Ways of Avoiding Double Taxation for a Limited Company Based In the UK

Most of the registration for small businesses are done annually either as a partnership, sole proprietorship, limited liability company or corporations. All because of friendly business environment in the U.K, establishing a limited company has become cheap, quick and easy. However, if you have all the much needed information, it’s practically possible to get your new business registered in a day.

Avoid Double Taxation
Avoid Double Taxation

A Limited Liability Company (LLC) is a perfect business structure in case if you plan to venture into entrepreneurship. Unlike partnerships and sole proprietorship, an LLC safeguards your personal assets against legal claims associated to business debts. An LLC also comes with a huge tax benefit.

Originally, a limited company was based on double taxation if it’s based out in the U.K but possess income from other countries. This is not at all the case anymore. The negotiation for double taxation treaties has been done by the UK government with over 100 countries. Exemption tax relief can now be claimed by you on a number of income sources. However, the exemption is not direct. An application needs to be sent from your end directly to HMRC.

How does an LLC pay tax?

Are you working as a single or multi-member limited liability company? Whatever the case, it’s significant to know the procedure your business is taxed. Unlike corporations, LLCs are never taxed as distinct entities from the owners. Instead, the company’s profits and losses pass through to every owners. In other words, LLC owners disclose the business’s profits and losses on their personal tax returns. HMRC consider limited liability companies just like a partnership or a sole proprietorship subject to the number of owners.

Corporation tax rates
Corporation tax rates

Single member LLCs are directly considered as sole traders when it comes to the matter of taxation. Preferably, this means the company itself does not pay tax. HMRC involves that company’s returns must be reported by you on your personal income tax returns. You can, however, choose to be treated as a corporation.

Owners of a multi-member limited liability company are taxed subject to their share of profits and losses from the business. In fact, HMRC directly taxes a multi-owner LLC just like a partnership. After getting your share of returns subject to your operating agreement, you need to report it via personal income tax return. The crux here is, the business still doesn’t directly pay the tax.

In order to reap additional tax advantages, you can elect to have your limited liability company taxed as S corporation.

General Tips on Ways to Avoid Double Taxation for an LLC

Double taxation prove to be a huge cost for the business. The following are some of the authorized methods you can use to avoid it:

  • Select a distinctive company name which cannot be confused with that of any other business. Always remember to employ the LLC designation at the end.
  • Hire an expert who can assist you in designing a comprehensive operating agreement. The document should enclose in detail how the company is managed and structured. If the firm is multi-owned, prefer outlining on the methods of sharing of income.
  • Register your business with the local government
  • Open a business bank account, distinct from your personal account. This will assist you in maintaining a clear line between personal finances and business. It also allows you to remain organized and avoid possible tax errors.

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