R01 Sole traders, partnerships and companies: free practice questions

1. Question 1 of 5

   Which statement about a sole trader is correct?

   Option A: The owner is personally liable for the debts of the businessOption B: The owner is an employee of the businessOption C: The business pays corporation tax on its profitsOption D: The business is a separate legal person, distinct from its owner

   Show answer

   The answer is A: The owner is personally liable for the debts of the business

   A sole trader controls their own business and the law makes no distinction between the owner and the business, so they are personally liable for its debts and taxed as an individual.

   Why the other options are wrong

   B

   Sole traders are self-employed, with no contract of employment.

   C

   Sole traders pay income tax on profits; corporation tax applies to companies.

   D

   Only companies and LLPs are separate legal persons from their owners.

2. Question 2 of 5

   A sole trader takes on an employee. What National Insurance must the sole trader deal with in respect of that employee?

   Option A: Collect the employee's Class 1 NI and pay secondary Class 1 as employerOption B: None, as employees of a sole trader pay their own Class 4 NI directlyOption C: Pay Class 2 NI on the employee's behalf in place of Class 1Option D: Pay Class 4 NI on the employee's wages through self-assessment

   Show answer

   The answer is A: Collect the employee's Class 1 NI and pay secondary Class 1 as employer

   The employee is taxed under PAYE and pays Class 1 NI. The sole trader must collect it and also pay secondary Class 1 NI as the employer.

   Why the other options are wrong

   B

   Employees pay Class 1, not Class 4, and the employer has obligations too.

   C

   Class 2 relates to the self-employed, not to employees.

   D

   Class 4 is charged on the sole trader's own profits, not on wages paid.

3. Question 3 of 5

   Why might a firm of professionals choose to be a limited liability partnership (LLP) rather than a traditional partnership?

   Option A: An LLP doesn't need to register or file accounts with Companies HouseOption B: The partners become employees of the LLP, which cuts their NI billOption C: The LLP is a separate legal person, so partners aren't liable for its debtsOption D: An LLP pays a lower rate of corporation tax than a company would

   Show answer

   The answer is C: The LLP is a separate legal person, so partners aren't liable for its debts

   An LLP is a separate legal person with limited liability, which suits professional firms facing large claims. For tax it's treated like a partnership: the partners stay self-employed and the LLP pays no corporation tax.

   Why the other options are wrong

   A

   LLPs have registration and accounting requirements similar to companies.

   B

   LLP partners remain self-employed for tax.

   D

   LLPs don't pay corporation tax at all.

4. Question 4 of 5

   What is a key difference between a private limited company and a public limited company (PLC)?

   Option A: A private company can't advertise its shares for sale to the publicOption B: A PLC's shareholders have unlimited liability for the company's debtsOption C: Only a PLC pays corporation tax; a private company's owners pay income taxOption D: A private company must have at least two qualified company secretaries

   Show answer

   The answer is A: A private company can't advertise its shares for sale to the public

   There's no tax difference. A private limited company can't advertise its shares for sale; they change hands only by private agreement. A PLC may be floated on the Stock Exchange.

   Why the other options are wrong

   B

   A PLC has limited liability like any limited company.

   C

   Both pay corporation tax in the same way.

   D

   Requirements for a company secretary relate to PLCs, not two secretaries for private companies.

5. Question 5 of 5

   Two former partners incorporate their business and become directors. How are their salaries treated for tax?

   Option A: As dividends, which are free of National Insurance contributionsOption B: As employment income under PAYE, with Class 1 NI worked out annuallyOption C: As trading profits, taxed under self-assessment with Class 4 NIOption D: As capital gains of the business, taxed at the CGT rates

   Show answer

   The answer is B: As employment income under PAYE, with Class 1 NI worked out annually

   Directors are office holders. Their earnings are employment income under PAYE, and their Class 1 NI is worked out on an annual cumulative basis to stop them timing income to save NI.

   Why the other options are wrong

   A

   A salary is employment income, not a dividend.

   C

   As directors they're no longer self-employed, so salaries aren't trading profits.

   D

   Salaries are income, not capital gains.

R0 Exam Prep is an independent revision tool. It is not produced, endorsed by or affiliated with the Chartered Insurance Institute (CII). Questions and explanations are original. Use it alongside the official study text. About R0 Exam Prep