Why A Few Business Owners Pay A Whole Lot Less Tax Than Others - One Big Reason
As we all know there are two main types of company you can choose to do business in - a sole trader and limited company.
In this section I'll illustrate how choosing the right vehicle at the right time is one of the big reasons why some business owners pay a lot less tax than others.
TAX TIP No.
1 For example, for the majority of businesses the early years are the toughest and its very common to make trading losses in the first two or three years for many.
Now depending on the vehicle you choose to trade in will affect your ability to take these losses and use them to gain tax rebates from the tax man.
You see as sole trader if you make losses its completely legitimate to take those losses and offset them against your income from previous tax years.
But if you run a limited company from day one then this tax strategy is closed to you.
TAX TIP No.
2 Now lets take the situation where a sole trader starts to get their business on track and they start to make decent profits.
In this situation it's not unusual for business owners to continue to trade as sole traders even though they have moved from loss maker to a growing profitable concern.
This can cost thousands in extra tax because they don't transfer from one to the other at the right time.
The reason for this is all of the profits of a sole trader have to be taxed at higher personal rates compared with the lower corporation tax rates.
Not only that but directors can take tax free dividends which can be extremely tax efficient in terms of their personal affairs.
So it is often much more tax as well as risk efficient to transfer from a sole trader entity to a limited company as things become profitable and things start to grow.
The take away from the two examples I've just highlighted is that you need to be strategic about the vehicle you choose to trade in based on the profitability outlook of the business.
And although you have to look at every situation on its own merits what I've shared with you today there is also a general rule here you can apply that will work for most.
In the next section we'll look at how presenting and packaging costs, the second key area of my tax system, is a key factor that determines why some business owners pay a whole lot less tax than others.
NOTE: This is an excerpt from a tax guide for business owners.
Click on the link below to download the guide in full.
In this section I'll illustrate how choosing the right vehicle at the right time is one of the big reasons why some business owners pay a lot less tax than others.
TAX TIP No.
1 For example, for the majority of businesses the early years are the toughest and its very common to make trading losses in the first two or three years for many.
Now depending on the vehicle you choose to trade in will affect your ability to take these losses and use them to gain tax rebates from the tax man.
You see as sole trader if you make losses its completely legitimate to take those losses and offset them against your income from previous tax years.
But if you run a limited company from day one then this tax strategy is closed to you.
TAX TIP No.
2 Now lets take the situation where a sole trader starts to get their business on track and they start to make decent profits.
In this situation it's not unusual for business owners to continue to trade as sole traders even though they have moved from loss maker to a growing profitable concern.
This can cost thousands in extra tax because they don't transfer from one to the other at the right time.
The reason for this is all of the profits of a sole trader have to be taxed at higher personal rates compared with the lower corporation tax rates.
Not only that but directors can take tax free dividends which can be extremely tax efficient in terms of their personal affairs.
So it is often much more tax as well as risk efficient to transfer from a sole trader entity to a limited company as things become profitable and things start to grow.
The take away from the two examples I've just highlighted is that you need to be strategic about the vehicle you choose to trade in based on the profitability outlook of the business.
And although you have to look at every situation on its own merits what I've shared with you today there is also a general rule here you can apply that will work for most.
In the next section we'll look at how presenting and packaging costs, the second key area of my tax system, is a key factor that determines why some business owners pay a whole lot less tax than others.
NOTE: This is an excerpt from a tax guide for business owners.
Click on the link below to download the guide in full.
