Pranjal Pravin – Dutch Uncles

What are the different types of business ownership?

Pranjal Pravin — Tue, 01 Jun 2021 11:35:04 +0000

Whenever we talk or discuss about business, we usually start with terminologies like the vision, the mission of the business, how they operate, what are the different levels involved and so on.

But before jumping into the land of starting a business or even owning one, we not only need to be aware of the above or even the geographic and political factors but also ask ourselves the main question, what are the different types of businesses?

The different types of businesses give an outline of a structure to the ownership world and without a structure, anything could be read like an open book ready to be disassembled like a rusty machine.

These businesses might be owned by a single person or a small group of people or even run by a large charitable organization with a notion to help. The point of differentiation is not just the amount of people but also the legalities that follow while being a part of them.

This legal and ownership structure of a business determines various factors- from the taxes that the business needs to pay to the profit distribution, the responsibilities that the owner or multiple owners have, ultimately determining the paperwork that the businesses have to go through to finally set up.

So, what are these different types of business ownership and how do you determine which is the right one for you?

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The different types of businesses give an outline of a structure to the ownership world and without a structure, anything could be read like an open book ready to be disassembled like a rusty machine.

Sole Proprietorship or Single Ownership

As the name suggests, the ownership of this kind of business falls in the hands of one single person, who is deemed as the sole or the final decision-making authority for the business. Here, the owner is the one responsible for all the assets and liabilities including both personal and professional ones.

With the profit or loss completely being handled by them, an advantage to being a sole proprietor is that these kinds of businesses are easy to set up since you’re the ultimate decision-maker but on the other hand you have to be responsible for all the liabilities and debts at any given point of time. Looking at the positives, the expenses to start a single ownership business is majorly minimal in the beginning and it is easier and flexible for the owner to operate.

Now, this does not mean that they should work alone. Like any other organization, they can always employ people to expand their businesses but any responsibilities from hiring to firing to giving profit to bearing the debt, to raising funds, everything falls on the head of the owner.

Examples of sole proprietorship or enterprises run by a single owner could be a small shop to sell handmade goods or an auto repair shop, a working plant to provide goods carved from wood, etc.

Given the above examples, the single ownership businesses have their fair share of ups and downs but given the advantages such as minimum legal restrictions, enjoying all the profit and also managing the raw materials and manufacturing methods to yourself, these assurances give a good deal of motivation and incentive to flourish.

Partnerships

Moving on to the next type of ownership we have Partnerships. These kinds of businesses involve two or more people as the owners of the business. When the time for the owner comes to realize that the potential for their business is much more than they could handle and they might not be in a position to hold all the responsibilities and duties that come to handle a business, then comes the entry for a co-owner or co-owners depending on the decision and situation.

Now, these partnerships could be of two types:

General partnerships

Running on a similar idea of single ownership, where two or more people with the same vision and mission come together through a legal contract to grow a business. Every partner here can act as a sole owner and have full control of the business along with owning full rights to all the profits and debts sustained by the business. The incentive for success becomes high as large capital is invested from both sides and the firm can hold better talents and skills.

Along with that, if the business goes into loss, there’s more than one person to handle the situation and also attach tax advantages with the business. Examples of a general partnership could be retail trade organizations, small engineering firms, law firms, medical clinics, etc.

Limited Partnerships

A form of the partnership business, here although the partners share the profit generated from the business they can’t interfere with the management or decision making of the firm. As the word suggests, limited partners have their authority limited to the amount of investment made into the business.

Depending on the type of situation and legal contracts, these types of business are easier and also less costly so all the investors and lenders who were earlier hesitating to invest in the business have now an incentive to go ahead without much of a risk.

Joint-stock organization/Companies

There are two different types of Joint-stock organizations:

Private limited companies

The number of members for this type of business ranges from 2 to 50 excluding any employee or ex-employee shareholders. The money or capital is collected from private partners where all of them might not be active but these types of organizations restrict the right to transfer shares and avoid the public to get ownership on shares or debentures.

Although there isn’t a need for consent of directors in these types of businesses and also, they don’t need any certificate from a registrar for the initiation of business but they do require to hold a general meeting at certain periods to discuss its profit and loss generation.

They also need to send a certificate to the registrar of the companies along with the returns stating that they don’t have more than 50 shareholders on their account.

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With a democratic form of ownership, these organizations promote cooperation and mutual belief and understanding of self-help.

Public Limited Companies

Unlike private ownership, the money in here is collected through the public in small amounts of shares having a low face value. The public limited companies have to file with the registrar of Joint Stock Companies several documents. Some of them involve the consent of directors, list of directors, director’s contract etc. where they can start the business only once they receive the certificate.

These businesses are responsible for holding a statutory meeting and issuing a statutory report to all the members and also the registrar within a given time. With no restriction on the transfer of shares, the company is liable to get its account audited every year by the registered auditors’ and also hold a general meeting every year.

Since the shares are transferable, public limited companies have a huge potential to raise a good sum of money and also acquire the services of specialists. Some examples of a public limited company would be Steel mills and Fertilizer factories.

Cooperative Societies or Organizations

Containing a mix of features from both the large partnerships and some from corporations, here the members of the cooperative societies buy shares on their own and then the amalgamated profit gets distributed among its members. Each member of the society is given the right to vote only one time so that the concentration of power does not fall into few hands.

These kinds of organizations aim to provide goods and services to their members at a cost and therefore it is deemed as a kind of voluntary, democratic ownership which is usually formed by a couple of motivated members who believe in obtaining necessities of everyday life at rates lower than those of the market.

With a democratic form of ownership, these organizations promote cooperation and mutual belief and understanding of self-help. With no one man making huge profits, the monetary help for these businesses can be secured even from the government.

Examples of Cooperative Societies include Consumer cooperatives in retail trade or producer cooperatives for buying and selling items such as dairy products, grains, fruits, etc.

Public Sector Companies

There are three different ways of managing a public enterprise:
Either they are owned by the state, or they are managed by the state or they are both owned as well as managed by the state. Here enterprises fall into the hands of the government as they are the ones to control and produce the supply of goods and services which are required by the society.

These public sector companies open the doors for those industries which are in dire need of a huge amount of capital and don’t have enough resources to flourish under the umbrella of the private sector.

The consumers get the befit of greater, better and cheaper goods and also encourage the growth and nourishment of the under-developed regions of the country. Although there could be sometimes too much interference by the government and also delay in the decision-making process, at the end of the day necessities like raw materials, fuel, power and transport get made easily available to them.

Private Sector Companies

Last but not the least, private sector companies. As the name suggests, private sector companies are exactly the opposite of how the public sector companies operate. One of the points that stand out for them is that they do not indulge themselves in businesses where profit margins are low or where there is a huge risk involved.

Run by various businessmen from various sectors who possess an in-depth knowledge of the sector they come from, the profitability factor along with efficiency is always focused on very high levels along with a quick decision-making capability as compared to the public sector companies.

As there is minimal to no interference from the government, sometimes the situation leads to having a concentration of profits only in a few hands and also over-exploitation of the labour involved which results in an unbalanced growth of industries.

While looking at all these kinds of businesses, choosing the right one depends on certain factors, such as how much capital you have, how you want to handle the profit and loss management of your organization, what legalities and paperwork would be involved, so and so forth. It is indeed a tough and scary step for any entrepreneur.

There are equally compelling benefits and also hindrances that could be worrisome but the first and foremost step for any budding entrepreneur should be to educate themselves and weigh the pros and cons before stepping onto the world or business ownership. Ultimately, it requires a good amount of knowledge, confidence and support to take the first step and then eventually figure out what could be the right type of business to go for.

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What is a speculative business?

Pranjal Pravin — Sun, 30 May 2021 10:35:04 +0000

Before jumping on to what a speculative business means, let’s try and understand our income tax provision. If you’re a serviceman/servicewoman or a businessman/businesswoman doing that 9 to 5 or putting your all to grow that business and earning your bread and butter through that organisation then the income that you earn has a liability of undergoing the cycle of taxing which is processed by the government. As a taxpayer, any kind of income taxed falls under five major categories.

5 Heads of Income

Income from Salary– The salary that you earn at the end of every month is taxed at a certain tax bracket depending on the level of income you earn.
Income from house properties– If you have a single or few houses in your name then be ready to not only shell out the monthly EMI or instalment but also a certain level of money for the tax slab. After all, you’re going to reap the benefits of the house as an asset and every asset holds a major value in the eyes of the government.
Profits or gains of business– There’s an unprecedented amount of income that you earn from running a business and with certain guidelines from the government of the country you operate that business in, your business income is liable to be taxed at the end of every financial year
Income from capital gains– This defines the tax that is operated on all the income that you earn from the investment you have done at various places including mutual funds, share markets or even bitcoins.
Income from other sources– Finally there might be an income that you might be earning from running an Instagram page and getting good deals or consulting a business apart from your daily job. As with any other income, this side hustle of yours also falls under the bracket of getting taxed.

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India’s income tax provision does not define what speculative business is but rather it defines what a speculative transaction is.

Now when we are through with the five different kinds of tax categories, it’s time to recall tax filing of which of the categories has been the easiest and which has accounted for a major brain as well as paperwork. When it comes to the classification of income from your business or profession, it is much easier for you to get the required paperwork for this category as compared to defining the income from capital gains.

Some say that the income earned on the capital gains must rely on the amount of investment and frequency of transactions or gains per transaction. And if the transactions fall under the category of business, then it’s further categorised into 2 different classifications of being speculative and non-speculative.

Understanding a speculative transaction

India’s income tax provision does not define what speculative business is but rather it defines what a speculative transaction is. According to Section 43(5) of the Income-tax Act, the term speculative transaction implies a transaction in which the contract which includes the purchase or sale of any commodity like stocks and shares is settled periodically or eventually settled otherwise than the actual delivery or transfer of the commodities or scripts.

Simplifying the above words, let’s take an example of Intra-day trading. Intra-day trading refers to the trading of shares within the same day. So, considering this example, there is no delivery as the shares enter and exit from a given trading account on the same date without getting a chance to enter the DEMAT account.

As the delivery does not take place, the above transaction falls under the category of speculative transactions. To further simplify you could call a speculative income or transaction the one where the outcome does not depend on your hard work or skills or your experience and the practice that you have. It rather completely depends on your luck or chance factors.

Intra-day trading might be a sophisticated way to term the speculative transaction, but to further understand you could also deem the speculative transaction as the one which gives you an income from gambling or casinos or sometimes even a coin toss for that matter.

Just like any business, there are always exceptions to playing this game. So, for your ease, to deem any transaction as speculative, you need to have a clear understanding of what is and what is not included while considering a transaction speculative.

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The task of calculating a speculative income and understanding the whereabouts of the business is no doubt risky and complex to fathom.

What cannot be termed as speculative business?

Hedging contract concerning raw materials or merchandise

If you’re a businessman/ businesswoman in possession of raw materials for manufacturing and merchandise to be sold, it is highly likely that with time, the value of the raw materials will fluctuate. So, to save the price fluctuation between the period at which you bought your raw materials and sold them, you get into a contract. This particular contract is for saving your goods and not a speculative transaction.

Hedging contract in the aspect of stocks and shares

In a similar fashion to the above example, there are a lot of price speculations which are expected when you hold a certain number of stocks and shares and to seal the loss incurred because of that with your dealer or investor you get in a contract. Reiterating the same, that this contract is not a part of the speculative transaction.

Forward Contract

Forward contract here refers to a situation in which a member enters into a forward market or stock exchange in the course of any transaction like jobbing (all transactions are squared off during the same day) or arbitrage (purchase of commodity or security in one market for immediate sale in another market) to guard against loss which may arise in the ordinary course of his/her business as such member. To ease the definition of a forward market, this typical market refers to an over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery. This again is not deemed as a speculative transaction.

Trading in derivatives

As the name suggests, when your transaction is carried out electronically by the recognized brokers as defined per relevant statutes, the given transaction is supported by a time stamped contract note. This note indicates a unique client identity number and PAN (Permanent Account Number). The given transaction in respect of trading in derivatives are referred to in Securities Contracts (Regulation) Act, 1956 and carried out in recognized stock exchanges and not deemed as a speculative transaction.

Trading in commodity derivatives

Finally, a type of transaction that follows the same rules like the one given above and is very much eligible is carried out in respect of trading commodity derivatives in a recognized association. This association is chargeable to commodities transaction tax mentioned under Chapter VII of the Finance Act, 2013.

What happens when a speculative transaction takes place?

Taking a scenario where a taxpayer is involved with a lot of businesses along with a speculative one, the speculative business of this taxpayer will be deemed as a separate entity from any other business carried out by the taxpayer.

This helps in calculating the loss incurred by the speculative business or transaction. Section 73 of the Income Tax Act states that the losses from speculation business can only be set off against the profits of the speculative business which is quite unlike the loss from any other business which can be set off against the profits of other businesses.

Noting further points, the losses from a speculative business can be carried forward to a subsequent year, can only be set-off against the profit and gains of any speculative business in the respective subsequent year. For this given condition, it becomes imperative for any taxpayer to distinguish between the gains or losses from a speculative business to that of other businesses.

Another important thing to note is that the loss from the speculative business cannot be carried forward for a period greater than four assessment years beyond the year in which the loss was incurred. Also, if there is any expenditure and depreciation involved in the process of scientific research, if the depreciation or capital expenditure is carried forward in the speculative business then it is required to be set off first.

Can a single transaction constitute speculative business?

Well according to explanation 2 of section 28, a single transaction is insufficient unless there is a systematic or organised course of activity or conduct on the part of the assessee, it is clear that a single transaction is not possible. A single transaction done instead of actual delivery is not sufficient to stand by the explanation 2 of section 28 of the Income Tax Act, 1961 and there should be a plural set of speculative transactions. So, given the rules again, a single transaction cannot be deemed as a speculative transaction.

The takeaways

If you have to calculate the turnover for a speculative transaction or business the simply add both the positives and the negative differences to get the final turnover
As the income earned from a speculation gain is majorly through intra-day trading, Income from your speculation gains is taxed at the given normal rates.
Speculative transaction or business no doubt involves very high risk, but if the luck is in your favour, it also gives an equal amount of great returns. All in all, the motive should be to gain the maximum advantage of the fluctuations that happen in the market.
Always take care of what is and what is not included in a speculative transaction or business. Examples like hedging contracts or trading derivatives could be tricky as sometimes they confuse you as a speculative transaction, but keeping a note of these points and further educating yourself about the same helps in the long run.

The task of calculating a speculative income and understanding the whereabouts of the business is no doubt risky and complex to fathom. The taxpayer involved with all these transactions has to take care of several things and rules and regulations to distinguish their income from a normal to a speculative one. Ultimately it depends that no matter what the business, the time and money invested in is bringing you a good return and profit given all the legalities.

There will be many times where mistakes will be made and given rules and regulations will be misunderstood or misinterpreted depending on the type of business and gains involved. To avoid this, one thing has to be kept in mind, that any taxpayer should always be well versed with the clauses and continuously educate themselves with the given rules or consult someone who deals with these transactions daily to not fix themselves in unwanted tax transactions.

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