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Accounting and Bookkeeping for Small Businesses and Sole Traders
Chartered Management Accountant, Certified Practising Accountant
and Registered Tax Agent
My Blog
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New Business – What Structure Should You Have?
Posted on 9 November, 2014 at 18:01 |
When starting a new business a decision has to
be taken as to how the business will be structured. There are various options.
Each option not only has its own implications for tax purposes but of course,
each option also has different legal/compliance requirements and also presents
to potential clients and to the public in different ways.
You need to be aware of the different options
available to you when starting your own business so that you can make an informed
decision as to which option is likely to be best for you.
We will therefore look at each of the different
options in turn.
Sole Trader Many new businesses start out as Sole Traders
because it is the easiest option, especially when the business just consists of
the one person. Basically the business is structured around you – you are
responsible for the business’s liability and debts but you also retain full
control of the business and its profits. The sole trader is the easiest option because
there are no formal or legal requirements for setting up the business, also
making this the cheapest option.
Tax for Sole Traders Is also straight forward
because the business and the sole trader are considered to be just the one
legal identity and so you pay the business tax, as part of your own tax,
through your individual tax number. Although most sole traders are individuals who
are in business alone, there is nothing to stop a sole trader from having
employees, they just have to register as an employer with the IRD. When doing the business accounts it is
important that a sole trader keeps their legitimate business expenses separate
from their personal living expenses and for this reason it is beneficial to
have a separate business bank account. The one thing that you can’t do as a sole
trader is protect your business name. You can however trade mark your brand as
protection. Partnership A partnership is when two or more individuals or
entities join together to form a business. A formal partnership agreement is
drawn up and this outlines that share of responsibilities, profits/losses and
liabilities.
In contrast to a business a partnership is made
up of individuals/entities who agree to pool their resources and/or skills into
one collective offering. There are no shares because the business doesn’t exist
as a legal entity. Potentially the major disadvantage to a
partnership is that partners can be held liable for business debts incurred by
their partners.
Although a partnership is required to have its
own tax number the partnership itself is not taxed. Rather each individual
partner pays tax on their share of the profits through their individual tax
returns. Although any individuals or entities can enter
into partnerships they are traditionally used by groups of professionals such
as Doctors, Lawyers, Architects and Accountants.
Companies Companies are separate legal entities to their
shareholders (owners). They have to be registered for incorporation with the
Companies House and declare their director and shareholder details. There are
two types of company, private and public. Private companies have their shares
owned within a private group (e.g. an individual or a family) while the shares
of a public company are listed on the stock exchange. Shareholders in a company have limited
liability which means that they can lose the value of their shares in a
business but that is all. They’re not responsible for any other debts or
liabilities that a company has. As the company is a separate entity it owns all
its own assets and liabilities and can potentially continue trading regardless
of change of ownership. Shareholders of a business are taxed separately
to that business. The income that the shareholders receive from the business
can either be paid as a salary or it can be paid as a dividend (or as a
combination of the two). Salaries are treated as a business expense and so are
deducted before tax whereas dividends are deducted after a company’s tax
liabilities have been calculated and paid.
A company is taxed in its own right and there
is a designated company tax rate. Any losses are carried forward to be offset
against future year profits.
Shareholders can receive salaries with PAYE
deducted or can opt for shareholder salaries where the tax is not deducted at
the time it is paid, however, with the latter option the shareholders will have
to pay the tax at a later date.
Look Through
Companies (LTC)
A company that has five or fewer shareholders
can apply to the Inland Revenue to become a Look Through Company. While the official designation of a Look
Through Company remains the same, i.e. a Limited Company registered with
Companies House, what changes for a look through company is the tax treatment. Rather than the company itself paying tax at
the company tax rate, the profits or losses flow down to the shareholders (the
same as with sole traders and Partnerships) and it is the shareholders who pay
the tax at their individual tax rates. Losses can either be carried forward by
the LTC or can be used by the shareholders to offset their own tax liabilities.
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Categories: business
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Stock Trading Tips
8:27 on 20 April, 2015
Choosing a structure for your business can be a confusing jumble of legalese but with the help of your blog & accurate advice it can be done easily so i am very thankful to you.
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