Sole Trader vs Partnership??

on_the_verge · Feb 15, 2010

Hi,

Posted this in the General Business part but think it may be more suitable in this section.......

My wife and I are starting our own accountancy services business and are just wondering the best form to set it up in - sole trader or partnership.

My wife. does not work (technically) but is a house wife, I am full time employed

What would be the most tax effective way of setting the business up? My thoughts are through a partnership - if we set up is it possible to set my wife up with a greater share of the profits as my wife will be doing alot of the set up, advertising, prep work etc.

Thanks

Virgil

MyAccountantOnline · Feb 15, 2010

Virgil - when you run an accountancy practice this is one of the basic questions you will be asked many times by your clients.

With respect if a client asked you how would answer?

on_the_verge · Feb 15, 2010

I would reply that if one of the partners has more lower tax bracket available and the distribution of the trading profits can be justified within reason then it would be fine to set the partnership up in this way.

I would also advisethem that each of the partners needs to submit a tax return as well as one for the partnership itself.

Also I would inform them that even though the profits may be split on different ratios if so desired the liability sits evenly with each of the partners should a liability situation arise.

Crowy2004 · Feb 16, 2010

Does your wife have any experience of accountancy??

elaine@cheapaccounting · Feb 16, 2010

Read the thread on sole v limited.

Bit surprised about this as a question from someone running an accountancy practice but as anyone can call themselves an accountant - I am surprised that I am surprised

I assume that neither of you have experience in running a practice.

Ray Coman · Feb 16, 2010

There are considerations besides saving tax that should be looked into prior to entering a partnership. For instance, if there is no agreement, then parts of the Partnership Act 1890 may apply by default.

Also, have you considered forming an LLP?

on_the_verge · Feb 16, 2010

elainec100 said:
Read the thread on sole v limited.

Bit surprised about this as a question from someone running an accountancy practice but as anyone can call themselves an accountant - I am surprised that I am surprised

I assume that neither of you have experience in running a practice.

As stated in my first post I am starting a business to provide accountancy services - along the lines of tax returns etc and after reading various threads I was thought that this through this forum advice could be given and I was not expecting replies like the above which are very insulting

I am a Chartered Accountant but my background is industry - this a new venture for my wife and I and we are not offey with being self employed hence the question.....

elaine@cheapaccounting · Feb 16, 2010

Well as I said - surprised about the level of question from an ACA.

If you find that insulting then there is isn't much I can do about that really.

Good luck with your practice.

But as you say:

on_the_verge said:
we are not offey with being self employed hence the question.....

then what are you going to offer to clients?

This is a bread and butter question for accountants in practice - harsh but fair and if Zeno is around you will get worse from him

Zeno · Feb 16, 2010

on_the_verge said:
we are not offey

First things first, do you mean au fait? (This is even funnier if said in a Scottish accent).

Have you considered the issue of a practicing certificate? You seem to lack the practice experience do be able to get one.

I am really confused by your post. If you admit that you are not up to speed on matters pertaining to self employment, then why are you setting up an accountancy practice? (Your clients will not appreciate you learning on the job)

I have said it before and looks like I'll be saying it again -Industry and practice are very different job. One does not qualify you for the other.

mr. mischief · Feb 16, 2010

I would not let these comments put you off. I have won various clients from Chartered Accountants since I set up, and found:

1. One 07-08 tax return still to submit.
2. One illegal dividend paid - which per the accountant was the client's fault!!!
3. A client who was being advised not to declare rental income by the CA!!
4. A £100k business which was paying £200 too much VAT per Quarter - previous accountant had missed this, I picked it up in Q1.

So any fears I had in coming back to practice from industry that I would not be able to cut it technically have been pretty quickly quelled by the rubbish I'm seeing from the long established practices in my area.

Going back to the original question, I have set up as a sole trader in case the marketing spend in year 1 means I make a loss which I can offset against my earned income. Then next year - well next month in fact - I'll go limited.

Jaykay · Feb 16, 2010

Presumably you have done the maths and come to the obvious conclusion that splitting the profit 2 ways is more tax efficient than one way.
However, there is more to it than the numbers. If your wife is not really involved in the business (that will become apparent should the taxman ask questions) then they will ignore the split and hit you for the underpaid tax and NI together with penalties and interest.
I wish you well in your business.

David Griffiths · Feb 16, 2010

Jaykay said:
If your wife is not really involved in the business (that will become apparent should the taxman ask questions) then they will ignore the split and hit you for the underpaid tax and NI together with penalties and interest..

How will they do that?

Do you have statutory or case law authority to back that up?

on_the_verge · Feb 17, 2010

mr. mischief said:
I would not let these comments put you off. I have won various clients from Chartered Accountants since I set up, and found:

1. One 07-08 tax return still to submit.
2. One illegal dividend paid - which per the accountant was the client's fault!!!
3. A client who was being advised not to declare rental income by the CA!!
4. A £100k business which was paying £200 too much VAT per Quarter - previous accountant had missed this, I picked it up in Q1.

So any fears I had in coming back to practice from industry that I would not be able to cut it technically have been pretty quickly quelled by the rubbish I'm seeing from the long established practices in my area.

Going back to the original question, I have set up as a sole trader in case the marketing spend in year 1 means I make a loss which I can offset against my earned income. Then next year - well next month in fact - I'll go limited.

Thanks for the above, after some of the comments received after a general enquiry I appreciate someone from the same background saying this.

on_the_verge · Feb 17, 2010

Jaykay said:
Presumably you have done the maths and come to the obvious conclusion that splitting the profit 2 ways is more tax efficient than one way.
However, there is more to it than the numbers. If your wife is not really involved in the business (that will become apparent should the taxman ask questions) then they will ignore the split and hit you for the underpaid tax and NI together with penalties and interest.
I wish you well in your business.

After speaking to the tax man yesterday and explaining the situation his reply was that the trading profit (if any) could be split however you wish so long as it was in the declared from the start and documented as such.

Although the business is a partnership my wife will in fact be doing a lot of the prep work and liaising with clients whilst I am at work, this coupled with the availability of her personal allowance seemed to make good business sense.

mr. mischief · Feb 17, 2010

Admittedly HMRC have made every effort to muddy the waters, but as I see it the following setup is fine:

1. Go limited, with a 50/50 shareholding with your wife.

2. Pay the wife a bona fide salary for the work she does. So for example if she assists you on the admin. front with letters and fielding calls, a £6k salary is easily justifiable if that is what you want to do.

3. The rest of the profits can be paid as dividends to you and your wife 50/50 if that's what you want to do.

HMRC may not like this, but if they had their way every self-assessment taxpayer would pay a minimum of 100% of their income in tax!

Zeno · Feb 17, 2010

on_the_verge said:
After speaking to the tax man yesterday and explaining the situation his reply was that the trading profit (if any) could be split however you wish so long as it was in the declared from the start and documented as such.

Although the business is a partnership my wife will in fact be doing a lot of the prep work and liaising with clients whilst I am at work, this coupled with the availability of her personal allowance seemed to make good business sense.

If you are determined to ignore our advice then fine but seriously, you phoned the tax office and asked them? Are you going to do that for clients too?

You have still not mentioned practising certficates. Your wife cannot be a partner with you without one either incidently.

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