Tax Planning through LLP

Rasesh (CS CWA MBA (Fin) B.Com LL.B (Spl))   (6501 Points)

14 March 2010  

Ms. XYZ is doing a part time job but because of her talent and reputation in the organisation is taken on the rolls of the company and considered as a full time employee. She is getting a small salary and on the basis of the Form 16, files her income tax return.


Ms. XYZ is also doing a home based trading business (buying items from various palces and selling them). This activity is being conducted from her residence. Nothing is being documented. The entire business is managed in cash. The gross monthly turnover is around Rs. 2 lac and the profit is around Rs. 35K. Since the whole business is managed in cash and without documents like invoice etc, Ms. XYZ is fearing as to how to file her IT return.


Now she has decided that she wants to go big and do the business in a legal set up. We have evaluated doing business in the proprietory form, partnership form, LLP and the company form of business and considering her needs, we have zeroed down to LLP.


The basic condition of Ms. XYZ is that she wants to keep her job and her business activity seperate in totality.


My queries are on the feasibility as to whether the structure can be formed as under or not:


1) The LLP will be formed with Ms. XYZ and one other close family member. Ms. XYZ will have 95% of the share of profits and the other person will have the balance 5%. The business will be operated from a premises belonging to the other person who will not bring any capital but will be given 5% in lieu of the rent.


2) The LLP will have a seperate PAN, will file returns under this PAN. All sales tax, VAT and other registrations will be obtained in the LLP. Ms. XYZ will built her capital in the LLP. She will buy assets which would be used by her and create depreciation (tax shelters) in the LLP. On the profits of the LLP, tax will be paid.


3) The profits of the LLP after paying taxes would be accumulated in the LLP itself and would not be distributed to the LLP partners. It would be invested in the name of the LLP only. By doing so, the person wealth of XYZ would not get built under her PAN but would get accumulated under the LLP's PAN.


4) In case anything happens to XYZ, the LLP would be dissolved. 5% of the profits in the LLP would be given to the othe partner and the balance to the legal heirs of XYZ.


I request members to kindly advise me in the matter.