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Tax Tip

Business Structures in brief

The most suitable structure depends upon the person, the nature of the business, the future prospects, the attitude to risk, and to taxation.

Sole trader
The simplest and cheapest business structure has the least formalities. HMRC have to be informed. Annual accounts are prepared as a basis for tax. Profits after tax are the trader’s. The sole trader business is not legally distinguished from the sole trader’s personal affairs and so business debts may need to be paid from the last worldly possession.

Two or more people will come together and pool their talents, customers and contacts to build a more successful business. A partnership agreement determines the rules of profit sharing, capital, goodwill, and working together. Partners are taxed on their own share of the partnership profits. Each partner is jointly and severally liable for the partnership debts so that if one partner is unable to pay then another partner is liable.

Limited Liability Partnerships
LLPs are suitable for medium and large sized partnerships who prefer to cap their liabilities.

Limited Company
A limited company is a separate legal entity from the shareholders or owners. A new company may be formed simply ‘off the shelf’ quite cheaply. The company’s profits are taxed in the company as corporation tax. Profits may be paid to the owners as dividends  and as salaries or bonuses to employees as directors. Dividends, salaries, bonuses and pension contributions are considered in order to minimize corporation tax, PAYE and NIC. Personal liability is limited to the nominal share capital invested.

If you are unsure about what structure to adopt or want to know more about the tax implications of each structure, please do not hesitate to contact us.

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