Custom Essays - Accounting Essay
Explain the main differences between a Sole Trader, a Limited Company and a Public Limited Company, in terms of accounting and reporting requirements.
UK GAAP, the Generally Accepted Accounting Principles in the UK is the regulatory body, establishing how company accounts must be prepared and published in the UK. This includes not only accounting standards, but also UK company law.
The sole trader
A sole trader is a very simple form of business. It is, as the name suggests, a one-person business. It is an individual running a business. Where in all revenues and payments from the business are included within the individual's personal financial and tax affairs.
Accounting
The financial statements of a sole trader consist of:
- An income statement which normally consists of profit and loss of account and incorporates the trading account for businesses that buys and sells goods.
- A balance sheet which shows assets and liabilities of the business including the owner’s capital.
Published Information
A sole trader can request an audit, but it is not required. There are no legal filing requirements or fees needed to set it up. One just literally goes into business on his own.
Tax and National Insurance
Sole traders must inform Inland Revenue that they are self-employed. They will also need to fill in a Self Assessment Tax Return. The latest submission date for tax returns is 31st of January. There are financial penalties for late submission.
If sole traders take on staff, they will have an extra responsibility of deducting Income Tax and Class 1 National Insurance Contributions from the staff’s pay, and paying it along with their Employer's Contribution to the Inland Revenue, under the Pay As You Earn scheme. Class 2 National Insurance Contributions are payable at a fixed weekly rate unless the sole traders have an exemption certificate. If their profit is below £4,215 per year they can apply for exemption from paying class 2 NIC contributions. Class 2 National Insurance Contributions Rates 2004 - 2005 are a flat rate of: £2.05 per week
Class 4 National Insurance Contributions are payable on profits between the Lower Profit Limit (£4,745) and the Upper Profit Limit (£31,720). Class 4 National Insurance Contributions Rates 2004-2005 are based on 8% of profits between the limits and 1% above £31,720 per year.
The company
A company is a legal entity, allowed by legislation, which allows a group of people, as shareholders, to form an organization, which focuses on achieving set goals, and is authorized with legal rights which are usually only set aside for individuals, such as to sue and be sued, own property, hire employees or loan and borrow money. A company is also known as a "corporation." The main advantage of a company structure is that it provides the shareholders with a right to participate in the profits (by dividends) without any personal liability (the company takes up the entire liability of the business).
Categories of company
Company law is mostly worried with the company limited by shares (where the liability of the shareholders for the company’s debt is limited to their unpaid shares value). Companies limited by shares are subdivided into public and private companies limited. There are also companies limited by guarantee. Due to which the people behind the undertaking guarantee to pay a certain amount towards the company’s debt should it fail to pay. These companies were designed for charitable or public interest undertakings where no profit is visualized.
Differences between public and private companies limited by shares
- In private companies investment comes either from the founder members in the form of personal savings or from a bank loan. Private companies are prohibited from raising capital from the general public.
- Public companies, on the other hand, are formed specifically to raise large amounts of money from the general public.
- Private companies can restrict their membership based on the Directors approval and those who wish to leave the company first offer their shares to the other members. Public companies could also do the same but since it is formed specifically to raise large amounts of money from the general public, a restriction on the sale of shares would not encourage the general public to invest.
- Public companies have a minimum capital requirement of £50,000. This capital requirement does not have to be fully paid – only one quarter of the £50,000 needs to be paid and an ability to arrange the remaining amount from the members. Private companies have no minimum capital requirements.
Accounting
The financial statements of a company required by the Companies Act 1985 consist of.
- The balance sheet: a statement showing the assets, liabilities, and capital of a business
- The profit and loss (P&L) account: an analysis of revenue and expenses of a business for the year just ended
- The cash flow statement: a statement showing how cash is generated and how it has been spent by the business.
- A signed auditor’s report
- A director’s report signed by a director or the secretary of the company
- Notes to the accounts
The accounts of a company should start on the date of incorporation and continue on a scheduled basis, called the financial year. This may be anywhere from 6 to 18 months long, however a preferred range is 12 months.
Published Information
All limited and public limited companies must send their accounts to the Registrar. All companies are required to file a set of annual returns with the Companies House at least every 12 months with a notification of any change in directors and secretaries of the company or any relevant detail regarding them, also notifying any changes in the registered address of the company. The directors of a company are legally obliged to report on the company’s performance for each financial year of the business. Companies with turnover of more than £1 million and have gross assets of more than £1.4 million need to have their accounts audited by a Chartered or Certified Accountant. Companies below these levels only need to file limited information called "Modified Accounts".
Tax and National Insurance
As a Limited Company, you will have to pay Corporation Tax on all profits. They will have to pay the Employer's Contribution part of the Class 1 National Insurance Contributions for all employees which include company directors.
Back to: Custom Essays...
References
www.londonexternal.ac.uk
www.anewbusiness.co.uk
www.inlandrevenue.gov.uk
Principals of Corporate Finance 6th Edition - Brealey and Myers- The McGraw-Hill Companies
