SOLE PROPRIETOR VS. LIMITED COMPANY–A CHOICE VIEWED FROM THE PERSPECTIVE OF INCOME TAX LAW

An entrepreneur, when starting a business has two options for his legal status – sole proprietorship or single member company. This article explores the choices available to entrepreneur from the point of view of Income Tax Law.

Every provision contained in part IV of chapter III – Income from Business – is applicable to both legal forms except one provision and that is salary. Since business is a separate entity from the owner for the purpose of accounting, therefore, salary received by the owner/manager from the business is viewed differently by Income Tax Law.

Understanding of the issue of salary received by the owner/manager is critical to decide about the legal form of the business.

Section 2(20) defines “employee” means any individual engaged in employment;

Section 2(22)(a) defines “employment” includes a directorship or any other office involved in the management of a company;

Section 12(2) defines “salary” means any amount received by an employee from any employment,

From the reading of the above three provisions of the law, it is clear that amount received by the owner/manager from his business is salary expense when he is a director of the company otherwise the amount is not treated as salary and hence is not an expense. Owner/manager shall be treated as director only in a limited company.

The second difference is the necessity of annual audit of accounts in case of limited company under rule 34(4)( e ) of Income Tax Rules.

The third difference is the effective rate of tax. Clause 1 of Division I of Part I of The First Schedule to Income Tax Ordinance provides rates of tax for income from business of sole proprietorship. The scheme of rates is slab based, different rates at different levels, however, maximum rate of tax is 25% applicable on income exceeding Rs. 1.5 (Million). Clause 1A of Division I of Part I of The First Schedule to Income Tax Ordinance provides rates of tax for salary income. Division II of Part I of The First Schedule to Income Tax Ordinance provides rates of tax for income from business of companies. In case of small companies as defined in section 2(59A) flat rate is 25% and for other companies the flat rate is 35%.

So the choice is very heavily tilted towards the effective rate of tax, which should be calculated keeping all the three differences in mind.

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how allan mulally saved ford?

Recently Allan Mulally was in news not because of his achievement in Ford Motors but as a possible candidate to head the Microsoft.

He saved Ford from bankruptcy and earned a name for himself along side the likes of Alfred P. Sloan Jr. , Jack Welch, Steve Jobs, and off course Henry Ford to name a few such illustrious personalities who contributed to the growth modern business.

Mulally described his style of management as

Positive leadership—conveying the idea that there is always a way forward—is so important, because that is what you are here for—to figure out how to move the organization forward. Critical to doing that is reinforcing the idea that everyone is included. Everyone is part of the team and everyone’s contribution is respected, so everyone should participate. When people feel accountable and included, it is more fun. It is just more rewarding to do things in a supportive environment.

Say, for example, an employee decides to stop production on a vehicle for some reason. In the past at Ford, someone would have jumped all over them: “What are you doing? How did this happen?” It is actually much more productive to say, “What can we do to help you out?” Because if you have consistency of purpose across your entire organization and you have nurtured an environment in which people want to help each other succeed, the problem will be fixed quickly. So it is important to create a safe environment for people to have an honest dialogue, especially when things go wrong.

A big part of leadership is being authentic to who you are, thinking about what you really believe in and behaving accordingly. At Ford, we have a card with our business plan on one side and the behaviors we expect listed on the other. It is the result of 43 years of doing this.

Michael Lee Stallard summarized his turn around philosophy into 7 practices.

  1. Communicate an Inspiring Vision
  2. Make Your Values Known
  3. Live It
  4. Think Win-Win
  5. Get Everyone on the Same Page
  6. Take a Positive “Can Do” Attitude
  7. Be Results Oriented
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introverts

I am an introvert and not many view introvert as capable as extrovert. Everybody has weaknesses and strengths and everybody is effective under different circumstances. We tend to compare each person with one yardstick even when everybody is unique in his own way. Here is a good piece about introverts.

In a dynamic, unpredictable environment, introverts are often more effective leaders—particularly when workers are proactive, offering ideas for improving the business. Such behavior can make extroverted leaders feel threatened. In contrast, introverted leaders tend to listen more carefully and show greater receptivity to suggestions, making them more effective leaders of vocal teams.

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How to stop procrastinating

I am definitely a procrastinator. I keep stretching “Things to Do” to a point where there is now or never and interestingly, I enjoy doing things under pressure. But sometimes, I have to let go of certain things in order to finish the job that otherwise may end in a much better shape.

I have come across an article that throws some light on the subject and offers solution.

Dr. Pychyl advises procrastinators to “just get started, and make the threshold for getting started quite low.”

He also advises procrastinators to practice “time travel”—projecting themselves into the future to imagine the good feelings they will have after finishing a task, or the bad ones they will have if they don’t.

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Talent vs. hard work

Famous quote of Thomas A. Edison is “

“Genius is one per cent inspiration and ninety-nine per cent perspiration. Accordingly, a  ‘genius’ is often merely a talented person who has done all of his or her homework.” 

In The New Yorker, Malcolm Gladwell cited a study by Herbert Simon and William Chase according to which expertise in any thing is the result of continuous hard work.

Is hard work the only ingredient necessary for success? There is another point of view, which says that some things come to some people easily than others no matter how hard they try. We can’t altogether ignore part played by talent in one’s success. The New York Times reported that all else being equal, those with innate talents—especially in terms of intelligence—tend to do better in life than their less-talented colleagues.

Talent vs. Hard Work debate does not consider luck in one’s success. But there are lucky breaks, we can’t deny that. Malcolm Gladwell argues this point in his book “Outliers” that highly successful people had lucky breaks.

But the debate is highly tilted towards hard work.

A common theme that appears throughout Outliers is the “10,000-Hour Rule”, based on a study by Anders Ericsson. Gladwell claims that greatness requires enormous time, using the source of The Beatles’ musical talents and Gates’ computer savvy as examples. The Beatles performed live in Hamburg, Germany over 1,200 times from 1960 to 1964, amassing more than 10,000 hours of playing time, therefore meeting the 10,000-Hour Rule. Gladwell asserts that all of the time The Beatles spent performing shaped their talent, and quotes Beatles’ biographer Philip Norman as saying, “So by the time they returned to England from Hamburg, Germany, ‘they sounded like no one else. It was the making of them.’” Gates met the 10,000-Hour Rule when he gained access to a high school computer in 1968 at the age of 13, and spent 10,000 hours programming on it. In Outliers, Gladwell interviews Gates, who says that unique access to a computer at a time when they were not commonplace helped him succeed. Without that access, Gladwell states that Gates would still be “a highly intelligent, driven, charming person and a successful professional”, but that he might not be worth US$50 billion.

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From Wagon on the way to Gujranwala

I am writing this blog while travelling in public transport and from my smartphone.

All this was unthinkable just a few years ago and made possible by some visionaries. We only know who were popular in media not by choice but by chance and off course some good luck that Allah (SWT) in HIS wisdom choose them among so many millions.

Before writing this blog , I was reading book on the style of management prevailing at WordPress.com – The year without pants. I was reading and thinking about my present work environment at the same time, which is devoid of clarity and is riddled with confusion and conflicts. The big question before me is how to survive and thrive also.

I also have a dream of building a consulting business on the lines of WordPress. com – Remote working. The basic idea is to provide business management consultancy advice through email or any other convenient tool depending on the situation e.g. Skype, IRC Channel, or teamviewer etc. The closest example is freelance. com.

The more I think the more I am convinced that working remotely is entirely possible because of ubiquitous availability of Internet and relevant tools like Skype, email etc. To my mind future of knowledge work is away from regulated office environment. We may not adjust to this new reality but for  smartphone generation it is not a problem.

I have reached Jehlam half way from my destination – Gujranwala.

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Missing the bandwagon

Yesterday’s hot technologies are today’s sour ones. Latest causality of the fast changing technological landscape is “Blackberry”.

Once blackberry cell phone was a symbol status. Now no one wants it any more. Every business needs to be constantly on the look out for rapid technological change in its products, manufacturing process, changing markets and demographics. Peter Drucker highlighted the importance of change management process. He says that every company after every three years has to re-think every thing it produces, its processes, its markets, its customer base.

The story of “Blackberry” is an example of such a costly overlook.

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7 Ways Teachers Use Social Media in the Classroom

Here is an excerpt from an article that shows how social media is playing role in imparting education.

  1. Encourage students to share work socially.
  2. Use a hashtag to facilitate guest speaker discussions.
  3. Require students to keep a blog.
  4. Require original expert sources.
  5. Use Google Hangouts.
  6. Create a social classroom on Edmodo.
  7. Hold a class in Second Life.

The above is a brief outline, if you want to read complete article. Please click here.

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