings: submit an annual return Form 11 by May 30 and financial statements Form 8 by October 30, along with income tax returns ITR-5 by July 31. Audits for LLPs are only required if your turnover exceeds Rs.40 lakh or capital is above Rs.25 lakh, making compliance less demanding than for LLCs.
Wherever you operate in India, state-specific rules come into play. Both LLCs and LLPs need a registered office, and some states, like Maharashtra, may ask for a No Objection Certificate from your landlord. If you have a physical office, you will likely need to register under the state’s Shop and Establishment Act. States like Karnataka or Tamil Nadu require professional tax registration if you have employees. Stamp duty, which applies to LLCs’ Memoranda and Articles or LLPs’ Agreements, varies by state, being higher in places like Maharashtra compared to Rajasthan.
If your business is in a specific industry, like running a restaurant, you might need state-specific licenses, such as an FSSAI license for food businesses. Checking your state’s MCA or local government website is a smart move to stay on top of these differences.
Staying compliant is worth the effort; it keeps penalties at bay, late LLP filings can cost Rs.100 per day, builds trust with customers and banks, and ensures your business stays active with the MCA. To make things easier, use the MCA portal, set reminders for key filing dates, or hire a chartered accountant to handle the paperwork. With these steps, you can focus on growing your business without the stress of legal hiccups.
When choosing the right business structure in India, understanding the ideal use cases for an LLC and an LLP is crucial. Both structures offer unique advantages tailored to different business needs. Here is a clear and concise guide to help you decide which structure aligns best with your business objectives.
LLCs can raise capital by issuing shares, making them attractive to venture capitalists and angel investors.
The structure supports growth and expansion through equity funding.
Being registered with the Ministry of Corporate Affairs enhances the company's reputation among clients and suppliers.
PLCs are preferred for attracting Foreign Direct Investment due to their structured legal framework.
The personal assets of shareholders are protected against the company’s debts and liabilities.
LLPs are suitable for professionals like lawyers, accountants, and consultants who wish to operate jointly.
With fewer compliance requirements, LLPs are cost-effective for smaller businesses.
Partners can define their roles and responsibilities through the LLP agreement, allowing for customized management structures.
LLPs are not subject to Dividend Distribution Tax, enabling direct profit sharing among partners.
LLPs offer more privacy as their partnership agreements are not required to be publicly disclosed.
Conclusion
Choosing between LLC and LLP depends on your goals, but setting up your business need not be a maze, especially with Online Legal India by your side. We help you seamlessly register companies or LLPs, file GST applications and returns. Our team of experts ensures error-free filing, which helps in fast processing. Our experts guide you through every step with clear documentation. Visit Online Legal India.
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