October 15, 2013


Many of us are often confused to choose which option to start a business or to run an existing business. Small businessmen are mainly confused whether to form a partnership or to form a proprietorship concern. Both of these have there own advantages and disadvantages in terms of taxation as well as procedural works.

Let us discuss step by step the difference in each form of concern:

1. Mode of Formation:

Proprietorship is one of the easiest form of entity to be established. You just need a name for your business and you can start registration under various acts such as Sales Tax, Service Tax or other local acts.

In Partnership, you need atleast 2 persons to a maximum of 20 to start a entity. A partnership deed is formed which contains all details from Firm Name, Firm Address, Partners Profit Sharing etc. This deed can be registered but it is not mandatory. After formation of Partnership deed you can start all your registration procedure under various acts.

2. Mode of Closure/Dissolution:

Proprietorship business can be closed anytime without any formality you just have to do certain formalities required under Sales Tax or Service Tax (if registered)

Partnership can be dissolved only according to the procedure mentioned in the Partnership Deed.

3. Profit Sharing-

Proprietor has gets full profit and is not required to part his/her profit with anyone.

On Other hand in partnership profit is either shared equally or at terms decided by the partnership deed.

4. Management-

In proprietorship, management is in the hand of proprietor and he/she can take any decisions regarding their business

But in partnership the managing partner has to be elected to take decisions for the management.

5. Taxation-

The one of the biggest role which any factor takes in selection of form of entity is, the Taxation structure in the country. In India there is not any difference in impact of VAT or Service Tax on Proprietorship or Partnership concern but the difference is created by Income Tax.

The tax rates had huge gaps between Proprietorship and Partnership. Proprietorship are taxed at slab rates and thus has lower rates of tax but partnership profit are taxed at flat 30% rate. Thus it can create a difference of rate of upto 20%. One of the other disadvantage which Partnership brings is that increase in procedural work. Partnership firm would result in an extra Income Tax Return to be filed, an extra accounts to be prepared and thus all the things from computation of income to filing of return is to be done twice.

But in partnership there are some advantages as well, firm can claim the expenses incurred on Partners remuneration and Interest on Capital. This way the amount of profit is considerably reduced and it can be very advantageous if the slab of Partners are below taxable limits.

Partnership can also be used as Tax planning measure as partnership helps to distribute burden of taxation on partners instead of impacting a single person. A family having one business can use it as a tax saving measure and can distribute its income and use free taxable limits of each member. But this in case should not be used as Tax evasion measure and only genuine working family business should be turned into partnership.

Partnership firm also helps to keep different business under different entity thus it helps to maintain well managed business.

In the end I would like to say that decesion of Partnership V/S Proprietorship should be taken on case to case basis. A person should see the size of his business, volume of receipts/turnover, his/her Taxable Income etc.

Akshay Jain
Chartered Accountant
Varanasi (U.P.)
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