Starting up, but how?

One of the things to think about when starting a business is the structure you want to establish. Will you be on your own or join forces with one or more partners? Will you contribute capital to set up a limited company? What are your goals?

There are many items to consider: size, trading volume, staff, liability, taxes:

• size: how big will you be or get, what exactly will you do, in what business sectors will you operate, and what could be a suitable structure for this?
• liability: are you prepared to put your personal assets at risk, or would you prefer to shift liability to a corporate vehicle?
• taxation: how will the structure you choose play out in terms of taxes?

Two basic structures are available if you do not do it as a sole proprietor (=on your own): partnerships and limited companies (US: corporations).

A partnership usually means full liability (up to the point of personal bankruptcy), whereas a limited company means limited liability in the amount of capital invested or shares held. In many countries, you can also have limited liability partnerships.

When it comes to taxation, partners are usually taxed themselves, whereas limited companies are taxed as an entity. Depending on the form of business you choose, you will have to deal with VAT and CIT (corporate income tax). The latter might be a national tax (UK) or a combination of federal and state taxes (US). In Germany, for instance, there is a flat 15% corporation tax plus a municipal trade tax that depends on where you are based.

UK companies are taxed at 25%. A small profits rate (SPR) of 19% applies to profits not exceeding £50,000. Profits between £50,001 and £250,000 are taxed at a rate of 26.5%. This is called “marginal relief”. If a company makes at least £ 250,000, the complete amount is taxed at 25%. Certain sectors are subject to special regimes that attract higher or lower taxes. These include, among others, oil and gas, life insurance, banking and real estate investment trusts (REIT).

In the US, the federal rate is 21%. Further taxes of up to 11.5% may apply, depending on where the company is based. North Carolina is at the bottom (2.5%), New Jersey at the top end. No taxes are levied by Nevada, South Dakota and Wyoming. The average combined federal and state corporate income tax rate is 25.89%.

In Europe, Hungary and Ireland have the lowest, Portugal and Malta the highest rates. Guernsey and Jersey do not tax corporations at all.

The OECD is working towards a global minimum tax rate of 15%, on which the EU passed a directive. This means that companies with an annual turnover of at least €750m pay the minimum rate no matter where they make their money. This a move towards fair taxation and combatting tax avoidance.

Key vocabulary

liability | sole proprietor | partnership | limited company | entity

corporation tax | (municipal) trade tax | small profits rate | marginal relief

real estate investment trust

OECD: Organisation for Economic Co-operation and Development

VAT | CIT | REIT | SPR

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