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Unit 10: Tax Planning for Different Organisations

6. Flexibility: A company’s shares can be transferred, pledged, sold, given away, used as Notes
security, or given as bonuses.
7. Alignment of key individuals with success of the business: A company can align key
individuals to the longer term success of the business. Increasing salaries or paying
bonuses can provide incentives for short term performance, whereas stock options
align the individual in the longer term.
8. Cash Extraction: The process of incorporation itself, for an existing business, can be
used as a tool to allow the sole trader to extract capital value from the business in a
tax-efficient manner as a part of the transfer of the business to the new company.
9. Succession Planning: Generally speaking, a company will be a more attractive business
prospect to either a potential purchaser in the future or to transferring ownership of
the business to the children. Not only will the stamp duty cost be reduced with the
company structure but the business owner may also be in a position to extract
profits in a tax-efficient manner before the disposal, thus reducing the overall tax
cost to both the seller and the purchaser.
Questions
1. Study and analyse the case.

2. Write down the case facts.
3. What do you infer from it?
Source: Adapted from http://www.opeswealthtrust.ie/self-employedprofessionals/case-study-2-a-self-
employed-it-consultant-for-whom-we-recommended-that-he-incorporate-his-business/

10.5 Summary

A business organization can be owned and organized in several forms - Sole Proprietorship,
Partnership and Company.
The various forms of organization are established by state law.

A sole proprietorship is a one-man business.
In a general partnership, the business is owned by two or more general partners.
A company is meant an association of many persons who contribute money or money’s
worth to a common stock and employs it in some trade or business, and who share the
profit and loss (as the case may be) arising there from.
The sole proprietor’s personal income tax return (Form 1040) must include calculation of
the proprietorship’s income tax as well as any income or loss that the owner incurs from
any additional entity, such as an employee, investor, or the like.

A firm is treated as a separate tax-entity under the Income-tax Act.
The partnership firm is taxed as a separate entity, with no distinction as registered and
unregistered firms.

Planning of taxes should be done in an efficient manner so as not to jeopardize the business
goals of expansion, profits and growth.
A company owner needs to be aware of anything that might impact taxes paid and for this
Self-employment tax, company expenses and deductions, business assets; charitable
contributions, shifting income, and retirement planning are important considerations.

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