Starting your own venture can be exciting and thrilling. However, you have to make an informed decision to choose the right business entity, as it will have an impact on your tax and National Insurance. The business entity also will affect how you offset the losses that you may suffer in the initial years of operation.

Trading or investment business?

Typically, majority of businesses managed by owners come under trading business category. However, there are some ventures, though listed as business, may offer capital gains or investment income. For instance, if you operate a property portfolio you will earn income and also experience capital gains.

All types of income other than dividends are taxed at the same rate when it comes to an individual. However, there will have an impact on your National Insurance and capital gains tax rather than income tax, depending on whether you start a trading company or investment company.

Carrying forward losses against future profits

If you set up a trading business, you can deduct the loss from the profit or income of the business the following year and subsequent year until you use up the loss. However, there is a time limit for such claims and you should be aware of it.

On the other hand, as an investment company, you are entitled to claim the loss against your capital gains. However, the amount of loss to set off against capital gains has to be lower than the amount of chargeable gains without taking into consideration the exempt amount that you are entitled to for the year.

You also have the advantage of including your loss in your PAYE code.

If you are intend using your losses and entitlement to capital gains tax deductions, like rollover relief and entrepreneurs’ relief, these deductions will be affected.

Hence, it is prudent to be clear whether you are establishing a trading or investment business. If you have a doubt, it is best to review badges of trade to get a better understanding. An informed decision is possible only if you have a knowledgeable and experienced financial adviser at your side.