Different Types of Business.

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Legal Status of a business

Different Types of Business

Sole Traders

A sole trader is the simplest form of business organisation. There are no legal requirements - you simply set up and get on with trading. Any income or profit that you earn is yours and yours alone and you pay income tax on that income. There are few legal constraints and you have what is called unlimited liability. This means that any debts are your debts and so if you stop trading with large debts, you will be personally responsible for these debts. Creditors will have a claim on your house, yacht or any other personal assets you may have.

  • Advantages 
  • Cheap and easy to start
  • All the profit is yours
  • You are your own boss
  • You do all the work
  • Disadvantages 
  • You have NO limited liability
  • All the risk is yours
  • What about sickness and holidays?
  • Do you have all the skills?

Tax implications

There are also important tax implications of operating a sole proprietorship. Net business income from a sole proprietorship must be included as part of the sole proprietor's personal income. However, if the business suffered a loss, the owner can deduct the loss from other income he or she has received for that year. This will lower the overall taxable income of the owner and reduce the amount of personal income tax that must be paid. If the business made a profit, the profits are taxed at the owner's personal income tax rate. In general, it is better from a tax standpoint to be a sole proprietor if you expect the business to lose money in its early years and you have income from another source, such as employment income.

Business taxation can be very complicated, and it is usually a good idea to contact a tax lawyer or a chartered accountant to determine the tax implications of your particular situation.

Normally, sole proprietorships are best for businesses earning a small profit which do not have significant liability concerns.

Partnership

This is, in essence, like a sole trader but with the ownership shared between partners. However, a partnership should have a partnership agreement (a legal document) drawn up to show the rights and responsibilities of all the partners. There may also be 'sleeping partners' who own a share of the business but are not involved in the day-to-day running of the business. A partnership also has unlimited liability. Partnerships are common in the professions such as accountancy and law.

Since April 2001 there has been a new form of partnership called a limited liability partnership (llp). This is like a cross between a partnership and a limited company as it has limited liability (like a limited company), but has to be owned by at least two members - being a partnership!

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  • Advantages
  • Partnership allows two or more people to work together
  • Bring different skills and resources to the business
  • Partnership is fairly easy to establish
  • If the partnership suffers a loss but the partners have other employment income, the loss can be used to reduce their taxable income, thereby lowering the income tax payable by the partner
  • Disadvantages
  • The partnership is not considered to be separate from its owners
  • the partners are personally responsible for liabilities of the partnership
  • If the business fails, the partners will be personally responsible to pay all of the debts and obligations of ...

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