Founder tax planning — what to read before you talk to your accountant

For most founders running a UK Ltd company, the optimised distribution is a small salary just above the National Insurance threshold (so the year counts toward your state pension) plus dividends to the personal-allowance edge of the basic-rate band. The exact split moves with each year's thresholds — your accountant will price the maths each April — but the structure is durable.

In the US, the choice depends on entity election. S-Corp founders typically take a "reasonable salary" (the IRS scrutinises this — too low triggers reclassification) plus distributions, which avoid self-employment tax on the distribution portion. C-Corp founders pay corporate tax on profits and then personal tax on dividends — the much-cited "double taxation" — which is why C-Corps usually distribute nothing and let founders realise via stock sale (where QSBS §1202 may apply; see below). LLCs taxed as partnerships pass through entirely and avoid the double-taxation trap but lose the QSBS pathway.

The wrong move is choosing the entity for one tax reason in isolation. The right move is mapping the next 3-5 years of expected outcomes (raise priced rounds? bootstrap to profitability? sell?) and choosing the structure that's right at exit — not for this year's tax bill.

UK — SEIS and EIS. Both schemes give investors income-tax relief and CGT advantages on investments into qualifying small companies. They're investor-facing, not founder-facing — but founders need to understand the rules because losing SEIS/EIS eligibility (by issuing the wrong share class, by raising too much, by giving investors too many board rights) is one of the most expensive avoidable mistakes at pre-seed. The £250k SEIS cap and 3-year holding period are hard limits.

UK — Business Asset Disposal Relief (BADR, formerly Entrepreneurs' Relief). A reduced CGT rate on the first £1m of lifetime gains on qualifying disposals. The headline rate has moved repeatedly (12.5% as of the 2026 Autumn Budget; check current). Requires 5% ownership and 24-month holding period — both of which you can lose through dilution if you raise.

US — QSBS §1202 (Qualified Small Business Stock). If you hold C-Corp shares in a qualifying small business for 5+ years, up to 100% of the gain on sale (capped at the greater of $10m or 10× basis) can be excluded from federal capital gains tax. This is the single biggest founder tax advantage in the US system — and it's lost entirely if you convert from an S-Corp or LLC to a C-Corp late (you only get the QSBS clock running from issuance of C-Corp shares to you). State-level treatment varies (California historically did not conform; check current).

US — AMT on ISO exercise. Incentive Stock Options exercised but not sold in the same calendar year trigger the Alternative Minimum Tax on the bargain element. Founders exercising sizeable ISO grants without modelling AMT can find themselves owing six-figure tax bills on stock they can't yet sell. Run the AMT projection before exercising; consider exercising in tranches across multiple tax years.

A common founder mistake is treating these reliefs as automatic. Every one has eligibility windows, holding periods, and disqualifying actions. Map them at company formation, not at exit.

UK. Incorporating as a Ltd company makes sense roughly when (a) you can pay yourself a salary plus dividends at materially lower effective rate than sole-trader self-employment tax, (b) you want limited liability for a real risk exposure, (c) you're planning to raise SEIS/EIS investment (which requires a Ltd company). For most service businesses, this is around £30-40k of profit. Below that, sole-trader is simpler and often cheaper after accountancy fees.

US. Incorporation choice is more consequential. LLC taxed as partnership is the lowest-friction starting point for solo or 2-person ventures and remains tax-efficient via pass-through. C-Corp election makes sense the moment institutional fundraising is realistic (VCs strongly prefer Delaware C-Corps) — and only then, because of the QSBS clock-start point above. The expensive mistake is incorporating as an LLC and converting to C-Corp later, losing 1-3 years of QSBS holding period in the process.

Both jurisdictions: incorporating earlier than needed adds compliance overhead (annual returns, separate accounts, separate tax filings) and accountancy fees that can outweigh the tax savings. Don't incorporate "because it sounds more professional" — incorporate when one of the above triggers is real.

Three categories repeatedly trip first-time founders in both jurisdictions:

Home office. Allowed in principle (UK: HMRC simplified rates or actual-cost apportionment; US: §280A home-office deduction with strict "regular and exclusive use" test). Most founders either claim nothing (leaving money on the table) or claim too aggressively (creating audit risk). The middle path: a defensible apportionment based on square footage and time, with photos and a written rationale kept in your records.

Travel and subsistence. The line between commuting (not deductible) and business travel (deductible) is harder than it looks for founders who work from multiple locations. The UK '24-month rule' on temporary workplaces and the US 'tax home' concept both have edges that catch remote-first founders. Document the business purpose of every trip; lunches without a documented business attendee are almost always disallowed.

Mixed-use assets. Cars, phones, laptops. Apportion realistically. HMRC and the IRS both treat 100%-business claims on assets with obvious personal use as a red flag.

The protective habit: from day one of trading, keep a receipts folder (digital is fine) and a single-line note on each receipt explaining the business purpose. The point isn't to reach an outcome — it's that if you're ever asked, you can answer.