Accountancy and Consultancy 			Services

Business Types

Rate this item
(0 votes)

The Main Choice

Of all the decisions you make when starting a business, probably the most important one relating to taxes is the type of legal structure you choose.  Not only will this decision have an impact on how much you pay in taxes, but it will affect the amount of paperwork your business is required to do, the personal liability you face and your ability to raise money. The most common forms of business are sole traders, partnership, and companies. A more recent development to these forms of business is the limited liability partnership (LLP). Because Each business form comes with different tax consequences so you will want to make you select wisely and choose the structure that most closely matches your business's needs. If you decide to start your business as a sole trader but later decide to take on partners, you can reorganise as a partnership or other entity.


Sole Trader

The simplest structure is the sole trader, which usually involves just one individual who owns and operates the enterprise. If you intend to work alone, this structure may be the way to go.  In its simplest form, sole trader conducts business by buying goods and services, devotes time, skill and materials to add value, and then sells the finished goods or services to customers.  The income generated by selling these goods and services if offset by the expenses incurred buying raw materials, goods for resale, and the costs of developing the goods and services (wages, rent, transport, processing, etc.).  The remainder is the business profit.  This profit is considered the owner’s income and is taxed as such after taking account of the owner’s personal tax allowance and other tax circumstances.  There are a few disadvantages to consider, however. Selecting the sole trader business structure means you are personally responsible for your business liabilities. As a result, you are placing your personal assets at risk, and they could be seized to satisfy a business debt or a legal claim against you.  Raising money for a sole traders can also be difficult. Banks and other financing sources may be reluctant to make business loans to sole proprietorships. In most cases, you will have to depend on your personal financing sources, such as savings, home equity or family loans.  These sources are also at risk.



If your business will be owned and operated by several individuals, you'll want to take a look at structuring your business as a partnership. Partnerships come in two varieties: general partnerships and limited partnerships. In a general partnership, the partners manage the company and assume responsibility for the partnership's debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.  Unless you expect to have many passive investors, limited partnerships are generally not the best choice for a new business because of all the required filings and administrative complexities. If you have two or more partners who want to be actively involved, a general partnership would be much easier to form.  Personal liability is a major concern if you use a general partnership to structure your business. Like sole traders, general partners are personally liable for the partnership's obligations and debts. Each general partner can act on behalf of the partnership, take out loans and make decisions that will affect and be binding on all the partners (if the partnership agreement permits).



The corporate structure is more complex and expensive than most other business structures. A company is an independent legal entity, separate from its owners, and as such, it requires complying with more regulations and tax requirements.  The biggest benefit for a business owner who decides to incorporate is the liability protection he or she receives. A company's debt is not considered that of its owners, so if you organise your business as a company, you are not necessarily putting your personal assets at risk. A company may also retain some of its profits without the owner paying tax on them.  Another plus is the ability of a company to raise money. A corporation can sell shares, either common or preferred, to raise funds. Companies also continue indefinitely, even if one of the shareholders dies, sells the shares or becomes incapacitated. The corporate structure, however, comes with a number of downsides. A major one is higher costs. Companies are formed and operated in accordance with the Companies Act 2006. You are advised to seek the assistance of a professional  to guide you. In addition, because a company must follow more complex rules and regulations than a partnership or sole proprietorship, it requires more accountancy and tax services.  Another drawback to forming a company: Owners of the company pay a double tax on the business's profits. Not only are companies subject to corporation, but any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal income.  A strategy to help soften the blow of double taxation is to pay some money out as salary to you and any other shareholders who work for the company. A company can deduct the payments of reasonable salary as a business expense for tax purposes.




More in this category: « Why Incorporate a Business?

News in Brief

Warning: Creating default object from empty value in /var/www/vhosts/ on line 37

BBC News - Business