How to Avoid Double Taxation for a Limited Company Based In the UK

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How to Avoid Double Taxation for a Limited Company Based In the UK

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Many small businesses are registered annually either as a sole proprietorship, partnership, limited liability company or corporations. Thanks to a friendly business environment in the UK, setting up a limited company has become quick, cheap, and easy. In fact, if you have all the information required, it’s practically possible to register your new business in a day.

A Limited Liability Company (LLC) is an ideal business structure if you are planning to venture into entrepreneurship. Unlike sole proprietorship and partnerships, an LLC protects your personal assets against legal claims related to business debts. An LLC also comes with a huge tax advantage.  

Initially, a limited company was subject to double taxation if it’s based in the UK but has income from other countries. This is never the case anymore. The UK government has negotiated for double taxation treaties with over 100 countries. You can now claim for exemption tax relief on a number of income sources. However, the exemption is not automatic. You have to send an application to HMRC.

Business abbreviation. Word cloud illustration.

How does an LLC pay tax?

Are you operating a single or multi-member limited liability company? Whichever the case, it’s important to understand how your business is taxed. LLCs, unlike corporations, are never taxed as separate entities from the owners. Instead, the company’s profits and losses pass through to each of the owners. In other words, LLC owners report the business’ profits and losses on their personal tax returns. HMRC treats limited liability companies just like a sole proprietorship or partnership depending on the number of owners.

Single member LLCs are automatically treated as sole traders when it comes to taxation. Ideally, this implies that the company itself does not pay tax. HMRC requires that you report your company’s returns on your personal income tax return. You can, however, elect to be treated as a corporation.

Owners of a multi-member limited liability company are taxed based on their share of profits and losses from the business. In fact, HMRC automatically taxes a multi-owner LLC like a partnership. Once you receive your share of the returns based on your operating agreement, all you have to do is report it via personal income tax return. Bottom line, the business still doesn’t pay the tax directly. In countries like the US, it is advisable to file form 1065 which indicate what each of the members is getting from the business. This helps Internal Revenue Service (IRS) to determine whether each of the partners is reporting the correct income.  

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

tips for LLC

General Tips on How to Avoid Double Taxation for an LLC

Double taxation can be a huge cost to the business. Below are some of the legitimate methods you can use to avoid it:

  • Choose a unique company name which cannot be confused with that of any other business. Remember to use the LLC designation at the end.
  • Hire an expert to help you design a comprehensive operating agreement. The document should cover in detail how the company is structured and managed. If the firm is multi-owned, consider outlining how income will be shared.
  • Register the business with the local government
  • Open a bank account for the business, separate from your personal account. This will help you to maintain a clear line between business and personal finances. It also enables you to stay organized and avoid possible tax errors.

Are you finding it difficult to keep track of your business finances? Weaccountax accounting professionals are here to help you. Our seasoned financial experts are familiar with the UK business registration and taxation policies. Call us today for a cheap accountant for small business and get all your business issues sorted. 

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