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Unit 10: Tax Planning for Different Organisations
10.2.3 Disadvantages of Sole Proprietorship Notes
This legal form of organization, however, has disadvantages:
The amount of capital available to the business is limited to the owner’s personal funds
and whatever funds can be borrowed. This disadvantages limits the potential size of the
business, no matter how attractive or popular its product or service.
Sole proprietors have unlimited liability for all debts and legal judgments incurred in the
course of business. Thus, a product liability lawsuit by a customer will not be made
against the business but rather against the owner.
The business may not be able to attract high-calibre employees whose goals include a
share of business ownership. Sharing the benefits of ownership, other than simple profit-
sharing, would require a change in the legal form of the business.
Some employee benefits, such as owner’s life, disability, and medical insurance premiums,
may not be deductible, or may be only partially deductible from taxable income.
The entity has a limited life; it exists only as long as the owner is alive. Upon the owner’s
death, the assets of the business go to his or her estate.
Self Assessment
State whether the following statements are true or false:
5. Sole proprietorship is not owned by a single individual.
6. Maintenance costs are very high for the sole proprietorship.
7. Expenses of the business are also claimed by the owner as deductions against income on
the owner’s year-end tax return.
8. Sole proprietors have unlimited liability for all debts and legal judgments incurred in the
course of business.
10.3 Tax Planning for Partnership
Partnership is the most common form of business organisation in India. Partnership firms are
governed by the provisions of the Indian Partnership Act, 1932. The Act lays down the rules
relating to formation of partnership, the rights and duties of partners and dissolution of
partnership. It defines partnership as a “relationship between persons who have agreed to share
the profits of business carried on by all or any of them acting for all”. This definition gives three
minimum requirements to constitute a partnership:-
There must be an agreement entered into orally or in writing by the persons who desire
to form a partnership.
The object of the agreement must be to share the profits of business intended to be carried
on by the partnership.
The business must be carried on by all the partners or by any of them acting for all of them.
Under the Act, persons who have entered into partnership with one another are individually
called as ‘partners’ and collectively as ‘firm’ and the name under which they run their business
is called the ‘firm name’.
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