Taxes are one of the most important obligations for business owners. However, despite their importance, tax considerations are frequently overlooked during key decision-making moments like selecting business structures, as most people prioritize factors like liability protection, funding options, and operational plans over potential tax implications. But once the business is up and running, the reality of taxes can hit hard, and many wish they’d made a different choice. To avoid such situations, let’s understand the breakdown of the tax rules for various types of business structures in India so that you can make an informed decision.

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LLP and Partnership Firms

Partnership firms and Limited Liability Partnerships (LLPs) are popular business structures in India. Both LLPs and regular partnership firms are taxed as separate entities with no personal liabilities or tax obligations of the business owners. However, they can deduct certain expenses, such as salaries, bonuses, commissions, and other payments made to business partners. If the firm pays interest to a partner, that interest is also tax-deductible, up to a maximum of 12%.

Tax Rate & Surcharge (AY 2025-26)

• LLPs and partnership firms are taxed at a flat rate of 30%.
• No surcharge if income is below ₹1 crore.
• 12% surcharge if income exceeds ₹1 crore.

Cess

• An additional 4% health and education cess is applied on the total of income tax and surcharge.

Alternative Minimum Tax (AMT)

If the regular tax is less than 18.5% of the book profit, the firm must pay Alternative Minimum Tax (AMT) at 18.5%, plus applicable surcharge and cess.

Private Limited Companies

A private limited company is a separate legal entity from its directors and shareholders right from the start. It’s one of the most preferred business structures in India, especially for those seeking better funding opportunities and limited liability protection.

For tax purposes, private limited companies are classified as either Domestic or Foreign, and each has different tax rates.

Tax Rate

For domestic companies:

• Annual turnover up to ₹400 crore: taxed at 25%
• Annual turnover above ₹400 crore: taxed at 30%

For foreign companies:

Corporate tax rate reduced from 40% to 35%.

Surcharge

For domestic companies:

• Income up to ₹1 crore: No surcharge
• Income between ₹1 crore and ₹10 crore: 2%
• Income above ₹10 crore: 5%

Cess

• A 4% health and education cess is charged on the total of income tax and surcharge.

Special Tax Rate

• Domestic companies opting for taxation under Section 115BAB are eligible for a reduced tax rate of 15%, which is the lowest available.

Sole Proprietorship

A sole proprietorship is owned by a single person and is not treated as a separate legal entity under the law. Since it’s an informal business structure, it follows the same tax rules as an individual taxpayer.

Tax Rate (AY 2025-26)

• Income up to ₹2,50,000: No tax
• ₹2,50,001 to ₹5,00,000: 5%
• ₹5,00,001 to ₹10,00,000: 20%
• Above ₹10,00,000: 30%

Surcharge

• Income below ₹50 lakhs: No surcharge
• Income between ₹50 lakhs and ₹1 crore: 10%
• Income above ₹1 crore: 15%

Cess

• A 4% health and education cess is added on top of the total tax and surcharge.

As per the business structure you choose to register your company under, the tax liability can change substantially. It’s always advisable to understand the tax implications of each option and choose the one that suits your business the best. If you need help with company registration or staying compliant with the tax rules afterwards, you can reach out to us at support@corporateleaps.com.