Unit -1

Lesson -1

Meaning
A non-corporate entity is a business structure that does not have a separate
legal existence from its owners. Unlike corporations, which are considered
separate legal persons, non-corporate entities are directly linked to the
individuals involved. This means that the owners are personally liable for
the entity's debts and obligations.

Features of Non-Corporate Entities

• Direct Liability: Owners are personally responsible for the entity's

debts and liabilities.
• No Separate Legal Existence: The entity and its owners are considered
one and the same in the eyes of the law.
• Simpler Formation: Typically easier and less costly to form compared
to corporations.
• Tax Implications: Profits and losses pass through to the owners'
personal tax returns.
• Management: Managed by the owners themselves.

Kinds of Non-Corporate Entities

1. Sole Proprietorship: A business owned and operated by a single

individual. It is the simplest form of business ownership.
2. Partnership: A business owned by two or more individuals who share
profits and losses. Partnerships can be general or limited.
o General Partnership: All partners share in management and
liability.
o Limited Partnership: At least one general partner manages the
business and has unlimited liability, while other partners
(limited partners) have limited liability but do not participate in
management.
 3. Limited Liability Partnership (LLP): A hybrid form of partnership
where partners have limited liability for the professional malpractice of
other partners.

Scope of Non-Corporate Entities

Non-corporate entities are suitable for various businesses, especially small

and medium-sized enterprises (SMEs). They are often chosen for their
simplicity, ease of formation, and tax advantages. However, the unlimited
liability aspect can be a significant risk for owners.

Factors to Consider When Choosing a Non-Corporate Entity:

• Number of owners: Sole proprietorship for one owner, partnership for

multiple owners.
• Liability concerns: If liability is a major concern, an LLP might be
suitable.
• Tax implications: Consider the tax benefits and burdens of each entity
type.
• Management and control: Determine who will manage the business
and how decisions will be made.
• Capital requirements: Assess the need for external funding.

Self check Questions

1. What is the legal structure of the entity?

2. What are the key advantages and disadvantages of this type of entity?
 Lesson -2

Forms of Noncorporate Entities

Sole Proprietorship

In the vast landscape of business structures, the sole proprietorship stands

out for its simplicity and personal touch. It is the most straightforward and
common form of business ownership, ideal for individuals looking to start
their own venture with minimal fuss. This chapter delves into the key
characteristics, advantages, and challenges associated with sole
proprietorships, offering a comprehensive overview for those considering this
path.

1. Understanding Sole Proprietorship

A sole proprietorship is a business entity owned and operated by a single

individual. It is the simplest form of business organization and does not
require formal registration with the state, though local licenses or permits
might be needed. The owner is often referred to as a sole proprietor.

Key Characteristics:

• Single Ownership: The business is owned by one person who has

complete control over all decisions and operations.

• No Legal Separation: Legally, there is no distinction between the

owner and the business. This means that the sole proprietor is
personally responsible for all business liabilities and debts.

• Minimal Formalities: Setting up a sole proprietorship is relatively easy

and involves fewer regulatory requirements compared to other
business structures.

2. Advantages of Sole Proprietorship

1. Simple and Inexpensive Setup:

 • Starting a sole proprietorship is straightforward and usually involves
minimal paperwork. The costs are often limited to obtaining the
necessary licenses or permits.

2. Complete Control:

• The sole proprietor has full authority over all business decisions,
allowing for a more streamlined decision-making process without the
need for consensus or approval from partners or shareholders.

3. Direct Tax Benefits:

• Income generated by the business is reported on the owner's personal

tax return. This can simplify tax filing and potentially reduce overall
tax liability, as profits are taxed only once.

4. Ease of Termination:

• If the owner decides to cease operations, ending the business is

relatively uncomplicated. There are no complex dissolution procedures
required.

5. Personal Satisfaction:

• Many sole proprietors find personal fulfillment in being their own boss
and directly reaping the rewards of their hard work.

3. Challenges of Sole Proprietorship

1. Unlimited Personal Liability:

• One of the major downsides is that the owner is personally liable for all
business debts and obligations. This means personal assets, such as a
home or savings, could be at risk if the business incurs significant
liabilities.

2. Limited Resources:

• Raising capital can be more challenging as sole proprietors often rely

on personal savings or loans. They may have fewer opportunities for
 substantial investment compared to businesses with multiple owners
or shareholders.

3. Burden of Responsibility:

• The sole proprietor bears the full responsibility for running the
business, including managing all aspects of operations, finances, and
legal compliance. This can be overwhelming, particularly as the
business grows.

4. Limited Growth Potential:

• Expansion may be limited by the sole proprietor’s personal capacity

and resources. Unlike corporations, sole proprietorships might struggle
to attract investors or scale up significantly.

5. Lack of Continuity:

• The business is often dependent on the owner’s presence and

involvement. If the sole proprietor decides to retire, become
incapacitated, or pass away, the business may face challenges in
continuing operations or transferring ownership.

4. Managing a Sole Proprietorship

1. Financial Management:

• It is crucial to keep accurate records of all business transactions.

Implementing a robust accounting system can help manage cash flow,
track expenses, and prepare for tax obligations.

2. Legal Considerations:

• Even though sole proprietorships do not require formal registration,

obtaining the necessary licenses, permits, and insurance is essential to
ensure compliance with local regulations and to mitigate risks.

3. Marketing and Branding:

• Developing a strong brand identity and effective marketing strategies

can help attract and retain customers. As a sole proprietor, personal
 networking and word-of-mouth recommendations can also play a
significant role in business growth.

4. Time Management:

• Balancing all aspects of the business requires effective time

management skills. Prioritizing tasks, delegating when possible, and
setting realistic goals can help in maintaining a productive workflow.

5. Transitioning to Other Business Structures

For some sole proprietors, the business may outgrow its initial structure.
When this happens, transitioning to a different business entity, such as a
partnership, limited liability company (LLC), or corporation, might be
beneficial. Each of these structures offers different advantages in terms of
liability protection, tax benefits, and growth potential.

Considerations for Transitioning:

• Legal and Tax Implications: Consult with a legal and tax advisor to
understand the implications of transitioning to a new business
structure.

• Business Growth: Assess whether the current structure limits growth

opportunities and whether a new structure might better support
expansion.

• Personal Goals: Reflect on how your personal goals and responsibilities

might change with a new business structure.

Conclusion
A sole proprietorship offers an accessible and flexible way to start and
manage a business. Its simplicity and direct control make it an appealing
option for many entrepreneurs. However, the associated risks, such as
unlimited personal liability and limited growth potential, necessitate careful
consideration. By understanding the characteristics, advantages, and
challenges of a sole proprietorship, individuals can make informed decisions
about whether this business structure aligns with their goals and resources.
For those who find that a sole proprietorship meets their needs, it can
provide a rewarding and personally fulfilling business experience.

Hindu Undivided Family (HUF)

Taxation works differently for individuals, companies, firms or other

entities. One among such entities is Hindu Undivided Family (hereinafter
called HUF). It involves a separate and independent set of tax liabilities and
exemptions. HUF as a concept was introduced in India to ensure that
families stay together and all the earnings of the business stay within the
family, thus, ensuring that the control and wealth of the business remains
within the family. It is basically an emotion, that has been given a legal
sanctity.

What is Hindu Undivided Family (HUF)?

HUF is not a creation or result of any codified law governing the country;
rather it came into existence only by practice and is now treated as a
separate legal entity under the Income Tax Act, 1961 (hereinafter called the
Act) just like an individual, a firm or a company. It consists of members who
have lineally descended from a common ancestor. Individuals become a
member in HUF or get rights in an HUF by birth or as a co-parcener or by
marriage with the existing member. It works on the eldest first concept.

Karta is the eldest member of the family. Upon retirement or death of the
Karta, the eldest child – male or female becomes the next Karta of the HUF
without any changes in the HUF. People who are born in the family
automatically become co-parceners of the HUF by birth. Also, any woman
who is married to any of the member of the HUF becomes the member of the
HUF. Woman gain privilege in such concept as they can be members in two
HUFs at the same time viz co-parcener in father’s HUF and member in
husband’s HUF. However, husbands of female co-parceners do not get any
right in the HUF of wives’ parents.

Jain and Sikh families even though not governed by the Hindu Law, are
treated as HUF under the Act.
Like any other business entity, HUF can run its own business to generate
income. Also, it can independently make its own investments in mutual
funds, shares, precious metals, real estate, etc.

Coparcener – A Coparcener, according to the Hindu Succession Act of 1956,

refers to an individual who receives a legal right to ancestral property by
birth.
Assets of HUF

Any asset received in the following situations would form part of the HUF
asset pool:

• Assets received on the partition of a larger HUF of which the

coparcener was a member.
• Assets received as gifts by the HUF from friends and relatives.
• Assets received by way of inheritance through a will.
• Individual assets brought in by any member of the HUF to HUF asset
pool. However, it won’t be beneficial to the individual member as the
tax liability on transfer of asset and income arising thereon will
continue to rest in the hands of the member.
Benefits of HUF
There are numerous benefits attached to following the HUF system.
Some of them are discussed henceforth.
4.1 Tax Benefits
HUF being an independent legal entity is treated separately from its
members and has its separate PAN card, creating a separate stream of
income. It enjoys basic tax exemption limit like an individual. A
member of an HUF enjoys complete tax exemption on any amount of
income received from business done by the HUF as the same is taxable
in the hands of the HUF. Moreover, deductions u/s 80C, 80D, 80DD,
80DDB, and 80TTA can be enjoyed by the HUF.
4.2 Extending Loans
HUF can extend loans to its members as per the terms and conditions
agreed upon. Also, it can take a Home Loan to purchase any residential
property and avail tax benefits under Section 80C of the Act for loan
repayment and the interest to be paid thereon.
4.3 Investments
Similar to individuals, even HUF can invest in insurance policies and
other investment instruments and avail exemptions on payment
towards such policies through the year. For instance, an HUF may pay
premium on insurance policies for its members and claim benefits for
the same. The amount of deductions that can be claimed by HUF
independently, being a maximum of Rs. 1.5 Lakhs under Section 80C of
the Act.
An HUF is allowed to make investments in Tax Saving Fixed Deposits
and Equity Linked Savings Scheme to earn tax benefits under Section
80C of the Act. Although, an HUF cannot hold a PPF Account in its own
name, it can avail tax deductions for the amount deposited by the HUF
in PPF Accounts of its members on their behalf.
4. Limited Liability
As co-parceners lack control over HUF management, with authority
resting solely with the Karta, their liability is confined to their
respective share of the property. This equilibrium between power and
responsibility is maintained. Moreover, since HUF members are all
relatives, a strong sense of loyalty and cooperation prevails, fostering
trust and overall collaboration among them.
Hurdles with Formation and Dissolution of an Hindu Undivided Family
Transfer of Property
Since all members of the HUF have the right in the properties and
assets of an HUF, the said Joint Assets cannot be sold without the
consent of all its members. Thus, implying that at any point of time, a
person purchases a property in the name of HUF, it will belong to each
of its members’ and not just to the person buying it. This rule creates
several issues upon extension of family into several branches, further
resulting in several disputes among its members.
As a member owns his/her right in the HUF automatically by birth,
he/she cannot bequeath his/her share to anyone. Also, a member by
marriage is only entitled to maintenance and gets no share of the HUF.
Sale of Assets
If the HUF is an owner of the property, the asset can only be alienated
or sold in certain circumstances viz. either by the consent of all the co -
parceners of the HUF or by the Karta who is the eldest member of the
HUF to meet a legal necessity or for the benefit of the HUF wherein
consent of all the co-parceners is not required. However, a co-parcener
can challenge such a decision of the Karta.
The property can also be alienated or sold by disposing the assets of the
HUF in case of a sole survivor of a co-parcener. If a minor child is
involved in the HUF, prior permission of the Court is required to create
a third-party right in any of the assets of HUF.
Hence, when a property is held in the name of HUF, one has to be
mindful of the restrictions on its transfer and on the tax implications
arising out of it.
No Universal Recognition
As discussed aforesaid, an HUF is not recognized universally in any
other country, except India; thereby posing a challenge in terms of
Income Assessment for members moving abroad or obtaining
citizenship of other countries.
Also, an HUF cannot avail Private Equity Fund for the business
conducted by it.
Dissolution in case of Death of or Partition by Members
An HUF may need to be dissolved in case of death of members or in
case of partition between the members. Upon dissolution and closure of
HUF, all of its properties and assets need to be distributed among its
members which can be quite challenging.
The partition of the HUF can either be Total or Partial and the
property can be partitioned through a physical division. A Total
Partition shall amount to dissolution of the HUF and the entire Joint
Family Property being divided among all its co-parceners; the family
shall cease to exist as an HUF.
In a Partial Partition, one or more co-parceners and their branch of the
family may separate from the others; remaining co-parceners may
continue to be an HUF. In such a situation, the share in the HUF
properties of the member leaving the HUF is determined and handed
over to them.
Dissolution of Hindu Undivided Family
The right to partition of an HUF lies only in the hands of the co-
parceners. Any co-parcener can through a written notice dissolve the
HUF. An HUF owning immovable properties can be dissolved by
executing a Partition Deed or by filing of a Partition Suit among all the
co-parceners. If any of the co-parceners of the HUF disagree to dissolve
the HUF through a partition deed, then the same cannot be called as a
dissolution of the HUF as the deed only extinguishes the rights of the
co-parceners in the HUF agreeing to dissolve by detaching their
interest in the joint property and the remaining co-parceners will
continue as an HUF.
Hindu Undivided Family (HUF) Membership Restriction
The policy of excluding non-family members from participation in
Hindu Undivided Families (HUFs) poses a significant obstacle to
securing additional capital from external sources, thereby diminishing
prospects for expansion due to limited financial resources.
6. Conclusion
Thus, a HUF has both advantages and drawbacks. Benefits from HUF
can be multiplied and it can serve as a useful tax planning tool, which
can be used to maximize one’s benefits keeping in mind the interests of
the family. However, it needs to be strategically planned with a long -
term perspective. While creating an HUF may be useful for tax
planning and investments, one has to always keep in mind issues
arising in joint families, the legal challenges it poses in dissolution and
partition of entity.
As the family expands, the dissolution process gets tedious and even
more complicated. It not only gets emotionally taxing but also legally
challenging to carry out the whole procedure of dissolution and
distribution of its assets.

What is Partnership?

A partnership is a kind of business where a formal agreement between

two or more people is made who agree to be the co-owners, distribute
responsibilities for running an organization and share the income or
losses that the business generates.

In India, all the aspects and functions of the partnership are

administered under ‘The Indian Partnership Act 1932’. This specific
law explains that partnership is an association between two or more
individuals or parties who have accepted to share the profits generated
from the business under the supervision of all the members or behalf of
other members.

Features of Partnership:

Following are the few features of a partnership:

1. Agreement between Partners: It is an association of two or more

individuals, and a partnership arises from an agreement or a
contract. The agreement (accord) becomes the basis of the
association between the partners. Such an agreement is in the
written form. An oral agreement is even handedly legitimate. In
order to avoid controversies, it is always good, if the partners have
a copy of the written agreement.
2. Two or More Persons: In order to manifest a partnership, there
should be at least two (2) persons possessing a common goal. To
put it in other words, the minimal number of partners in an
enterprise can be two (2). However, there is a constraint on their
maximum number of people.
3. Sharing of Profit: Another significant component of the
partnership is, the accord between partners has to share gains and
losses of a trading concern. However, the definition held in the
Partnership Act elucidates – partnership as an association
between people who have consented to share the gains of a
business, the sharing of loss is implicit. Hence, sharing of gains
 and losses is vital.
4.Business Motive: It is important for a firm to carry some kind of
business and should have a profit gaining motive.
5. Mutual Business: The partners are the owners as well as the
agent of their firm. Any act performed by one partner can affect
other partners and the firm. It can be concluded that this point
acts as a test of partnership for all the partners.

Types of Partnerships

A partnership is divided into different types depending on the state and

where the business operates. Here are some general aspects of the three
most common types of partnerships.

• General Partnership

A general partnership comprises two or more owners to run a

business. In this partnership, each partner represents the firm with
equal right. All partners can participate in management activities,
decision making, and have the right to control the business. Similarly,
profits, debts, and liabilities are equally shared and divided equally.

In other words, the general partnership definition can be stated as

those partnerships where rights and responsibilities are shared equally
in terms of management and decision making. Each partner should
take full responsibility for the debts and liability incurred by the other
partner. If one partner is sued, all the other partners are considered
accountable. The creditor or court will hold the partner’s personal
assets. Therefore, most of the partners do not opt for this partnership.

• Limited Partnership

In this partnership, includes both the general and limited partners. The
general partner has unlimited liability, manages the business and the
other limited partners. Limited partners have limited control over the
business (limited to his investment). They are not associated with the
everyday operations of the firm.

In most of the cases, the limited partners only invest and take a profit
share. They do not have any interest in participating in management or
decision making. This non-involvement means they do not have the
right to compensate the partnership losses from their income tax
return.

• Limited Liability Partnership

In Limited Liability Partnership (LLP), all the partners have limited

liability. Each partner is guarded against other partners legal and
financial mistakes. A limited liability partnership is almost similar to a
Limited Liability Company (LLC) but different from a limited
partnership or a general partnership.

• Partnership at Will

Partnership at Will can be defined as when there is no clause

mentioned about the expiration of a partnership firm. Under section 7
of the Indian Partnership Act 1932, the two conditions that have to be
fulfilled by a firm to become a Partnership at Will are:

• The partnership agreement should have not any fixed expiration

date.
• No particular determination of the partnership should be
mentioned.

Therefore, if the duration and determination are mentioned in the

agreement, then it is not a partnership at will. Also, initially, if the
firm had a fixed expiration date, but the operation of the firm continues
beyond the mentioned date that it will be considered as a partnership
at will.

Indian Partnership Act 1932

Most of the businesses in India adopt a partnership business, so to

monitor and govern such partnership The Indian Partnership Act was
established on the 1st October 1932. Under this partnership act, an
agreement is made between two or more persons who agrees to operate
the business together and distribute the profits they gain from this
business.
Advantages of Partnership:

• Easy Formation – An agreement can be made oral or printed as an

agreement to enter as a partner and establish a firm.
• Large Resources – Unlike sole proprietor where every contribution
is made by one person, in partnership, partners of the firm can
contribute more capital and other resources as required.
• Flexibility – The partners can initiate any changes if they think it
is required to meet the desired result or change circumstances.
• Sharing Risk – All loss incurred by the firm is equally distributed
amongst each partner.
• Combination of different skills – The partnership firm has the
advantage of knowledge, skill, experience and talents of different
partners.

Partnership Examples:

Few co-branding partnership examples are listed below:

• Red Bull and GoPro

• Spotify and Uber
• Levi’s & Pinterest
• Maruti Suzuki
• Hindustan Petroleum

Self check Questions

1. What are the implications of personal liability versus limited

liability?
2. How does the structure affect the personal assets of the owners or
members?
3. How is income taxed for each type of entity?
4. What is the decision-making process within the entity?
5. How are conflicts resolved among partners or between the entity and
stakeholders?
6. Are there specific tax benefits or deductions available?
Lesson -3

Factors Governing the Decision for a Suitable Form of

Organization

The choice of an appropriate organizational form is crucial for a business's

success. Several factors influence this decision. Let's explore them:

Internal Factors

• Nature of Business: The type of business activity significantly impacts

the choice. For example, service-based businesses might opt for a sole
proprietorship or partnership, while manufacturing or large-scale
operations often lean towards corporations.
• Scale of Operations: Small-scale businesses might prefer sole
proprietorships or partnerships, while larger operations often require
the structure and capital-raising capabilities of a corporation.
• Capital Requirements: The amount of capital needed to start and
operate the business is a key factor. Corporations can raise capital
through equity and debt, while sole proprietorships and partnerships
rely on personal funds and loans.
• Managerial Ability: The skills and expertise of the owners or managers
influence the organizational form. Sole proprietorships and
partnerships rely on the owners' abilities, while corporations can hire
specialized management.
• Degree of Control: Owners seeking complete control often prefer sole
proprietorships or partnerships. Corporations involve shared
ownership and control.
• Risk and Liability: The level of personal liability is a critical
consideration. Corporations offer limited liability, while sole
proprietors and partners have unlimited liability.
• Stability of Business: Businesses aiming for long-term stability often
choose the corporate form due to its legal permanence.
 • Flexibility of Administration: Some organizational forms offer more
flexibility in decision-making and operations. Sole proprietorships and
partnerships generally have more flexibility.
• Division of Profits: How profits are shared among owners is crucial.
Partnerships divide profits based on the partnership agreement, while
corporations distribute dividends to shareholders.
• Costs, Procedures, and Government Regulations: The costs and
complexities of forming and maintaining different organizational forms
vary.

External Factors

• Tax Implications: Different organizational forms have different tax

consequences for the business and its owners.
• Geographical Mobility: The ease of transferring ownership and location
can influence the choice. Corporations generally offer more flexibility
in this regard.
• Transferability of Ownership: The ability to sell ownership interests
easily is important for some businesses. Corporations provide this
flexibility.
• Managerial Needs: The availability of qualified managers can impact
the choice. Corporations can attract professional managers.
• Secrecy: Some businesses require maintaining confidentiality. Sole
proprietorships and partnerships offer more secrecy than corporations.
• Independence: The desire for complete independence often leads to sole
proprietorships or partnerships.

By carefully considering these factors, entrepreneurs can select the

organizational form that best aligns with their business goals and objectives.

1. What is the fundamental difference between a corporate and non-

corporate entity?
2. Why would someone choose a non-corporate entity over a corporation?
3. What are the primary advantages and disadvantages of sole
proprietorships, partnerships, and limited liability partnerships?
 4. How does the liability of owners differ between these three forms of
non-corporate entities?
5. What factors should be considered when deciding on the legal structure
for a small business?

Deeper Dive Questions

1. How do tax implications differ between sole proprietorships,

partnerships, and limited liability partnerships?
2. What are the common challenges faced by non-corporate entities, and
how can they be mitigated?
3. How does the legal and regulatory environment impact the choice of a
non-corporate entity?
4. What are the succession planning considerations for non-corporate
entities?
5. In what situations would a limited liability partnership be a more
suitable choice than a general partnership?