In this article, we will discuss the procedure to form a HUF and Sole Proprietorship.
Sole Proprietorship is managed and formed by one individual and HUF is a group of Family members for the purpose of doing business.
Sole proprietorship or individual entrepreneurship is a business concern owned and operated by one individual. The sole proprietor is an individual who carries on business exclusively by and for himself. He alone contributes the capital and skills and is solely responsible for the results of the enterprise. In fact, a sole proprietor is the supreme judge of all matters pertaining to his business subject only to the general laws of the land and to such special legislation as may affect his specific business. No deed or agreement is required to constitute a Sole Proprietorship.
However, in actual practice and keeping in mind the nature of the business activity, registration may be required
under the following enactments as prevailing in the respective States or of the Central Government, such as
- Shops and Commercial Establishments Act (State-specific).
- Law relating to Professional Tax (State-specific).
- Registration under Micro, Small and Medium Enterprises Development Act, 2006.
- Registration as a Small-Scale Industry (State-specific).
- GST registration (with the launch of GST, only GSTIN will be used for Import-Export Code Number).
- Intellectual Property laws.
Hindu Undivided Family (HUF)
(i) Create a HUF Deed.
Creating a HUF Deed is not compulsory. However, it is always useful to have a HUF Deed. To form a Hindu Undivided Family, you have to prepare a deed on stamp paper declaring the formation of the Hindu Undivided Family. It should have all the details, including the name of Karta, co-parceners, address, and source of capital funds. Key issues to be noted in preparation of a Hindu Undivided Family Deed are:
(a) A Hindu Undivided Family deed is a written document on a stamp paper stating the name of Karta and Coparceners of Hindu Undivided Family.
(b) The eldest male member of HUF becomes Karta of Hindu Undivided Family.
(c) The name of members of Hindu Undivided Family and the name of the Hindu Undivided Family is also required to be stated in the HUF Deed at the time of creating of Hindu Undivided Family.
(d) The name of the Hindu Undivided Family is generally the name of the Karta followed by the word HUF e.g. Manoj Kumar HUF.
(e) HUF Deed also states the capital with which the Hindu Undivided Family has been started. There are numerous sources through which capital can be introduced.
(f) A declaration is also provided by each member of the family where they declare the name of Karta and also state that –
- Karta has the authority of the accounts assigned in his hand
- Karta holds the right to govern all the transactions of the Hindu Undivided Family accounts on behalf of the members.
(g) Further, a rubber stamp of Hindu Undivided Family will also be prepared. Rubber stamp should be Rectangular. Rubber Stamp will be attached to all the documents relating to HUF to authorize the transaction.
(h) It is recommended that the Deed should be notarized.
(ii) Register the Deed
(iii) Obtain PAN.
Once the deed is made, the Karta should apply for a PAN for the Hindu Undivided Family. It is mandatorily required to have PAN.
(iv) Open bank account
After you are allotted a PAN from the Income Tax Department, open a bank account in the name of the Hindu Undivided Family. The Hindu Undivided Family is now operational. The Karta will have to invest in tax saving instruments and file income tax returns on behalf of the Hindu Undivided Family.
While there are income tax benefits of forming a HUF, the following matters merit consideration:
- One person cannot form HUF. A HUF is formed by a family.
- A HUF is automatically created at the time of marriage.
- HUF contains a common ancestor and all of his lineal descendants, including their wives and unmarried daughters. after 1-9-2005, the daughter married or unmarried is a coparcener like a son.
- Hindus, Buddhists, Jains, and Sikhs can form HUFs.
- HUF generally has properties which come as a gift, a will, or inherited property, or property acquired from the sale of joint family property or property contributed to the common pool by members of the HUF.
- Once a HUF is formed it must be lawfully registered in its name. A HUF should have a legal deed. The deed shall contain particulars of HUF members and the business of the HUF. A PAN and a bank account should be opened in the name of the HUF.
- Use a capital asset to set up the corpus of the HUF. This can be inherited property, assets gifted by relatives and friends, or received by the HUF through a will. If you give a personal asset to the HUF, the income will be clubbed with your own. Gifts of over Rs. 50,000 a year received by a HUF will be taxable. The best mode is for the HUF to receive assets as part of a will.
Key Points in the creation of a Hindu Undivided Family and format of Deed for the formation of Hindu Undivided Family
- Under the Income Tax Act, 1961 a HUF is a separate entity for the purpose of income tax.
- The Tax slabs applicable to Hindu Undivided Family are the same as individual assessee.
- You can’t transfer your own assets into Hindu Undivided Family.
- If you have inherited property and earning some income from this property, then it is better to transfer this asset to Hindu Undivided Family and save tax up to the exemption limit applicable to the individual.
- You can transfer the money received on the sale of an inherited property into your HUF.
- The income from assets of Hindu Undivided Family can be further invested in shares, mutual funds, etc. and will be assessed under the Hindu Undivided Family.
- The existence of property or multiple members is not mandatory to create the Hindu Undivided Family. A family that does not have any assets may still have the character of Hindu joint family. This jointness is known in terms of faith and food. This is because a Hindu is born as a member of the joint family.
- Any gifts received by the members of the Hindu Undivided Family can be treated as assets of HUF.
- The Hindu Undivided Family is taxable as a separate person under income tax from its members hence one can save tax from a basic exemption of Rs. 2.5 lakh.
- Apart from the basic exemption of Rs. 2.50 lakh, section 80C deduction up to Rs. 1.50 lakh is also available.