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Taxation

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Introduction

It is recommended to set up a partnership with individual parties in order to avoid corporate taxes and include only income tax from these parties. Investment must be made in a mixed form. Loans are more profitable to expand business. They can minimize taxes.  In order to minimize taxes, it is necessary to register a company as a charitable organization or NGO. If it is not possible, then it is necessary to set up a partnership with physical entities parties. Corporate and income taxes for both periods will be calculated as LLC tax rate.

Business Model

Before analyzing business form and taxation systems, it is necessary to describe a potentially possible business model. The Lucky Windfall company has got a start-up capital of £2 million from the lottery. According to the business plan, they intend buying 18 small properties, £110, 000 each, all together £1,980,000. It is known from the case that the gross rental yield of 7% is equal to £138,600 with 20% running expenses, which are equal to £27,720. All together, it is £110, 880 annually. Net profit will be less, because it is necessary to take into account agent’s and insurance costs, depreciation and other expenses, including costs for property purchase and legal assistance.

Looking at Mr LW’s interests about golf courses, it is possible to assume that later he could promote this business and create something new. Mrs LW’s interests show that she is not against gardening; that is the reason why she could develop gardening as a company.

Partnership or LLC

When analysing LLC and partnership as business forms enumerated above in the case, it is possible to say that both forms are feasible. Partnership has meaning in terms of two levels. On the first level, partnership is a registered form of business organisation between physical or legal entities. On the second level, partnership is a form of cooperation only between legal entities. Partnership is a form that gives equal rights for participating sides. Nonetheless, in the case of Mr and Mrs LW, this is not relevant as they are a married couple.  According to numerous businessmen, partnership has not got extra loop of taxes. It can be explained by the fact that the net profit is usually divided by partners and directly sent to them. From another point of view, it depends on business form of both sides. If parties are sole proprietors, they will pay even more taxes than in LLC. Partnerships also can be of different types. These partnerships can have different taxation rates. Certainly, Mr and Mrs LW can divide their assets into 2 parts and later start different business branches. According to the tax rate, it can be said that in partnership, it is possible to avoid a corporate tax. It is probable to send money to the parties. If partnership is legally formed up by physical entities, they can pay only income tax. In our case, it will be from 10-40%, about 19%.

Another business form for such business is LLC. Mr LW is going to be a shareholder and top manager, because he is an expert in property. Mrs LW is going to be a director and employee, and her salary, which can be half of the net profit, will be taxed as a line worker at 12,8%. Surely, after all deduction of expenses, the net profit will be taxed at 20%, because annual profit in our case is around £68 000 in 2015. This is less than £300 000. After the corporate tax, in order to get profit, it is necessary to pay dividends. Dividends are also taxed. From this point of view, partnership is much better than LLC.

Equity or Loan

Next question is which form of investments to take, namely a pure investment of money from the lottery or mixed form of equity with a bank loan. All sources of financing current assets are divided into own and borrowed. Own funds play a major role in the circulation of funds, because enterprises are operating on the basis of commercial calculation. They must have a certain operational independence in order to conduct business profitably and take responsibility for decisions. Equity is a part of finances, which organisation can use in case of emergency. Loan is a part of the working capital of enterprises created by the short-term bank loan and borrowed funds. Moreover, if companies use loans, they put interest rates payments into expenses; that is why, in this case, they pay less taxes, because their net profit is less. However, they increase their equity with the help of property that they buy for the bank money. Consequently, as a recommendation, it is possible to say that a mixed investment is better for the company. The rest part of the equity can be saved as a deposit for emergent situations. 

Tax Minimization

In terms of the tax minimization process, it is essential to describe different types of working. Firstly, LLC with two shareholders will be taxed as a corporate law at 20% after getting net profit, and later paying dividends to both shareholders. Secondly, the described below variant is about LLC with one shareholder. Taking into consideration the profit and loss forecast in the article of overheads, it is possible to show £30,000 as Mrs LW’s salary. This salary will be taxed only at 12,8%.

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