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Sep 02

Business types

  • It can be very confusing to understand all the varying types of business structures and their meanings. In this article we will look at the definitions of Sole Trader, Partnership and Company for greater understanding.
  • Sole Trader:

    • A sole trader is a person trading on their own. The business is controlled, managed and owned by that person.
    • There are usually no formal or legal processes to become a sole trader. The owner or manager is personally entitled to all profits, but is also personally responsible for all business taxes and debts.
    • Individuals fitting the description of a sole trader will need to file an IR3 Income Tax return at the end of the tax year.

    Partnership:

    • A partnership is where two or more people join together to run a business. Each partner contributes something to the business and, in return, each shares any profit or loss. Each partner is also responsible for any debt within the partnership.
    • A formal partnership agreement can be prepared. Partners share responsibility for running the business, and share the profits and losses equally unless the agreement says otherwise. The partnership does not pay income tax. It distributes the partnership income to the partners who pay tax on their own share.
    • Partnerships will need to file an IR7 Income Tax return and the partners will need to file IR3’s at the end of the tax year.

    Company:

    • A company is a formal and legal entity in its own right, separate from its shareholders (or owners). It’s formed when a group of people exchange money and/or property for shares in an enterprise registered under the Companies Act.
    • There is a legal registration process you will have to pay for. More money can be raised with more owners. The company owns the assets and liabilities of the business and is responsible for any debts. The shareholders’ liability for losses is limited to their share of ownership in the company.
    • Companies (except look-through companies) will need to file an IR4 Income Tax return at the end of the tax year. Look-through companies will need to file an IR7.

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