Establishing your business entity is important for your tax
When someone decides to start their own business, there are many things that need to be arranged. In the initial days, you will be running around to find the right resources and work, you also have to think about purchasing the right equipment, employing staff and finding the right premises for your business.
With so many things to handle, it is not surprising most entrepreneurs forget about taxes and National Insurance. Of course, taxes are not due until the business completes its first year, but that is not a reason to ignore this vital component of running a venture. However, before you plan your tax and National Insurance, be clear about the type of entity you choose for the business. This decision will have a profound effect on the tax and National Insurance.
Business entity matters
If you decide to become self-employed or start a partnership, remember the consequences will be very different from being an employee in a limited company.
If your business comes with high financial risk, you will also have a high tax and National Insurance liability. However, your choice of business entity should not depend solely on this factor. You, along with your financial and tax advisers, should carefully weigh the pros and cons of each type of business entity before zeroing in on one. Of course, the pros should outweigh the cons.
One of the many deciding factors in the quest for the right entity will be tax. If you know your business will suffer financial losses in the initial stages, it is best to opt for a partnership or become a sole trader. That way, losses can be offset against other personal income that you earn. This can be income for the same year if you are running a business while being employed.
In case of self-employment, losses of the initial four years of the business can be offset against the income from the previous three years. On the other hand, if you start a corporate, losses can be offset just against the future profits that the corporate makes.
So, if you intend starting your business venture, make sure you sit with an expert and make an informed choice of the type of entity. The entity should offer maximal benefit.