Taxation Law for Small Businesses

Taxation Law for Small Businesses

Taxation law is a complex and in-depth area of concern for the small business owner.  With potential pecuniary and criminal consequences, it is of paramount importance to ensure as a business owner, you are familiar with the tax consequences in your jurisdictions, and the ways in which you can minimise your liability.  Whilst one of the most legally important things to understand as a small business owner, taxation law also provides an excellent opportunity for saving money and increasing profitability within a small business environment.  In this article, we will look at some of the main and most common tax implications of running a small business, and some of the most effective ways of ensuring you pay less tax through your small business operation.

Tax regimes vary from jurisdiction to jurisdiction, and the implications of running a small business also vary, both in terms of the legal and financial requirements.  Having said that, there are a number of common elements that transcend jurisdiction and appear in numerous guises across various systems that can be of use to the small business owner.  One of the first things to consider as a small business owner is to establish a limited liability company.  The primary reason for this is that limited liability companies usually provide a more relaxed tax regime as compared to income tax liability.  A sole proprietor operating out-with the parameters of a corporate entity is liable to account for profits as income, which can lead to a greater tax liability and potential individual state contributions.  As a corporate entity, the owner can pay himself via share dividends, which carry a lower tax liability and thus minimising his overall liability to tax.  This is significantly better than paying oneself a wage, which bears the tax liability from both ends, i.e. the company is liable to taxation as is the employee.

Another essential for the small business owner is what is known as capital allowance.  By means of capital allowance, business owners can offset the acquisition cost of assets on a graduated scale in accordance with the specific principles of the regime in question.  This is in effect a deductible expense, which ultimately minimises yearly tax liability.  There is a particular benefit in that many regimes allow an accelerated relief for business assets.  This can be exploited to an extent by acquiring assets through the business, for example a car, which can also be used for personal purposes.  Rather than buying a car from personal income, buying it through the company allows you to offset the amount of the expense quickly against your business profits, which ultimately reduce your liability to tax.

Before embarking on any tax reducing strategies, it is important to ensure you are acquainted with the specific laws of your jurisdiction to avoid running into trouble with the authorities.  In some of Europe, for example, there is a requirement to declare any specific tax minimising strategies to the government to allow for rectification of loopholes.  It is important to ensure you are acquainted with the specific laws to avoid potential criminal liability as a consequence of ignorance.  By familiarising yourself with the laws in your jurisdiction, you can avoid the potential pitfalls and create a tax planning strategy that provides the most cost effective solution for you and your small business.

Taxation Law for the Sole Trader

They say the only things in life that are certain are death and taxes.  For the sole trader, this is definitely the case, and at times it can seem like an overbearing pressure.  Thankfully, for the sole trader there are many ways in which you can minimise liability to income tax and leave more in your bank account at the end of the month.  In this article, we will look at some of the key features of tax management from the perspective of the sole trader, and some of the ways in which the sole trader can minimise the legal consequences of his operation.

As a sole trader, you are usually accountable for your profits in terms of income tax.  This can be particularly problematic, given that the structure of income tax in most jurisdictions is a fairly heavy burden on the citizen, particularly those with higher incomes.  The first thing that should be considered is incorporation.  As a corporate entity, you will be required to handle more paperwork, but ultimately it will save you money.  Corporation tax on profits is lower than income tax in the majority of situations, and dividend income carries less taxable weight than other income, for example wages and salaries.  The first thing to do, as a sole trader within the top income tax bracket, is to incorporate, which could potentially save thousands every year.

The sole trader must be aware of the fact that there are certain items that cannot be discounted from income.  In fact, certain everyday items must be declared and must give rise to tax.  For example, say a self-employed solicitor is given a bottle of fine wine by a particular client every year as thanks for his service.  This wine, although not initially apparent, will usually require declaration for tax, on the basis that it is an ongoing gift or benefit arising from employment.  It is therefore important to watch what is included and what is ignored from your tax return.  If you are at all unsure, it is better to include an item and pay tax, rather than running the risk of neglecting to mention its existence.  Alternatively, it may be a good idea to consult a specialist on the particular laws of your jurisdiction, and to determine whether or not it would be possible to avoid liability.  

Another important thing to remember is that there may be certain personal capital gains liability for disposal of a primarily business asset.  As a sole trader, this means you will be liable to account for the disposal of the asset and any capital gains at market value, which can be a costly business.  Again, it is probably advisable to consult a tax lawyer or tax adviser to minimise liability on disposal and to manage your tax liability more effectively.

Tax law is a particularly intricate area of the law, and one that is in perpetual change.  This means the small business owner is required to keep one eye on tax developments to avoid being caught out, which means there is less room for focus on the core areas of business and making money.  Alternatively, the advice of a tax specialist can be invaluable in minimising overall liability and ultimately saving money from your tax bill every year.