Fiscal Considerations Relating to Setting up A Completely New UK Enterprise

One of the decisions and actions which have to be considered when a business is first set up can have significant effects for some time. The foundations set up at the beginning of the business are very important, and may affect the survival of the enterprise. To ignore this basic process could cause the business as well as its proprietors substantial ongoing difficulties, to the extent that their growth is hampered or even the fundamental viability of the endeavor might be compromised. Alternatively, if the fundamental set up is completed using the best advise obtainable, the business can flourish because of this.

This information briefly describes some of the main tax as well as monetary considerations which are involved. It presumes that a thorough overview of the marketplace has already been conducted, estimates are already developed into a strategic business plan and also the required finance has been obtained.

The business person is additionally assumed to have made a decision to trade as an unincorporated enterprise. Generally, the majority of small businesses need only consider incorporation into limited liability companies following trading for quite some time. Initially, a limited company may not be desirable for the following reasons:

* The limited liability is of comparatively little protection for shareholders who are also company directors, if banking institutions, other sources of finance, or trade creditors require individual warranties;
* The expenses of complying with company law demands, such as preparing statutory company accounts, having an audit and preparing yearly returns, are greater with regard to limited companies compared to sole traders or partnerships;
* The tax, national insurance and budget of a single trader is normally a lot more flexible compared to a limited company.

In the uk the rate of company tax for smaller businesses is considerably less than the 40% higher rate of income tax. A business might therefore be attractive wherever it is not essential to take out earnings as remuneration, which would be liable to both income tax and national insurance contributions. Most small businesses pay tax at 21% on annual profits of up to £300,000 (30.5% on profits between £300,000 and £1.5m) however larger companies pay out taxes at 28% (on earnings over £1.5m a year).

The profit steps mentioned above are proportionately reduced where there are associated businesses. Since 6 April 2001, it has been possible to create a limited liability partnership ("LLP") in the UK. An LLP offers limited liability safety in the same way as for limited companies. However, an LLP differs from a limited company in that its profits are taxed on its members in a similar manner as for ordinary partnerships with the principal difference when compared with salaries being a substantial saving in National Insurance Contributions. Therefore, an LLP offers the best of both worlds - protection from liability and lower NIC costs. For many small businesses, an LLP has become the preferred business format option while starting up in business.

It's very necessary for each and every new business start up to make the right choices in respect of all of the previously mentioned factors. To guarantee this, the business owner should always seek professional help before the beginning of trading.

David A Griffiths works in association with Geoffrey Cole & Co. Chartered Accountants in Reading, Berkshire. He has prepared an online series of articles for business start ups.