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. Choosing a business structure The alternative business structures are: Sole trader This is the simplest form of business structure since it can be established without legal formality.
Taxation of unincorporated businesses 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 is irrelevant. From 2024/25, profits will be taxed on an actual basis; an individual will be taxed on any profits arising from the 6 April in one year to the 5 April in the next. Previously an individual would broadly have been taxed on the profits of the period of account ending in the tax year. This may add significant complexity to calculating the income tax payable for a trader who does not have a 31 March or 5 April year end as the profits will need to be apportioned into the tax year itself. We would be happy to assist you with these calculations. Cash basis for smaller unincorporated businesses The cash basis is an optional basis for calculating taxable profits. Previously, this was available to small unincorporated businesses upon election. If no election was made, the accruals basis applied. From 2024/25, most unincorporated businesses will have to calculate taxable profits using the cash basis as the default. The historic restrictions on who can use the cash basis have been removed. A business can elect to apply the accruals basis instead.
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. Companies are subject to corporation tax and individuals are only subject to income tax on any funds withdrawn from the company by way of salary or dividend, for example. In the past, this has been an advantage of incorporation as corporation tax rates have been lower than income tax rates. The recent increase in corporation tax has eroded that tax advantage for companies with larger profits. 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.
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. The trading profits of both sole traders and partnerships are subject to income tax. Limited company A company is a legal entity in its own right, separate
Running a Business
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