amit agarwal (.) 01 June 2012

Converting a partnership to a sole proprietorship?

Dear Experts,

We have a partneship firm with 2 partners my mom and dad - we are thinking to convert this to a sole proprietorship - where only my dad will be sole proprietor - we are planning to do this as we will be able to save on tax.

Will the sole proprietor will be able to take salary which he is drawing now every month?

Can the experts please discuss the other advantage and disadvantage of the same?

Thanks in advance.

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1 Replies

C. P. CHUGH (Practicing Lawyer) 01 June 2012

Dear Amit,

Partnership Firm are considered to be advantageous if it is really a partnership between different individuals who have joined hands and resources but in your case the partnership was between your mother and dad which means it was merely for records without addittional contribution or resources.

As such to have a partnership from the beginning was a bad choice. Now you have decided to revert back to Proprietorship, let me clear as a Proprietor your dad wouldnot be able to draw salary as he has been drawing as partner. In case of partnership there is dual taxation where in partners are allowed remunerations to the specified limit and balance income is charged to tax at maximum marginal rate without any basic exemption limit whereas in case of Proprietorship (Individuals) there is single taxation at graded slab rates with basic exempion limit.