Trading F&O via LLC or Pvt Ltd

Personal expenses are not allowed to be claimed by company. Now if you say they are perks for the director, that will be added to directors salary.

Agree. Some day or the other you will have to na. That’s what I said you are only differing the tax liability.

Yes. For sure. How much? Beyond 50 lakhs there is surcharge. So ultimately you are down to the same thing. Every year you can anyways claim 50lakhs. Do you really think the ones who have posted over here earn more than 50lakhs?
Go for a partnership firm na. There too you can claim remuneration and balance amount will be taxed at 30 percent. Saving 5 percent by having a private limited company and having huge compliance and double taxation?
Even the house that he uses which is in companies name will be considered as perk in the hands of the director.

If I am the auditor of the company, I would not even allow such expenses. Very high possibility of a notice.

Now after that you have told, may be it makes sense for a person earning around 10cr per year.
The ones posting here are earning 10cr? They would have asked an expert and found a way out.

@nithin since you have replied to most of them above, can you give me a very convincing reason as to why these are looking to incorporate a private limited company for trading purpose?

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Ohh I meant that might be a separate bussiness to offset expenses like youtube or Influencer(instagram). Saying this based on the thread below which I remember very well.

Now I don’t know exactly what’s a better benefit of making a company when profits can only be spent as expense and cannot be transferred under own name or invested.

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Tax free prerequisites https://www.indiafilings.com/learn/tax-free-perquisites/

Nope most probably.

Yes just more options. Thats all.

This is a reality. My sense is those who are asking the question doesn’t have a feel of what it is like.

Apologies. I had understood it differently.

First of all only business expenses can be claimed. And if the AO has reasons to believe the expenses are personal by nature, he can disallow them.
Now let’s say he still wants to take risk of claiming them. Even then why incorporate a company? Whatever expense a company can claim even a partnership firm or an individual can claim.

Whatever tax free prerequisites that are there are mainly only for employees. If it’s provided to directors, then it becomes a related party transaction. Disclosure for the same would be required as per companies act. Further AO on reading this disclosure if he has reasons to believe that it’s specially designed to evade tax may even disallow such expenses.

Thank you @raoawesome and @t7support for your insights. Please add if there is anything else.

One more question. Some of them are asking if at least OPC can be incorporated?
An OPC has to be compulsorily converted to a private limited company when turnover crosses 2cr. So whatever I said above about income exceeding 10cr may make some sense also won’t hold good. Lol. :rofl::rofl::rofl:

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It isn’t hard for a major shareholder to be an executive and be on the payroll.

OPC is attractive since one doesn’t need to bring in a co shareholder and director like a pvt ltd company.

Eye tends to find what it wants to see. So the 2 Cr turnover limit may have been missed by OPC proponents.

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If he has a controlling stake then disclosure is required.
Moreover the shareholder cannot be a relative of the director or any key managerial person as defined in companies act. The moment he is a relative to the director, any transaction with him becomes a related party transaction.
So if all the shareholders are family members, then all are related to the director and all transaction are related party transactions.

Now if the shareholders are friends, may be it is possible. But trust me it’s only gonna get more complicated with all the adjustments between them.

Agree. But this is a general advantage of OPC.
With a turnover of 2cr, how much income would he really have. And how much tax can he really save? Again won’t serve the purpose for trading.
As you have already mentioned, the turnover limit is ignored by most.

A friend of mine is willing to lend me 50 lakhs , however the tax issue comes here , whenever he transfers the money, how to avoid it , any idea guys ?
@Jason_Castelino
@t7support

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Tax free pre requisites when given to a related party to dispose of his business responsibilities calls for disclosure but still not taxable. I understand the AO angle you referred to which shall fall in to the compliance overheads running a pvt ltd company comes with. Those who venture in to this line must be willing to accept the trade off.

Render unto Taxman the things which are his, and unto you which are only legally yours :rofl:

On your friend lending you -

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What’s the issue? Let him just transfer it to your bank account. Have an agreement in place and pay periodic interests.
Again what tax are you talking about over here?

Learnt a lot from CA Jason and your exchange of thoughts, but the question still remains above what income should one consider pvt limited or partnership. and does it really have an advantage.
This forum has some dynamic members, I feel happy to be a part of this and learning so much.
Thanks to everyone.

:grinning:

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Agree.

Is it really worth all the pain just to save 5 percent in the form of taxes?
After considering compliance cost he may save less than this or even lose more.

First of all for trading, option of incorporating a private limited company is ruled out straight away.

If you are asking me for other businesses, and if your purpose is just to save taxes, then may be you should consider forming a private limited company if your net income in more than 10cr at least.
But there are other advantages of having a private limited company which partnership doesn’t.

These are my personal views. You may argue that even with 1cr net profit one stands to save some tax. True. But I feel it’s not worth it.

Cant think of any reason to do this without very large capital + compounding + good returns. I don’t know much anyway. Probably some mistakes in below, but what about this.

What happens if company gets closed down and capital is returned to shareholders? Would capital gains tax apply? Hard to see it as dividend and full capital getting taxed.

If so, and if we have large capital with very high income and say with effective tax rate around 40%. If my aim is to compound money till retirement, then i can keep compounding paying 15%? less tax and only at the end will i pay capital gains tax again which might be 10%. I did some calculations, with 25% returns and just 10 year compounding you save on tax even if CG is at 20% without indexation. ofc, lots of assumptions built in, but that might be the motivation.

Also, would you be personally liable if company goes bankrupt? If you can structure it in a way that you are not, then that can add some protection to you.

You can have some capital outside company and trade with that for expenses, or maybe you have other businesses/salary to manage that ( selling courses like PRS ? :slight_smile: )

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I would assume those who are asking hasn’t really experienced the compliance overheads including cost. Personally I wouldn’t start a company to save 5% tax.

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Here is my point blank verdict. Pls Ignore it if you don’t like it.

Strictly for trading and generating income from it, a pvt ltd or even partnership is a waste of time and money. One would be better off in the sole proprietorship mode where he/she trades on individual account and pay tax on profit as per the applicable tax slab. Pay some money to a CA to get the audit (if required) and file the returns. Taxman is happy, u r happy.

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Yes. Issue price will be cost of acquisition.

Yes. That’s why I said it may work out if we are talking about income of 10cr.

No. Unless your intention was to defraud the creditors, you liability is limited to the extent of share capital.

This is the point I was really trying to make. Nothing again the company structure. Just felt very curious because everybody was asking same question again and again. Over that saying it’s not fair not letting them create a company for trading.
If you are having such huge capital just get an NBFC license and do it.

With you on this. I would rather put my energy in generating better returns than bother about taxes.

I have a decent capital and I have still not switched to partnership firm. May be in next few months am planning to open one.
RJ’s trading firm, Rare Enterprises is also not a company.

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Please ask him for the relevant section under which he would be deducting 30percent.

Lol. Obviously. He wants return but doesn’t want to pay tax ? If he invests in FD and bank pays him interest, wouldn’t he be paying tax?

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How did you get this 15percent? There is surcharge for companies too above income of 1cr.

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Someone quoted 25% above, so assumed that. I have no idea on this stuff.

At what amount of profit does this make sense ?

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