Unit 15 Assignment 2.1

Developing a small business in the creative media industry:

What is the legal status of small business?

It is important to get the legal status sorted from the start as it effects a few things like the design of letterheads and invoices, through to having major implications for the amount of tax a business pays and the timing of tax payments. 

The four basic business formats are:

• sole trader
• partnership
• limited company
• limited liability partnership

What legal protection does a small business?

Unincorporated legal forms:

1. sole trader- this is setting up a business by yourself which gives you control with fewer administrative burdens,  however it has implications for tax and raising finance. Also sole traders have unlimited liability and could therefore risk personal loss if something were to go seriously wrong. Sole traders pay income tax and national insurance contributions (NIC) on the business profits. You will be assessed after you complete the self-employment section of your tax return. 
2.  Partnership- when there is two or more people running the business then they will share profits, losses and unlimited legal liability. This is a is a common format, and is often very successful, formula, but it is essential to define the rights and responsibilities of partners and to set them out in a partnership deed. Which this can require accountancy and legal skills. All partners include an annual self-employment return with their income tax return, also a partnership tax return (showing how profits were divided between the partners) and pay income tax and NIC on their share of the profits. Payment timings are the same as for sole traders.
3. Limited company- A limited company which is legal entity separate from its owners. Ownership could be changed or extra capital raised through the selling of shares, without necessarily affecting the management of the company. However, there are a number of additional legal requirements with limited companies that can substantially add to the time and money spent on administration, so the costs and benefits of this approach need careful consideration.

Incorporated legal forms:

1. Limited Liability Partnership (LLP)- Unlike in a standard partnership, the liability of the partners in a LLP is usually limited to the amount of their partnership commitments. Requirements regarding accounts, audit, returns to Companies House, winding up and insolvency all follow normal company law rules, but taxation follows the rules for partnerships.

What can you tell us about the tax liabilities of a small business?

The main taxes are:

• Corporation Tax- Corporation Tax is a tax on limited companies’ taxable income or profits.
• Value Added Tax (VAT)- Value Added Tax (VAT) is a tax on the final consumption of certain goods and services in the home market but is collected at every stage of production and distribution.
• National Insurance- National Insurance is a deduction from earnings, set up originally to fund various State benefits such as the NHS, the State pension and other welfare-related schemes. In reality, it is just another tax.
• PAYE- Pay As You Earn (PAYE) is a scheme operated by HM Revenue & Customs to take income tax from employees as they earn it.
• Stamp Duty- Businesses may have to pay Stamp duty for transactions on the transfer of land or interests in land; grants or assignments of leases; and transfers of chargeable securities such as shares in companies.
• Capital Gains Tax- From 6th April 2008, the Government has applied a flat 18% CGT rate on business disposals. However the so-called “entrepreneurs relief” scheme allows business owners to pay a reduced rate of 10% on business disposals up to a lifetime allowance of £10 million.
• Capital Allowances- The system of tax relief on investment in business equipment can be complicated. As a rule of thumb, when your business makes a significant investment in capital equipment, you cannot normally set the entire purchase cost against that year’s profits.

Millions of small business owners will see the amount of tax they pay go up following the Spring 2017 Budget. If you are a limited company shareholder, you may have to pay personal tax on any dividend income you receive.

What sources of finance (grants, loans, investment) are available for small business?

Usually small business funding is due to either friends and family or banks, however there are actually a range of business finance solutions available.

Why raising finance is important-

• If your company needs to grow quickly to accommodate demand and make a mark, organic profit revenue may not help.
• If you encounter difficulties which were a surprise (delays with suppliers or late payments from clients) a financial cushion could save your business.

The sources that are available for a start up business is:

• Internal sources- this involves personal sources, Retained profits and Share capital.
• External sources- this involves- A bank loan, bank overdraft, share capital–outside investors and business angels.
• Personal sources- Savings and other "nest-eggs", borrowing from friends and family and credit cards.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31676/11-1399-guide-legal-forms-for-business.pdf

http://www.bytestart.co.uk/section/tax/tax-guides

https://www.tutor2u.net/business/reference/sources-of-finance-for-a-startup-or-small-business