ICAEW AND X-FORCES BUSINESS ADVICE SERIES: WHAT BUSINESS FORMAT SHOULD A START-UP ADOPT?

What business format a start-up adopts will affect the amount of tax the start-up pays. It will also impact other areas such as liability for losses, so it should be decided after consideration of the issues.

There are three basic business formats.

Sole trader

This gives you complete control and fewer administrative burdens. But, you have unlimited liability and you could therefore risk personal loss. Sole traders include an annual Self Employment return with their Income Tax return and pay Income Tax and National Insurance Contributions on the profits.

Partnership

Partners in a business share profits or losses and unlimited legal liability. All partners include an annual Self Employment return with their Income Tax return as well as a Partnership Tax return and pay Income Tax and National Insurance Contributions on their share of the profits.

Limited Company

A limited company is a legal entity separate from its owners. Companies file a Corporation Tax return with HMRC (H M Revenue & Customs) which summarizes its annual trading results and pays Corporation Tax on the taxable profits. Companies must submit annual accounts and other information to Companies House.

Important changes to the taxation of dividends from Limited companies

From April 2016 important changes have been made in the way dividends (from limited companies) are taxed.

The new system gives each taxpayer a new Dividend Tax Allowance of £5,000. Dividends received by taxpayers in excess of the dividend allowance (and any remaining unused personal allowance) will be taxed at 7.5% for Basic Rate taxpayers, 32.5% for 40% taxpayers and 38.1% for45% taxpayers

From 2016/17 a limited company format will be less tax efficient – a business needs to make profits approaching £40,000 to be tax efficient and to cover the costs of being a limited company.

X-Forces Business Case Study:

“For me there were three main reasons. One was for tax reasons, the second was for a separation of identity for legal reasons, including the protection of my company name and the third was about perception – I wanted to show a little bit more professionalism as somehow it makes the whole idea more serious.”

Michelle, Elementary Sciences

Register for X-Forces’ start-up and business planning support today through our website, www.x-forces.comor by telephone. Help for businesses can be obtained from ICAEW’s Business Advice Service. This is a free straightforward discussion with an ICAEW Chartered Accountant. Further information can be found at www.businessadviceservice.com

Article by Clive Lewis, ICAEW in conjunction with X-Forces.