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ADMINISTRATION
TERM PAPER
OF
On
SUBMITTED TO
SUBMITTED BY
MOHD.ANISH SIR ABHINAV PANDEY
MBA 3nd Sem(Fin.)
PAGE No. 1
CONTENT
ADVANTAGE
DISADVANTAGE
PARTNERSHIP BUSSINESS
IN INDIA
KEY ASPECTS
COMPANY
LEGAL FORMATION
ARTIFICIAL PERSON
COMMON SEAL
PAGE No. 2
CONTENT (Cont…)
PERPITUAL EXITANCE
LIMITED LIABILITY
DEMOCRATIC MANAGEMENT
DOMESTIC COMPANY
FPREIGN COMPANY
WEALTH TAX
COMPENSATION
PAGE No. 3
TYPE OF BUSSINESS
ENTITIES
Sole proprietorship
A sole proprietorship also known as a sole trader, or simply
proprietorship is a type of business entity which is owned and run by one
individual and where there is no legal distinction between the owner and the
business. All profits and all losses accrue to the owner (subject to taxation).
All assets of the business are owned by the proprietor and all debts of the
business are his debts and he must pay them from his personal resources.
This means that the owner has unlimited liability. It is a “sole”
proprietorship in the sense that the owner has no partners (partnership).
A sole proprietor may do business with a trade name other than his or her
legal name. This also allows the proprietor to open a business account with
banking institutions.
Advantages
The main advantages of a sole proprietorship are that they are easy to start
up, they are subject to fewer regulations relative to other types of businesses,
the owner has full autonomy with regard to business decisions, and they are
easy to discontinue. [1] Another advantage is that one takes all the profits of
the business. This is the main reason that most businesses are of this type. A
sole proprietorship is not a corporation; it does not pay corporate taxes, but
rather the person who organized the business pays self employment taxes on
the profits made, making accounting much simpler. A sole proprietorship
also does not have to be concerned with double taxation, as a corporate
entity would. A sole proprietor usually has a quick decision process and
doesn’t have any opposition when making a decision as he or she has total
control of his business. All profits and losses accrue to the owner.
PAGE No. 4
Disadvantages
A business organized as a sole trader will likely have a hard time raising
capital since he has to make up for all the business’s funds. The owner of the
business has unlimited liability as he is responsible for the business’s debts
because he has control over the business.
PARTNERSHIP
According to section 4 of the Indian Partnership Act of 1932, “Partnership
is defined as the relation between two or more persons who have agreed to
share the profits and losses according to their ratio of business run by all or
any one of them acting for all”. This definition superseded the previous
definition given in section 239 of Indian Contract Act 1872 as - “Partnership
is the relation which subsists between persons who have agreed to combine
their property, labour, skill in some business, and to share the profits thereof
between them”. The 1932 definition added the concept of mutual
agency.Partnerships in Pakistan are also conducted under the same act i.e.
Partnership act of 1932, as Pakistan and India share the same constitutional
heritage left by the British.
PAGE No. 5
and to prove rights and liabilities of each partner, as it is difficult to
prove an oral agreement. - - However, written agreement is not
essential under Indian Partnership Act.
NUMBER OF PARTNERS –
Since partnership is ‘agreement’ there must be minimum
two partners. The Partnership Act does not put any
restrictions on maximum number of partners. However,
section 11 of Companies Act prohibits partnership consisting
of more than 20 members, unless it is registered as a
company or formed in pursuance of some other law.
PAGE No. 6
exhibits elements of partnerships and corporations. [1] In an LLP one partner
is not responsible or liable for another partner’s misconduct or negligence.
This is an important difference from that of a limited partnership. In an LLP,
some partners have a form of limited liability similar to that of the
shareholders of a corporation.[2] In some countries, an LLP must also have at
least one “general partner” with unlimited liability. Unlike corporate
shareholders, the partners have the right to manage the business directly. As
opposed to that, corporate shareholders have to elect a board of directors
under the laws of various state charters. The board organizes itself (also
under the laws of the various state charters) and hires corporate officers who
then have as “corporate” individuals the legal responsibility to manage the
corporation in the corporation’s best interest. An LLP also contains a
different level of tax liability than a corporation.
India
The Limited Liability Parternship Act 2008 was published in the official
Gazette of India on January 9, 2009 and has been notified with effect from
31 March 2009. However, the Act, has been notified with limited sections
only.[4]. The rules have been notified in the official gazette on April 1, 2009.
The Lok Sabha (Lower House) granted its assent to the Bill on December
12, 2008 which was earlier passed by the Rajya Sabha (Upper House) in
October 2008. The first LLP was incorporated in the first week of April
2009.
For Income Tax purposes, an LLP is treates as any other partnership firm.
1. The LLP has an alternative corporate business vehicle that would give the
benefits of limited liability but allows its members the flexibility of
organizing their internal structure as a partnership based on an agreement.
PAGE No. 7
2. The LLP Act does not restrict the benefit of LLP structure to certain
classes of professionals only and would be available for use by any
enterprise which fulfills the requirements of the Act.
3. While the LLP has a separate legal entity, liable to the full extent of its
assets, the liability of the partners would be limited to their agreed
contribution in the LLP. Further, no partner would be liable on account of
the independent or un-authorized actions of other partners, thus allowing
individual partners to be shielded from joint liability created by another
partner’s wrongful business decisions or misconduct.
4. LLP shall be a body corporate and a legal entity separate from its partners.
It will have perpetual succession. Indian Partnership Act, 1932 shall not be
applicable to LLPs and there shall not be any upper limit on number of
partners in an LLP unlike an ordinary partnership firm where the maximum
number of partners can not exceed 20, LLP Act makes a mandatory
statement where one of the partner to the LLP should be an Indian.
7. The Act also provides for conversion of existing partnership firm, private
limited company and unlisted public company into a LLP by registering the
same with the Registrar of Companies (ROC)
9. The Registrar of Companies (Roc) shall register and control LLPs also.
PAGE No. 8
Process to Start LLP
PAGE No. 9
required to be executed. LLP
Partnership deed is executed.
Minimum 2 and maximum 20 Agreement is required in almost
partners all cases, though it is not
mandatory.
Documents are required to be
filed with registrar of firms (of Minimum 2 and no limit on
respective states) maximum number of partners.
PAGE No. 10
There are several schools of Hindu Law, such Mitakshara, the Dayabhaga,
the Murumakkattayam, the Aliyasanthana etc. Broadly, Mitakshara and
Dayabhaga systems of laws are very common. Family ties are given more
importance than marital ties. The arrangement provides a kind of social
security in a familial atmosphere.
Due to the development of Indian Legal System, of late, the female members
are also given the right of share to the property in the HUF. In CIT vs
Veerappa Chettiar, 76 ITR 467 (SC), Supreme Court had occasion to decide
on an issue whether after the death of all the male members in a HUF, the
HUF would still exist.
The “father”, or the “senior member” of the family called “Karta”, ordinarily
manages the property belonging to Joint Family. Hence, the status of HUF
cannot be termed as person.
PAGE No. 11
persons belonging to the same family and carrying on the family business,
HUF cannot be a partner in a partnership firm.
PAGE No. 12
The powers of the karta are, however, limited and charge
created by him is binding on the family property, only if the loan
for which the charge is created, is taken for a purpose
necessary or beneficial to the family, or is in discharge of a
lawful antecedent debt due from the family. This is also called as
vyavaharika debt. [”Vyavahar” means conduct. In this context, it
means good conduct]. In the event of a suit being filed by a HUF
as a partner in a partnership firm
The “father”, or the “senior member” of the family called “Karta”, ordinarily
manages the property belonging to Joint Family. Hence, the status of HUF
cannot be termed as person.
PAGE No. 13
potential of perpetual succession. The Companies Act, 1956, states that
‘company’ includes company formed and registered under the Act or an
existing company i.e. a company formed or registered under any of the
previous company laws.
Section 2(17) of the act defines company. The term company includes:
PAGE No. 14
Just like an individual takes birth, grows, enters into relationships and dies, a
joint stock company takes birth, grows, enters into relationships and dies.
However, it is called an artificial person as it’s birth, existence and death are
regulated by law.
Separate legal entity:
Being an artificial person, a joint stock company has its own separate
existence independent of it’s investors. This means that a joint stock
company can own property, enter into contracts and conduct any lawful
business in it’s “own” name. It can sue and can be sued by others in the
court of law. The shareholders are “not” the owners of the property owned
by the company. Also, the shareholders cannot be held responsible for any of
the acts of the company.
Common seal:
A joint stock company has a “seal”, which is used while dealing with others
or entering into contracts with outsiders. It is called a common seal as it can
be used by any officer at any level of the organization working on behalf of
the company. Any document, on which the company’s seal is put and is duly
signed by any official of the company, becomes binding on the company.
Perpetual existence:
A joint stock company continues to exist as long as it fulfills the
requirements of law. It is not affected by the death, lunacy, insolvency or
retirement of any of it’s investors. For example, in case of a private limited
company having four members, if all of them die in an accident, the
company will “not” be closed. It will continue to exist. The shares of the
company will be transferred to the legal heirs of the members.
Limited liability:
In a joint stock company, the liability of a member is limited to the amount
he has invested. While repaying debts, for example, if a person has invested
only Rs.10,000 then only this amount that he has invested can be used for
the payment of debts. That is, even if there is liquidation of the company, the
PAGE No. 15
personal property of the investor can not be used to pay the debts and he will
lose his investment worth Rs.10,000.
Democratic management:
Joint stock companies have democratic management and control. Since in
joint stock companies there are thousands and thousands of investors, all of
them cannot participate in the affairs of management of the company.
Normally, the investors elect representatives from among themselves known
as ‘Directors’ to manage the affairs of the company
PAGE No. 16
The shares allotted to the members are freely transferable.
These companies can raise funds from general public through open
invitations by selling its shares or accepting fixed deposits.
These companies are required to write either ‘public limited’ or ‘limited’
after their names.
DOMESTIC COMPANY
Domestic company means an Indian company, or any other company
which, in respect of its income liable to tax under this Act, has made the
prescribed arrangements for the declaration and payment, within India, of
the dividends (including dividends on preference shares) payable out of such
income ;]
4
[(22AA) document includes an electronic record as defined in clause (t)5 of sub-
section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000);
PAGE No. 17
Corporate Tax Rate in India
PARTNERSHIP
The partnership uses Schedule K-1 to report a partner’s share of the
partnership’s income, deductions, credits, etc. The partner must only keep
Schedule K-1 for his records, but not file it with his tax return. The
partnership must file a copy of Schedule K-1 for each partner with the IRS.
The corporate tax rate in India is at par with the tax rates of the other nations
worldwide. The corporate tax rate in India depends on the origin of the company.
PAGE No. 18
income liable to tax, under the Income Tax Act, has made the prescribed
arrangement for declaration and payments within India, of the dividends
payable out of such income. A domestic company may be a public company
or a private company.
Foreign company [Section 2(23A)] :
- means a company whose control and management are situated wholly
outside India, and which has not made the prescribed arrangements for
declaration and payment of dividends within India.
If the company is domicile to India, the tax rate is flat at 30%. But for a
foreign company, the tax rate depends on a number of factors and
considerations. The companies that are domicile to India are taxed on the
global income whereas the foreign companies in India are taxed on their
income within the Indian territory. The incomes that are taxable in case of
foreign companies are interest gained, royalties, income from the capital
assets in India, income from sale of equity shares of the company, dividends
earned, etc.
Domestic Corporations /
Private Limited 30% 33.99% 1
Companies
Domestic Corporations /
Public Limited 30% 33.99% 1
Companies
PAGE No. 19
Limited Liability
30% 30.9% 2
Partnership (LLP’s)
PAGE No. 20
tax rates are different under the tax treaties between India and other
countries.
2. 10% or 15% in some cases.
3. Withholding tax is charged on estimated income, as approved by the
tax authorities.
4. There are other favorable tax rates under various tax treaties between
India and other countries..
Wealth Tax
0 Rs.1,500,000 0
Rs.1,500,000 above 1%
Gift Tax
0 Rs.30,000 0
Rs.30,000 above 30%
PAGE No. 21
Gifts to dependent relatives at the time of marriage are exempt upto
Rs.100,000. Foreign nationals are exempt from gift tax on non-Indian
assets.
For companies, income is taxed at a flat rate of 30% for Indian companies.
Foreign companies pay 40%. An education cess of 3% (on the tax) are
payable, yielding effective tax rates of 33.99% for domestic companies and
41.2% for foreign companies.
Fringe Benefit Tax is a tax payable by companies against benefits that are
seen by employees but cannot be attributed to them individually. This tax is
paid as 33.99% of the benefit, which is only a percentage of the actual
amount paid.
Some fringe benefits and their taxable rates are mentioned:
PAGE No. 22
Taxable Effective Tax
Fringe Benefit
percentage Rate
Medical reimbursements 20% 6.8%
PAGE No. 23
Rs.1,50,000: Taxed at Upto Rs. 1 crore: Taxed at 30% + cess
10% at 30% + cess
Above Rs. 1 crore: Taxed
Rs.1.5 lakhs to Rs.2.5 Above Rs. 1 crore: Taxed at 30% + surcharge +
lakhs: Taxed at 20% at 30% + surcharge + cess
cess
Rs.2.5 lakhs to Rs. 10
Lakhs: Taxed at 30%. No
surcharge
PAGE No. 24