Tax Treatment of Different Business Models Flashcards
How are sole traders taxed on their business profits?
A) Corporation tax
B) Income tax
C) Capital gains tax
D) VAT
B) Income tax
(Sole traders pay income tax on all profits as part of their personal tax return.)
Which business structure is considered “tax transparent” for HMRC purposes?
A) Sole traders only
B) Limited companies
C) Partnerships and LLPs
D) Private and public companies
C) Partnerships and LLPs
(Partnerships and LLPs are tax transparent, meaning profits are taxed at the individual level, not at the entity level.)
What tax applies to a company’s profits?
A) Income tax
B) Capital gains tax
C) Corporation tax
D) Value-added tax (VAT)
C) Corporation tax
(Companies pay corporation tax on profits, including income and capital gains.)
What is the main tax disadvantage of a company compared to a sole trader?
A) Companies pay capital gains tax
B) Companies pay both income tax and corporation tax
C) Companies suffer double taxation if they distribute profits as dividends
D) Companies pay VAT on all earnings
C) Companies suffer double taxation if they distribute profits as dividends
(First, the company pays corporation tax on profits. Then, shareholders pay income tax on dividends received.)
John and Lisa run a bakery as a partnership. How will they be taxed?
A) The partnership pays corporation tax, and they receive net profits
B) John and Lisa are taxed individually on their share of profits
C) The bakery pays income tax as a single entity
D) They only pay capital gains tax on profits
B) John and Lisa are taxed individually on their share of profits
(Partnerships are tax transparent – the partners pay income tax on their share of profits.)
A tech startup operates as a private limited company (Ltd). It earns £100,000 profit this year but doesn’t distribute dividends. What tax does it pay?
A) Income tax
B) Capital gains tax
C) Corporation tax
D) No tax, as dividends were not issued
C) Corporation tax
(Companies pay corporation tax on profits, whether or not they distribute dividends.)
Sophia owns an LLP with three other partners. The business made a £200,000 profit. How will the tax be applied?
A) The LLP pays corporation tax
B) The LLP pays tax, but partners do not
C) Each partner pays income tax on their share of profits
D) The LLP pays capital gains tax on the full amount
C) Each partner pays income tax on their share of profits
(LLPs are tax-transparent, so partners pay income tax individually on their share.)
A company makes £500,000 in profit and distributes £100,000 as dividends. What taxes apply?
A) The company pays corporation tax only
B) The company pays corporation tax, and shareholders pay income tax on dividends
C) Shareholders pay capital gains tax on dividends
D) The company and shareholders both pay income tax
B) The company pays corporation tax, and shareholders pay income tax on dividends
(Corporation tax applies to company profits, and shareholders then pay income tax on dividends received.)
A law firm is deciding between a partnership and an LLP. What is a key tax difference?
A) Partnerships are taxed at a lower rate than LLPs
B) LLPs pay corporation tax, while partnerships pay income tax
C) Both are tax transparent, so partners in either structure pay income tax on their share
D) Partnerships must file tax returns, while LLPs do not
C) Both are tax transparent, so partners in either structure pay income tax on their share
(Neither a partnership nor an LLP pays corporate tax – instead, partners pay income tax individually.)
Alex is a sole trader who sells part of his business, making a large one-off profit. What tax applies?
A) Corporation tax
B) Capital gains tax
C) VAT
D) Inheritance tax
B) Capital gains tax
(A one-off sale of business assets by a sole trader is taxed under capital gains tax (CGT).)
