Introduction - Tax Treatment

Question 1

How are sole traders taxed?

Answer 1

All profits are taxed as the individual’s income for income tax purposes. One-off transactions are subject to CGT

Question 2

Who is liable for tax in ST structure?

Answer 2

The individual ST

Question 3

How are partnerships taxed?

Answer 3

Partnerships are tax transparent. HMRC ‘looks through’ the entity, and each partner is taxed individually on their share of:
- Income profits (taxed under income tax)
- Capital gains (taxed under CGT)

Question 4

Does a partnership pay tax as a business entity?

Answer 4

No - it does not pay tax in its own name. Each partner is personally taxed on their share

Question 5

How are LLPs treated for tax purposes?

Answer 5

LLPs are taxed like partnerships:
- Tax transparent
- Members taxed as individuals
- Members pay income tax on their share of profits and CGT on gains

Question 6

Why is the LLP tax structure considered hybrid?

Answer 6

Because it combines limited liability and legal personality (like a company) with tax transparency (like a partnership)

Question 7

How are companies taxed?

Answer 7

Pay corporation tax on their taxable total profits, which include both income profits and capital gains

Question 8

What is the key downside of company taxation for owners?

Answer 8

Double taxation - company pays corporation tax on profits and when those profits are distributed as dividends, the shareholder pays income tax on those dividends