Unit 30-LO3 Determine taxation liabilities for incorporated organizations BTEC-HND LEVEL 4 & 5

Course: Pearson BTEC Levels 4 and 5 Higher Nationals in Business

Taxation on an incorporated company is always the responsibility of the corporation and not of its shareholders.

The tax obligations for a corporation are quite complex, though they ultimately become clear after consultation with a tax professional. The first step would be to determine which type of incorporation you pursue.

Incorporation:

Characteristics of incorporated organizations as separate entities. The advantages and disadvantages of incorporation.

An incorporated organization is a type of legal entity that can be created by filing articles of incorporation with the applicable state or territorial government. The corporation is recognized as an independent person in law and it has its own existence apart from its shareholders.

The advantages of a corporation are that shareholders enjoy limited liability, tax benefits, and a simpler process when issuing stock options to employees.

The disadvantages are that the smaller number of shareholders can lead to oligarchy or co-management by a few directors, small shareholder participation in decision-making issues, and sometimes higher costs for financial services.

Private v public limited companies:

How are they different?

Public limited companies are able to issue shares of ownership to the public, but private limited companies cannot. If you wish to raise more capital than just the amount that your initial investors have invested, then you either need to create a new type of company or grow enough as a business so as not to need any more funding. This is in contrast with SEPTAQ’s IPO which allows them access to use shareholders’ investment should they require it.

There are many benefits associated with raising funds through private markets, for instance, the cost is often cheaper and a larger proportion goes into working capital instead of interest payments and potential costs of issuing shareholding stock among other things.

Why set up as one but not the other?

It’s usually the preference of where you want to trade.

Private companies such as Apple aren’t listed on a stock market, so they don’t have shareholders. This means that any money accrued by the company can be used for anything it needs without taking into account shareholder interest.

Privately held companies are typically family businesses or small startups where the head of the organization is an entrepreneur who owns over 50% of the organization.

Public limited companies, also known as open corporations or public co., give their shares out to investors so that people may purchase them and be entitled to rights in relation to voting powers and dividend payouts based on how much they’ve invested in said corporation. For this reason, public limited companies tend to require more capital to start up. Public corporations offer the advantage of being able to sell their shares on a stock exchange.

Private non-profit organizations use some methods that are more typical of companies, such as leveraging their employees in financial decisions and allocating resources for the maximum benefit of those same individuals.

What are the taxation advantages for each?

Taxation advantages for Private and Public limited companies:

Public company shareholders must bear the liability of losses in excess of the company’s assets. This is done on a pro-rata basis (meaning that each shareholder owes proportionately to their percentage shareholding) which gives incentive to shareholdings in private companies with no outside financing.

Private Companies Limited By Shares are taxed on any income they derive from trade only self-employed income is exempt unless it has been diverted through the company’s trading activity or not declare revenue when there isn’t a corresponding proven expenditure incurred by the Company. The share capital will be liable for trade losses where such deficits exceed its fixed assets.

Calculating taxation liabilities:

Using recognized models and formulae, taking into account changes in allowances from one tax year to another and changes in legislation.

A change in legislation is usually more of a “demand shock” and not something you can easily predict. There are many possible expected changes that we could make to the formulae though – some have been noted by others in other comments: what taxes do we want? What should be our inflation rate, and what is tax-free? How do those related stocks affect the stability of my retirement? How much government deficit spendings can I handle in later years from such high private savings rates (remember – the money has to come from somewhere)?

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