An LLP is a business entity that gives the combined benefits of partnerships and private limited companies. It includes partners who share limited liability for the enterprise.
What are the returns?
Since it is such an essential element of running any business, rules regarding how the remuneration is paid are mentioned in the LLP agreement itself. Each partner will, therefore, want maximum investment return for their efforts, and so, partners must know about the kinds of returns available so that they can establish the agreement in the right way. Here are the three most well-known forms of returns when dealing with an LLP.
1. Remuneration
2. Interest on capital
3. Profit share
Types of Returns Explained
Remuneration
This phrase contains everything from bonuses and commissions to the base income that a partner or employee receives. Generally, it is paid to partners who take an active effort in supporting the LLP grow and expand. It is a form of payment that is proportional to the work being done and does not have much connection to the capital built by them at the onset of the partnership.
Interest
This is a form of income that has direct connections to the capital introduced by them at the start of building the business. It doesn’t have anything to do with their recent work. Every partner must have contributed a share of the total capital needed at the time of beginning the partnership, and their interest return is a fixed share or percentage of this amount. Hence, the interest they receive will be some proportion of this amount they have invested themselves.
Profit Share
This return is available when the LLP begins making a profit or turns cash positive. This form of return takes into consideration both the amount of work they have put in and the capital they have before investing. As soon as the LLP starts to make money, the profit is analyzed and split into chunks according to work done, and capital introduced and then divide amongst the partners accordingly.
Eligibility To Receive Returns
Which partners get returns and which do not is purely decided on by the clauses registered in the LLP agreement. Even if a partner is working, inactive, sleeping, active or non-working, if it is particularly mentioned in the LLP agreement that they are to earn a percentage of the profit or interest, then they must be given that amount irrespective of whether they deserve it or have performed any work. But, this being said, there is a max limit on remunerations given by the LLP as per the Income Tax Act. Also, the LLP agreement can not provide any remuneration retrospectively to duration before the agreement was enforced.
Amount Deducted Table Under The Income Tax Act:
1. The deduction is possible only if the remuneration is obtained by a working partner
2. The expenditure of remuneration must be duly authorized and registered within the agreement or LLP.
3. The payment due must not exceed the proportions stated below
4. If a partner has received additional remuneration than what is detailed below, that excess amount is not valid or legal for any deduction and tax must be paid on it
5. The remuneration received by the members or partners is taxed as Business Income. Share or percentage of profit is not included in the similar section as remuneration 6. For both the members working and non-working members, the share or percentage of profit returns is exempted as per Section 10(2A) of the Income Tax Act
7. Interest received on the money invested by them is also taxed as Business Income 8. Also, for the first 3 lakhs earned, remuneration cannot exceed ₹1,50,000 or 90% of book profit, whichever adds up to be more
9. When in balance with profit, the remuneration cannot exceed 60% of the book profits earned by the LLP
10. The interest achieved by the LLP on drawings from partners is charged as profits and gains of business as far as taxation is concerned
11. An LLP will be taxed the exact way a partnership is. This indicates their income is liable to be taxed at 30%. However, LLPs are not eligible for the advantages of section 44AD, which authorizes firms not to keep books if their income falls below 8% of the total gross
12. As the LLP doesn’t distribute dividends like a company, it is not eligible for any laws under the dividend distribution tax.
Interest
The 12% maximum interest rate is permissible under the Income Tax Act.
Above this share, anything obtained by the partners is taxable.
The LLP Agreement must completely specify what the exact interest rate is and how it will be paid. What incomes are not allowed any deductions?
Not all types of income earned from an LLP are allowed tax deductions.
Here’s a look at the types of income that do not earn any reduction.
1. Salary and remuneration received by non-working partners
2. Remuneration received by partners or members in cases where it goes against what is mentioned and authorized in the LLP agreement
3. If remuneration aligns with what is mentioned in the agreement, but relates to a much older article of the deed, and doesn’t comply with the modified deed
4. If returns from interest surpass 12% per annum
5. Remuneration paid exceeds the limits set by the income TAX Act.
