Question

Sally-Anne is considering starting a business and is not sure what type of structure to use. She estimates that the annual turnover for the 2020 tax year will be $525,000 and the (taxable) net profit will be $183,000. Both Sally-Anne and her husband have private health insurance.

Calculate (showing workings) the tax she would have to pay if she sets up the business as:

a. A sole trader (no other income)

b. A partnership 50/50 with her husband (neither earn any other income)

c. A company (1 mark)

d. Advise her on which would be the best structure based on total tax payable only. (1 mark)

e. Describe 3 distinctive features of a partnership. (1.5 marks)

f. Describe 3 distinctive features of a company. (1.5 marks)

g. Given the current volatility in the economic climate, Sally-Anne is concerned about what would happen if her business collapsed. Explain her legal liability with each structure listed above and advise which structure would give her the best protection for her personal assets. (2.5 marks)

Answer 1

A) according to budget 2020 new regime rate of tax is 10% in the income range 5,00,000 to 7,50,000.But old regime the rate is 20%.According to new regime calculation is 5,25,000*10/100 =52500

The calculation .According to old regime is 5,25,000*20/100 =1,05000

B) Flat 30 %tax 5,25,000*(30/100)=1,57,500

Health cess 4%(from AY2019-20) 6,300

Total= 1,63,100

C)

The Tax Cuts and Jobs Act of 2017 established a tax rate for corporations of 21 percent of taxable income

5,25,000*(21/100)=1,10,250

D)

based on total tax payable the best structure is sole trader.

E)

• There must be at least two persons to form a partnership. The maximum number is 20 and 10 in the case of banking business.
• The liability of partners is unlimited.
• There must be an agreement to form a partnership, called the partnership deed.The Agreement may be written or oral. In order to avoid future disputes and differences it is desirable to have a written agreement.

F)

• Company is a Independent Legal Entity
• The shareholders liability is limited by shares held by him.
• Company has Perpetual Existence

G) As in Sole trader business, sole traders liability is unlimited. Also in partnership form of business structure, the partners liability is unlimited. But in a company, the shareholders liability is limited by the shares held by him. So the best protection for her personal assets is in a company. If the business collapsed their private property will be lost in other two forms of business.