Sole Trader or Partnership??

[imran999]

Hi,

New to these forums and needing some advice on setting up my first company. I have decided to purchase a franchise business and as such need to determine whether i startup as a sole trader or to do a partnership with my wife ( for tax purposes). I am intending to leave my full time job to run the new business. Expectations are for the business to earn between 30-50k pa

My current situation is that I am employed fulltime and earning 35k+
My wife, was working, but since Aug 07 has been on maternity leave and is planning on returning June or July 08 but she might not return, depending on how well my new franchise business does.

What is the most beneficial method of starting up my business?

Current options that i see are

a) Myself as a sole trader (wife as an employee?)
-- I'm guessing my income whilst being employed will be taken into account and give me a lower entitlement before being taxed on a higher rate (if business earnings are 40k+)

b) My wife as the sole trader (me as an employee?).
-- I think this will let me use my wifes full tax entitlement on the lower rate
-- Possible downfalls, if business doesnt do as well as expected and wife needs to return to work.

c) Partnership with me and wife. Allowing both me and wifes tax entitlement to be used. Not sure if any negatives involved? Perhaps higher accountancy bill?

d) Ltd Company?

Any advice would be welcome as very confused as to which option would be most tax beneficial to me and my wife. Feel free to suggest other options to me.

[kimik]

I would suggest your wife going back to work at least one of you have a guaranteed income. Whoever the sole trader is, there will still be income tax on your business income. If you are concerned about your current employment earning effecting your business income tax at the higher rate, I believe you wont have to submit your returns until the next tax year? By this time, you should be able to pay yourself the lower tax rate (upto £36k) and the remainder to your employed wife at a second income rate of 40% which is the same as earning over £36k.
When you earn enough for both of you, your wife can leave her job and split the £36k/£36k at the lower basic income tax rate of 21%.

If your business is earning over £70k. I would personally incorporate it so you are both Directors, spend as much as you can on the business income and pay the remaining profit at 21% Corporate Tax. Obviously if you are going to pay yourself from the company you are due to income tax again.

Not sure about partnerships.

[imran999]

I was initially thinking of getting my wife to run the business, but due to a 6 month old baby, i thought it would be better for myself to give up work and plough 100% of my effort into the new business to give it the best chance of success rather than my wife who would not be able to commit full time.

My wife would return to work part time intially to give us guaranteed income.

So I should set up as a sole trader in my name alone?

[imran999]

What do you mean, when you say, if earning over 70k, spend as much of it as i can on business income?

[kimik]

Sole Trader: If your earning is £50k, minus allowance £5435 = £44,565. 40% income tax will be £17,826 paid to the government. So best to pay your wife with a second income £14k @40% tax = £5,600 tax. The remaining £36k is at the lower rate of 20% = £7200. So your total tax paid will be £12,800 rather than £17,826.

Company Ltd. pay 21% coporate tax on 'profit'. Say turnover £50k, spend £25k, leave you with £25k profit at 21% corporate tax. The corporate tax payable to the government is £5250! - So what i mean, is spend legitimately on the company's expense. Check the expense allowances with your accountant. If you decide to pay the remaining profit to yourself and your wife, why not split the remaining £19750 between the two of you so you can use up 'both' your allowances? I.e. £9875 - £5435 allowance = £4440 at the lower rate income tax of 20% which is only £888. Times that by 2 (you and your wife's income tax) = £1776. So your total tax for the year is only £7026 (Corporate & Income) compared with the £12,800 income tax as a sole trader.

[imran999]

[quote=kimik;43760]Sole Trader: If your earning is £50k, minus allowance £5435 = £44,565. 40% income tax will be £17,826 paid to the government.
QUOTE]

As a Sole trader, would the following taxation not apply?
£50k, minus allowance £5435 = £44,565.
£36k @20% = £7.2k
And I could pay my wife
£8.565k @20% = £1.7
----------
8.9k Tax Bill


I spoke with an accountant last night (from tax assist), he mentioned that if i was forcasting any profit within the next 2 years that it would be better for me to start as a limited company. HE advised to only go sole trader if i was going to make a loss in first 2 yrs.
Not sure on his reasoning but it goes against 2 other accountants opinions and feedback on this forum that i have heard.
Prices seemed quite high too,
£1000+VAT for Yr end Accounts
£1200+VAT for weekly payroll (10 employees)
£2.5k+VAT for book keeping (not sure if this includes vat returns)

[imran999]

Some further info that i had forgot to mention...
Here are my total outlays to start the franchise up.
Initial Franchise license fee £12,500 inc vat (paid)
Shopfitting and signage (dependent on shop size) £44,000 to £57,000
Tills £2,000
Legal Fees (approx) £5,000
Initial working capital requirements £1,500
Approximate total investment
£65,000 to £78,000
All figures are exclusive of VAT.

The shopfitting/signage costs will be paid for via a lease agreement or I could goto the bank to get a business loan. Benefits of the lease option (my prefered option) is that I get a lower APR and I do not have to secure my house against the funds released.