The business of ‘business type’
16th September 2016 by Jonathan Wingfield
Most people in business know what ‘type’ of business they have, mainly one of three common structures; Sole trader, Partnership or a Limited Company (there are many others but lets leave those for another day). However, there is normally confusion of what the tax implications and benefits are with each, so to try and offer a little more information to help understand this further we will take a look now.
So lets start with a “Sole trader” business. This is where someone starts a business on their own; this is the simplest way of trading. You will need to keep accounting records and prepare accounts in order to calculate your business profits. You then complete a Tax Return declaring these profits to HM Revenue & Customs. Any profits the business makes, over the tax and national insurance allowances, will be taxed (at either 20%, 40% or 45% plus National insurance of 9% or 2%), whether or not you take the money out and spend it!
Moving up from this there is the Partnership. The most basic way to consider this is two or more sole traders (now classed as Partners) working together in one business. Again any business profits will be taxed on the Partners Personal Tax Returns at the same rates as above. Here there is a difference in that the allocation of profits does not have to be equal to all partners and can be weighted to individuals. Each partner has a tax free allowance of £11,000 (as do sole traders), so with more partners there are more tax free allowances which helps reduce tax liabilities.
In both cases these are flexible structures but there is no control of when you are taxed on profits, you simply pay on what you make. Also if either of the above makes a loss, this can be offset against other income you may have personally, something you can’t do if a company makes a loss.
A limited company is a completely separate entity; it pays its own tax on profits it makes at a flat rate of 20%, reducing to 17% in a few years but it does not have any tax free allowance. They are great if you are making big profits and want to keep them in the business. If you want to get access to your company’s money there are various ways, mainly, salary and dividends but there are additional tax bills payable by you. This is when it starts to get complicated and advice is really needed as careful planning is needed to keep tax bills down, otherwise any tax savings of being in a company are lost.
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