Final answer:
Sarah must consider several tax elements when deciding to set up as a sole trader or a company. A sole trader has complete control and personal liability, with taxes paid on individual income, while a company provides limited liability protection and may face double taxation but offers more opportunities for growth and investment.
Step-by-step explanation:
When Sarah is deciding whether to set up her sports clothing shop as a company or a sole trader, there are several tax considerations she should take into account. As a sole trader, Sarah would have complete control over her business and would be able to keep all the profits after taxes; however, she would also assume unlimited liability for any debts and obligations of the business. This means that Sarah's personal assets could be at risk if her business runs into financial trouble. On the other hand, if Sarah sets up a company, such as a corporation or LLC, the business becomes a separate legal entity, which usually provides limited liability protection. This means her personal assets would typically be protected, separate from the business's liabilities. However, running a company could involve more regulation and potentially double taxation, where the company pays taxes on its profits, and then Sarah would pay taxes again on any profits that she receives as dividends.
Tax-wise, a sole trader simply pays income tax on the profits made by the business, which can be straightforward but might result in higher taxes if the profits are substantial. By contrast, corporations are taxed at the corporate tax rate and can also benefit from various tax deductions and incentives that may not be available to sole traders. Additionally, if Sarah is considering growth or bringing in investors in the future, setting up a company may be more advantageous as it allows for easier capital raising and transfers of ownership.