WE CAN HELP YOU WITH YOUR NEW JOURNEY FROM SETTING UP A BUSINESS ,CHOICE OF BUSINESS VEHICLE TO TRADE, TAX AND RELATED ISSUES
The decision should be made in the early days of the business and it should be reviewed as and when circumstances change. This includes changes in the trade (eg expansion); changes in the personal circumstances of the individual(s) (eg a new source of income) and changes in tax rules, rates and allowances.
There are significant differences between the business vehicles and the best vehicle for the individual(s) will depend on the particular circumstances. This article will set out the key differences between the vehicles and it will guide you through the process of choosing the best vehicle for your business .
Choosing the best vehicle is not straight forward. We will provide you with expert planning and guidance from our experienced team.
Choice of business vehicle: trades
In general, a trade is carried on:
- by the individual (sole trader) or individuals (partnership);
- by a limited liability partnership of which the individuals are members; or
- by a limited company owned and managed by the individual(s).
Each business vehicle has different implications – tax and non-tax – and the best vehicle for the individual(s) will depend on the particular circumstances. This decision should be made before the trade begins and it should be reviewed on a regular basis; it is possible to change business vehicle.
A limited company is a separate legal entity from its shareholders and directors. It must be registered with, and submit annual accounts to Companies House. The company pays corporation tax on its profits. The liability of the shareholders for the company’s debts is limited to the amount they have contributed as share capital (‘limited liability’).
Limited liability partnership (LLP)
An LLP is similar to a limited company in that, as a separate legal entity, it provides limited liability for its members. However, it is treated like a partnership for tax purposes in that the members are taxable on their share of the LLP’s profits.
In a partnership, the partners share responsibility for the business and are liable for the debts of the business. The partnership’s profits are shared between the partners in accordance with the partnership agreement and each partner pays tax and NICs on his/her share. It is possible for a limited company to be a member of a partnership.
A Scottish taxpayer is a UK resident individual whose only or main residence is in Scotland. A Scottish taxpayer pays income tax at the Scottish Rate of Income Tax (SRIT) on income other than savings income and dividend income.
A sole trader runs their business on their own and in their own name; ie they are self-employed. The sole trader is responsible for the debts of the business and pays tax on the profits of the business.
Comparison of sole trader/partnership and limited company
|Sole trader/partner||Limited company|
|Legal status||For the sole trader, there is no barrier between the individual’s business affairs and their private affairs. This means that the individual’s non-business assets may be at risk if the individual’s business fails or experiences difficulties. |
The partner is in a similar position as a sole trader as the partner is jointly liable with the other partner(s) for the partnership’s debts. It is possible to limit the individual’s liability; for example, by using a Limited Liability Partnership (LLP).
|The liability of a shareholder in a limited company is limited to the amount invested by that individual in the share capital of the company. This protects the shareholder’s other assets – for example, his/her home – in the event that the company is wound-up.|
The benefits of limited liability may be reduced where the shareholder is required to give a personal guarantee to a creditor of the company (for example, a bank in respect of borrowing by the company).
|Taxation of profits||The sole trader pays income tax and Class 4 NICs in respect of their profits as they are earned. As a rough guide, the combined rates of tax and NICs for profits are: from £8,632 to £12,500 – 9%; £12,500 to £50,000 – 29%; £50,000 to £150,000 – 42%, and above £150,000 is 47%. |
The partner pays income tax and Class 4 NICs in respect of their share of the profits of the partnership. This is on the same basis as the sole trader. This is also the case for the partner in a LLP.
| The company pays corporation tax (CT) on its profits as they are earned. The current rate of corporation tax is 19%; this is expected to fall to 17% from April 2020. |
A second layer of tax is payable when the business owner withdraws some or all of the after-CT profits from the company. There is a degree of flexibility as to how and when the profits are paid to the business owner. This can give the limited company an advantage over the sole trader/partnership.
|Losses||The sole trader and partner may set a loss realised in the trade against their other income or gains for the current or previous tax year. In the first 4 years of the business, this relief is extended so that losses may be carried back three years.||It is not possible to set a loss realised by the company against the business owner’s income.|
|Administration||The sole trader must register with HMRC and from then on, submit a tax return each year. For small businesses, only three figures need to be returned to HMRC: income, expenses and profit/loss. Also, it is possible to calculate the tax liability by reference to cash received and paid out. |
It is advisable for the partnership to have a formal Partnership Agreement setting out the basis on which the partnership will exist. An annual tax return is required in respect of the partnership. The partner records his/her share of the partnership’s profits or losses – as set out in the partnership’s tax return – in their tax return.
For these purposes, a LLP is treated in much the same way as a company . A partner in a LLP records his/her share of the LLP’s profits/losses in their tax return.
|The company must be registered with Companies House. A company must prepare statutory accounts in the format prescribed by the Companies Acts, and those accounts must be filed with Companies House. |
Further, a company must complete a Confirmation Statement each year and it must notify Companies House of certain developments, such as the appointment of new directors. The company’s accounts, etc. may be viewed on GOV.UK by members of the pubic.
The company must submit an annual tax return to HMRC, including supporting calculations. The shareholder records on his/her personal tax return any income received from the company.
WE CAN HELP YOU WITH YOUR NEW JOURNEY
When starting up a business, It is very important and essential to understand all the available options. A lot of factors need to be considered before choosing the right business vehicle to trade.
In this article, we’ve managed to only briefly touch upon some of the key issues/factors involved.
If you want to know more about Choice of business vehicle: Trades, Limited Company, Limited liability partnership (LLP), Partnership, Scottish taxpayer, Sole trader Contact us. We can work with you and help ensure the best tailor-made choice of options are available to you and your business.
ALL THIS AND MORE
In addition to the above, we at ISA Consortium also offer you a wide range of Tax and Accounting Services including Capital Gains Tax, Inheritance Tax, Retirement Planning and Self-Assessment Tax Returns.