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Unit 8: Tax Planning for Different Organisations

important factor which we should consider, and investors can select the organisation form of the Notes
enterprise to reduce the tax burden for the enterprise. So, before one can embark on a study of
tax planning for different organisations, it is absolutely vital to understand the meaning of tax
planning and the concept of various kinds of business organisations and the importance of tax
planning in sole proprietorship, partnership and company. The purpose of this unit is to enable
the students to comprehend basic expressions. Therefore, all such basic terms are explained and

suitable illustrations are provided to define their meaning and scope.
8.1 Decision Regarding Forms of Organisations

A business organisation can be owned and organised in several forms. Each form of organisation
has its own merits and demerits. The ultimate choice of the form of business depends upon the
balancing of the advantages and disadvantages of the various forms of business. The right choice
of the form of the business is very crucial because it determines the power, control, risk and
responsibility of the entrepreneur as well as the division of profits and losses. Being a long term

commitment, the choice of the form of business should be made after considerable thought and
deliberation.
The various forms of organisation are established by state law. There are a wide variety of
business organisations recognised by the states. In order for an organisation to run smoothly,
decisions must constantly be made. How those decisions are made is an important factor in the
success of a decision?

Example: A popular form of organisation is the Limited Liability Company. The LLC is
a state designation. At the federal level, an LLC is taxed as a partnership. If the LLC so chooses,
it can be taxed as a corporation at the federal level.

Notes The Limited Liability Company is a relatively new type of hybrid business structure
that is now permissible in most states. It is designed to provide limited liability features of a
corporation and the tax efficiencies and operational flexibility of a partnership. Formation

is more complex and formal than that of a general partnership. The owners are members,
and the duration of the LLC is usually determined when the organisation papers are

filed. The time limit can be continued if desired by a vote of the members at the time
of expiration. LLC’s must not have more than two of the four characteristics that defi ne
corporations: Limited liability to the extent of assets; continuity of life; centralisation of
management; and free transferability of ownership interests.

8.1.1 Forms of Business Organisations

Tax is not levied at the corporate level; instead all profits are fully distributed to the shareholders,

and reported & taxed on each shareholder’s 1040. On a profitable business, this will increase each
shareholder’s taxable income, and possibly move them to a higher tax bracket. The various forms
of business organisations are as follows:
1. Sole Proprietors: A sole proprietorship is a one-man business. The owner is liable for all of
the company’s debts. Furthermore, the company’s income is considered to be the owner’s
personal income and must be reported on the owner’s individual income tax return. The
advantage of this form of business organisation is simplicity; no partnership agreements
need to be signed, there are no corporate registration formalities to perform, and there is
no need for corporate formalities, such as shareholder’s meetings.

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