How does the choice of business ownership impact taxation?

The choice of business ownership significantly impacts the type and amount of taxes a business must pay.

Different types of business ownership structures are taxed differently. For instance, sole traders and partnerships are subject to income tax, while limited companies pay corporation tax.

Sole traders and partnerships are considered 'unincorporated' businesses. This means the business and the owner are legally the same entity. Therefore, the profits made by the business are considered the personal income of the owner or partners, and they are taxed accordingly through income tax. The tax rate depends on the individual's personal income tax band, which can range from 20% to 45%.

On the other hand, limited companies are 'incorporated' businesses, meaning the business is a separate legal entity from its owners. Limited companies pay corporation tax on their profits, which is a flat rate of 19%. This can be beneficial if the business is making substantial profits, as the corporation tax rate is lower than the higher income tax bands.

However, it's important to note that when a limited company distributes profits to its shareholders in the form of dividends, these dividends are subject to additional taxation on the shareholder's personal tax return. This can somewhat offset the advantage of the lower corporation tax rate.

Moreover, Value Added Tax (VAT) is another consideration. If a business's taxable turnover exceeds the VAT threshold, currently £85,000, it must register for VAT and charge this on its sales. This applies to all types of business structures.

In conclusion, the choice of business ownership structure can have a significant impact on the amount and type of tax a business pays. It's crucial for business owners to understand these implications when deciding on the most suitable structure for their business.