B9.102 Tax treatment of differing business structures
Many people assume that being in business is synonymous with running a company. Clearly this is not the case. There are actually four alternative common forms of business structure:
• sole trader (see Part B2)
• conventional partnership where the individual works with one or more partners in the business (see Part B7)
• limited liability partnership (LLP) which provides the individual and their partners with the protection of limited liability, just as with a company (see B7.513) or
• limited company (see Division D1.3)
There is a fifth option, namely the limited partnership (as distinct from LLP), but this is rarely an attractive or feasible choice for smaller businesses (see B7.106).
In the past, there was a tendency to incorporate solely because the tax system seemed to enable small companies to pay less tax than sole traders and partnerships. On a simple comparison of current tax rates, the difference on UK (ie non-Scottish) tax rates for retained profits between companies and unincorporated businesses may be up to 28% (ie 19% main rate of corporation tax versus 47% higher rate of income tax and Class 4 NICs combined). Note that any comparisons of tax liabilities in the Division will assume the individual is not a Scottish taxpayer.
In practice, however, there are also a host of commercial and practical issues to consider when choosing between the four principal alternative business structures. Most of these issues are mentioned later in this Division.
Ideally, one would select the