Thinking of starting a business in the New Year?
Innumerable issues can arise when starting a business for the first time, even when the new business has enticing appeal.
Researching the legal and financial requirements for a new venture in advance can seem daunting. However, reviewing your options carefully at the outset can overcome important hurdles and avoid future set-backs.
Corporate solicitor Edward Daniel shares his insights on how to approach the legal structure of your business from a financial perspective.
• Take time to consider the structure of your business at the outset
Setting up as a sole trader or in partnership is rather different to setting up a limited company. A company structure may at first appear more enticing but take care to review your options carefully.
• Research thoroughly the tax implications for the structure you have in mind
For most start-ups the relevant tax rate of a company is 21% with retained profits benefiting from a “nil-rate band,” provided that no dividends are paid. There is also the issue of limited liability with incorporation.
In a partnership, taking account of national insurance contributions, taxation is at 31% for the basic rate taxpayer and 51% for the higher rate taxpayer.
• Don’t forget certain structures can provide opportunities to offset loss
Certain structures, such as a partnership, might be beneficial as a result. Losses are likely to be borne before a business takes off. With a partnership trading losses can be carried forward against profits of the trade. In addition, “sideways loss relief” up to the sum of £25,000 allow partners to set their share of the partnership’s trading losses against other income or capital gains.
In contrast, a company can only be set off against future profits of the same trade, such that if it is unsuccessful, the losses are simply lost.
• Sole traders and partnerships also have the option to incorporate as a company at a future date
For capital gains tax purposes where a sole trader or partnership is incorporated into a company, incorporation relief is available where all the assets of the businesses are transferred in exchange for shares.
Though, it may not always be advantageous to apply incorporation relief particularly where there is little goodwill already established. Even so, it is useful to use up the £10,100 general exemption limit. Where there is substantial goodwill built up prior to incorporation, the directors effectively have loan accounts which they can utilise in future without tax implications.
• Keep an eye on updates to legislation that can work in your favour
For example, to assist targeted regions outside London, Chancellor George Osborne introduced a payment holiday for new businesses taking on employees in his budget dated 22 June 2010.
The payment holiday encompasses the first £5,000 for employers Class 1 NICs due in the first year of employment.
If you’re unsure as to which legal structure is the best fit for your new business don’t hesitate to seek the counsel of a solicitor or an accountant. Most firms offer an initial free consultation which can be used to address immediate queries and also help guide you with regards to important taxation or legal requirements.
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Edward Daniel is the principal at Edward Daniel Solicitors in the City of London. Edward is also founder of Busibuddies, a new social website for businesses and professionals and the Language Foundation, a language school.