Choosing the right Business Structure can have a significant impact on how much tax you pay and it is possible to change from one structure to another.
Here are some useful links comparing structures:
Sole Trader v’s Limited Company
So why are some Companies changing back to Partnerships/Limited Liability Partnerships?
LLP’s can provide an alternative method of remuneration for key employees, rather than the traditional routes of dividends or salary. Such employees could terminate their employment contract, form an LLP and provide consultancy services to the business. The individual would then save an element of national insurance, as rates are lower for the self employed than for the employed. In addition, the business will benefit from a tax deduction on the charges made by the LLP, and save employer’s national insurance at a rate of 13.8%, potentially a significant saving. IR35 regulations would need to be considered in this plan.
Alternatively, an LLP could be used to remunerate all employees. They could all resign and become members of a “service“ LLP. This would have the advantages of national insurance savings as above. There are non tax areas to consider, for example the individuals will lose their employment rights on becoming self employed (this could be a huge advantage to the employer). Clearly this risk would have to be appropriately managed and considered throughout.
How much NI could be saved?
Employers pay 13.8%
Employees pay 12% on earnings above £146/week (2012/13) and 2% on earnings above £817/week (2012/13)
So for most employees that means on most of their earnings the employer and employee NI is 25.8%
The Self Employed (Sole Traders and Partnerships) pay Class 2 and Class 4 NI
Class 2 is £2.65/week (2012/13)
Class 4 is 9% on profits above £7,605 and up to £42,475, after that its 2% (2012/13)
So we are comparing 25.8% for employees with 9% for partners, a potential saving of 16.8%
Another area of tax saving is on the sale of the business using the Entrepreneurs Tax Relief
Capital Gains Tax could be as high as 28% or as low as 10% with the Entrepreneurs Tax Relief.
The qualifying conditions are less stringent on partnerships, in a company the shareholder must:
- own at least 5 per cent of the ordinary share capital and have at least 5 per cent of the voting rights
- you must have been an officer or employee of the company
These rules don’t apply to partnerships.
For short term projects such as a property development an LLP could save tax but for many businesses a limited company could be a better option.
You could of course have a mixture with companies and LLP’s holding shares or being partners.