Pt 3. Laws and legal concepts relevant to financial advice - Legal persons

Question 1

What is a sole trader?

Answer 1

• Self employed pay income tax twice yearly directly to HMRC.
• NI contributions paid under both Classes 2 and 4.
• Employees pay income tax under PAYE, and Class 1 NICs, additional to employers paying tax.
• Sole trader is also liable to pay secondary Class 1 NICs as employer.

Question 2

What is a partnership?

Answer 2

• Same as sole trader, but now will pay income tax on their share of partnership’s profits - usually 50%.
• Partners are solely liable for their own tax.
• Partners are solely liable for their employees tax.

Question 3

What is a limited liability partnership (LLPs)?

Answer 3

• Company and partners are not individually liable for LLP debts, attractive to firms that may be at risk of large liability claims.
• Treated like a partnership in paying income tax and NICs on their share of profits.
• Do not pay corporation tax.

Question 4

What is limited companies (Ltd)?

Answer 4

• A legally separate entity from owners of the business, with HMRC looking to limited company itself for company profit tax.
• Unable to advertise its shares for sale, only changing hands as a result of a private agreement.
• Company owners does not pay income tax, NICs or CGT, but do pay corporation tax on profits (includes capital gains).
• Companies must still pay secondary Class 1 NIC on employees who are liable for Class 1 NIC.

Question 5

What are the requirements for public companies (PLCs)?

Answer 5

1. Must have at least 2 directors, 2 shareholders and company secretary.
2. Must state they are public with PLC ending to their name.
3. Need an extra certificate from Registrar of Companies after incorporation before they start trading - at least £50,000 alloted nominal value shares, company must have received at least £12,500 plus whole of any premium.
4. Company secretary needs to be member of a professional body, or directors recognise as fully qualified in profession.
5. Must always lay accounts and reports before GM of shareholders, hold annual GM, file accounts within 6 months of end of accounting period, not allowed to waive requirement of audited accounts or provide abbreviated accounts.
6. Required to disclose shareholdings in company, and release information that may affect share price.

Question 6

What is an ownership legal person?

Answer 6

1. Sole trader - soley controls own business, regardless if employ others, no contract of employment, but carries contract for services to clients, no difference between business owners and business itself.
2. Partnership - owners are still self employed.
3. LLP - separate legal persons, subject to similar registration and accounting requirements like companies.
4. Ltd/PLC - legal separate entity from owners (shareholders), who become employees of business.

Question 7

What is a liability legal persons?

Answer 7

1. Sole trader - personally liable for liabilities of own business.
2. Partnership - each partner unlimited, joint and several, liability for trade debts of partnership (not restricted to share of profits.
3. LLP - limited liability means partners are not individually liable for partnerships debts.
4. Ltd/PLC - company is responsible for its own debts to limit its own assets.

Question 8

What is a tax legal person?

Answer 8

1. Sole trader - tax levied on owners, business profits liable to income tax and CGT through owner, self-employed pay income x2 a year to HMRC, NI paid under Class 2 and 4.
2. Partnership - owners pay income tax on share of profits to HMRC, liable to same amount when paying NI Classes 2 and 4, partner cannot be held liable for any other partners tax.
3. LLP - treated like partnerships, do not pay corporation tax.
4. Ltd/PLC - shareholders do not pay tax on profits, the limited company does, with no difference in tax between Ltd and PLC.

• Do not pay income tax or CGT,
• Do pay corporation tax on all forms of profit, including capital gains.