The structure within which a business operates can have implications for commerciality, in protecting the business and owners from liability and claims, the level of tax liabilities incurred and in considering succession or exit strategies.
The structure will usually be that of a sole trader, partnership, limited company, or limited liability partnership (LLP). Sometimes a combination can be used and ownership of the business can be in various forms, ranging from direct personal ownership to holding shares and assets in family trusts. The structure is often chosen at the outset when the business starts to trade but changing circumstances may mean the initial structure should be reviewed, to ensure the arrangements continue to be appropriate for the business.
When considering the optimum business structure it is important to take into account short and long term objectives. Initially, as the business invests in capital assets on commencement and may not yet have become profitable, a simple sole trader route may be the best option. Tax losses may be generated and relief for these is quite flexible. Alternatively, managing risk and protection from liability may be the priority and a limited company or LLP may be more appropriate.
As the business grows and profitability increases, again a limited company or LLP may become attractive. Limited companies benefit from lower corporate tax rates, which were recently reduced further, and these can be beneficial if profits are to be retained in the business, for reinvestment, growth, or to repay borrowing. The benefits must be weighed against the increased costs which come with running a corporate structure.
An LLP provides an attractive option for businesses based on a brand, or a service-based businesses, particularly those gearing up for a sale or requiring protection from liability. The sale of the assets of a trading LLP will qualify for the lowest capital gains tax rate, 10 per cent, if certain conditions are met. Profits can be shared flexibly between the business owners, without incurring the significant level of National Insurance costs which arise on salaries from a limited company.
Diversification by an existing business into a new speculative venture may merit use of a subsidiary company to ring fence the existing business from risk and facilitate the tax exemptions available to companies for dividends and any future disposals of the new venture.
The future exit from the business or succession plan should also be factored into the decision on the most appropriate structure. It is important to maximise value on any sale by ensuring the business is geared to sell for the best price or be passed on efficiently to the next generation. The business structure will influence the tax payable on the sale or transfer and planning early to minimise the liability is often beneficial.
Rennie Welch are offering a complimentary business structure review, to help owners consider the efficiency and suitability of the arrangements used for their business. We can provide suggestions to increase commerciality and protection from current and future tax liabilities.
For details of the review service, or if you require assistance with any other tax matter, Mark Thompson can be contacted on 01573 224391, email email@example.com.