Forms of Organisation

TAX PLANNING WITH REFERENCE TO FORMS OF
ORGANISATION:
The choice of the appropriate form of business organisation will have to be
thought of and decided by the person who intends to carry on business or
profession at the beginning itself, because a change in the form of business
organisation after the commencement of the business, may attract liability to
tax. A new business can be organised under any of the following forms :
1. Sole proprietorship
2. Hindu undivided family
3. Partnership firm/LLP
4. Company
5. Co-operative society
The selection of a particular form of organisation would depend not only on

the tax aspect but on other considerations also, e.g., financial requirements
and resources, requirement of limited liability and many other practical
considerations.
However, depending upon the taxable status and level of tax liability of the
owners, a selection can be made from the various forms available for setting
up a new unit.
Sole proprietorship :-
For sole proprietor income tax rate of individual is applicable in India. It may be
earning income from salary, house property, business and other sources etc
Hence it is important to have right tax planning. Besides the deductions which
are allowed to all assessee, a sole proprietor being assessed as individual, is
entitled to get all deductions from sec 80C to 80U.
Sole Proprietorship: In the case of a sole proprietorship concern, one of the

important tax disadvantages would be that no allowance or relief would be
available to the tax payer in computing his income from business in respect of
carrying on the business. As a result, the taxable income arrived at would be a
larger amount than what it would have been if it had been the case of, say, a
private company in which the individual himself is the Managing Director.
In the case of a private company, the reasonable amount of remuneration to

the Managing Director, is allowable as an item of business expenditure and to
the extent of this allowance, the taxable income from business would get
reduced and correspondingly the incidence of tax would also be reduced.
Salary and interest paid to other members are allowed as deduction to the
owner member and these salaries and interest are taxable in the hands of
other members under the head salaries and income from other sources
respectively.
Under sole proprietorship, the entire income of a business unit gets assessed
in the hands of the same person along with other income, while the entire loss
and other allowances shall be available for set off in his hands against other
income. This may have some advantage in the initial years, after which the
possibility of converting it into company/firm may be considered; on such
conversion, the questions of possible capital gains tax, etc., will have to be
considered.
 Hindu Undivided Family: -
 A joint Hindu family pays tax on its total income at prescribed rates on
the basis of slab system.
 The Hindu undivided family as a unit of taxation in which the family can
pay reasonable remuneration to the Karta and other family members for
their services to the business and it is allowed as a deduction in
computing the business income and remuneration is taxable in their
individual hands under the head salaries.
 However ,interest on capital contributed by the family for the business is
not deductible in computing business income.
 The demerits of HUF are similar to that of individual.
 Partnership Firm/LLP:-
 All firms and LLPs will be taxed at a flat rate of 30%.

 If the total income exceeds Rs.1 corer , surcharge@12% would be
attracted. Further, health and education cess will be surcharged @4% of
income-tax plus surcharge. There will be no initial exemption and the
entire income will be taxed.
 In computing the taxable income of a firm, certain prescribed
deductions in respect of interest on capital or loan are allowed not
exceeding 12% .
 Further it can also give remuneration to its working partners subject to
the limits mentioned in sec 40(b).
(i) On first Rs 3,00,000 of the book profits @ 90% or Rs 1,50,000 (if
90% of book profits is less than Rs 1,50,000 or there is a loss),
whichever is more).
(ii) On balance of the book profits @ 60%.
 Remuneration and interest received from the firm by the partners is
taxable under the heads “profits and gains of business and profession”
in their individual hands. However,, the share of partner in the total
income of the firm is exempt u/s 10(2A).
 Where the assessee partner borrows money for investing as capital in
partnership, interest paid by the assessee on borrowed money is an
allowable as deduction.
 LLP which combines the benefits of company and general partnership
form of organisations. From income-tax point of view it is treated same
as general partnership firm therefore its profit will be taxed in the hands
of the LLP not in the hands of partners.
 Losses of the firm should be carried forward and set off against the
income of firm of partners.
 Tax liability of firm and LLP are same but LLP’S cannot claim benefit of
sec 44AD by using presumptive basis.
Company
 Companies are subjected to flat rate of tax, regardless of the quantum of
their income.
 Allow ability of remuneration, for the persons who are managing the
affairs of the company and also owning its shares.
 The provisions relating to clubbing of income u/s 64 of the Income Tax
Act, 1961 do not apply even if the business is carried on by family
members through a company. This ultimately leads to reduction of tax
liability on the part of the individual members. However, if spouse of an
individual having a substantial interest in a company receives
remuneration from the same company, such remuneration is added to
the income of the individual unless the spouse is technically or
professionally qualified.
 Any income by way of dividend referred to in sec 115-O is exempt u/s
10(34).
 There are certain special tax concessions, allowances and deductions
given under the Income-Tax Act,1961 available to the company form of
business enterprises such as deductions allowed u/s 33AC,35D.
 Whole amount of interest paid to the loan taken for business purposes is
allowed as a deduction and also the remuneration paid to Managing
director, director and other staff.
 There is no wealth tax on shares of company w.e.f a.y 1993.
 Co-operative societies:
It means a society registered under the co-operative societies

Act,1912 or under any other law for the time being in force in any
state for the registration of co-operative societies.
 There is no threshold limit for taxability of income in case of a

co-operative society. It has to follow a slab rate for computing
tax liability.
 The co-operative form of business organisation, i.e., a co-operative
society would also be advantageous from the tax angle and, in addition
to the general benefits flowing from the co-operative form the society,
can claim deduction in respect of the reasonable amount of
remuneration payable to the members of the society for their services
rendered, including the amount of commission, if any payable to them
and the interest on the deposits or loans given by them.
 The co-operative society is entitled to a further tax benefit arising from
section 80P under which the income of a co -operative society is
exempted from tax under different circumstances depending upon the
nature of the income and/or the amount thereof.
 In addition to the various tax concessions which are available to all
assesses, the co-operative society stands to gain substantially by virtue
of the special benefits available to it under section 80P
 . The profits of the society remaining after payment of tax would be
distributed by it amongst its members in the form of dividends subject
to the relevant legislation.
 Current and brought forward losses shall be adjusted under the head of
the other income.
COMPARATIVE STUDY OF PARTNERSHIP FIRM OR LLP AND COMPANY IN

RELATION TO TAX LIABILITY
 When we have to choose one of the forms of business organisation

between a partnership firm and a company from tax point of view, we
should consider the following factors and choose that one which attracts
minimum tax liability:
(1) Deduction regarding capital expenditure on family planning : U/s
36(1(ix) a company is entitled to this deduction in five equal annual
instalment commencing from the previous year in which the
expenditure is incurred. On the other hand, a firm can claim
depreciation on the asset acquired for the purpose u/s 32. The
difference between the two sums may increase the tax liability of a firm.
(2) Deduction regarding interest: A company can pay interest on loan taken
from its shareholders, at the rate it deems fit. On the other hand, a firm cannot
deduct interest on loan taken from its partners, more than 12% p.a. while
computing its income. This may increase the tax liability of the firm.
(3) Deduction regarding remuneration : A company can pay remuneration to

its employees (including shareholders) as it deems fit and it is deductible in
computing its income. On the other hand, a partnership firm is entitled to a
deduction for remuneration to its working partners as prescribed u/s 40(b).
This increases the tax liability of a firm.
4.Effect of tax on selling of share :- sale of company share is subject to capital-

gain tax where as in case of LLP it may possible to change in ownership without
resulting in any tax-outflow.
Valuation of share:- selling of share in case of company is subject to

valuation under income- tax and will lead to unfavourable tax consequences in
case valuation norms are not met. But there are no such valuation norms in
case of LLP.

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TAX PLANNING WITH REFERENCE TO FORMS OF

2. Hindu undivided family

The selection of a particular form of organisation would depend not only on

Sole Proprietorship: In the case of a sole proprietorship concern, one of the

In the case of a private company, the reasonable amount of remuneration to

 Hindu Undivided Family: -

 All firms and LLPs will be taxed at a flat rate of 30%.

It means a society registered under the co-operative societies

 There is no threshold limit for taxability of income in case of a

COMPARATIVE STUDY OF PARTNERSHIP FIRM OR LLP AND COMPANY IN

 When we have to choose one of the forms of business organisation

(3) Deduction regarding remuneration : A company can pay remuneration to

4.Effect of tax on selling of share :- sale of company share is subject to capital-

Valuation of share:- selling of share in case of company is subject to

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