RUNNING A BUSINESS Starting up a business of your own is a big step and not one to take lightly. The taxation of your business is only one of many commercial and legal aspects of starting a business that you will need to consider. Preparation is the key and a proper business plan is one of the first things you should do. However, tax matters are our main concern here. Choosing a business structure The alternative business structures are: Sole trader This is the simplest form of business structure since
The tax regime Unincorporated businesses
Limited company A company is a legal entity in its own right, separate from the personal affairs of the owners and the directors. A company provides protection from liability, which means that the creditors of the company cannot make a claim against the owners or the directors except in limited circumstances. Often this advantage is somewhat eroded because a bank, for example, may seek personal guarantees from the directors. These potential advantages carry the downside of greater legal requirements and regulations that must be complied with. Limited Liability Partnerships (LLPs) LLPs are a halfway house between partnerships and companies. They are taxed in the same way as a partnership but are legally a corporate body. This again gives some protection to the owners from the partnership’s creditors. In this guide we consider the differing tax treatments of the alternatives but you should choose which structure is right for you based on more than just the tax issues alone.
A new business should register with HMRC on commencing to trade. Income tax is paid on the profits of the business. The amount that the proprietor, or a partner in a partnership, draws out of the business (referred to as ‘drawings’) is irrelevant. Profits are taxed on a current year basis as shown by the example, although a new business will be subject to special rules, which we will be pleased to explain to you. Example If the accounting period (or ‘year’) end is 31 March then, in the tax year 2021/22, the profits for the year ended 31 March 2022will be taxed. If the year endwas 31 August then, in the tax year 2021/22, the profits for the year ended 31 August 2021 will be taxed. Tax Tip The choice of accounting date on a business start up can affect: • howprofits are taxed • when tax is payable • when losses are relieved. • Please contact us to discuss the options available for your circumstances.
it can be established without legal formality. The business of a sole trader is not distinguished from the proprietor’s personal affairs. If the business incurs debts which are unpaid, the creditors can seek repayment from the sole trader personally. Partnership A partnership is similar in nature to a sole trader but involves two or more people working together. A written agreement is essential so that all partners are aware of the terms of the partnership. Again, the business and personal affairs of the partners are not legally separate. Sole traders and partnerships are often referred to as unincorporated businesses and the individual owners as self-employed.
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Running a Business
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