Still can't decide, and don't know any local accountants to ask. Should I go ltd?

borobabe · Jun 8, 2008

I have read the threads how to choose an accountant and ltd vs sole trader but still can't work out which would suit me best. I hope that some of the accountants on here may be able to offer some advice.

My plans are to go ltd, I want to set up a company called xyz company and have party sprite as a trading name for it, so the website and the shop (when it comes) will still be under that name but the bigger company would also cover other business ideas I am working on. I also want to let my dad and my sister have shares in return for the investment they have made.

At the moment I am not taking money from the business so everything it makes is being spent on increasing stock levels and marketing. I suspect my reasons for wanting to go ltd are not good enough, and I don't want to make a bad decision so early in setting the business up.

What would your advice be, I appreciate its a difficult question to answer without knowing more however a good proportion of my competitors are VAT registered and trading as companies, and my sales forecasts suggest that I will need to register for VAT too.
Help please?

deniser · Jun 8, 2008

I would always trade as a limited company for one reason only - that if things go pear shaped, you are limited to the losses of the company and your personal assets are safe.

There are of course exceptions to this but this is just the general principle.

dp0848 · Jun 8, 2008

As an accountant who specialise in small business and startups I always work from the premise that a client should use a limited company as the trading vehicle. Why? Well tax is one consideration but by no means the only one. As Deniser points out the big advantage of a limited company is limited liability (except on some rare occasions) and the protection of the shareholder's personal assets e.g. their house.

Of course it is important to consider all the other implications of trading via a limited company such as the extra paperwork generated over and above that of a sole trader, the effect on tax credits and the circumstance under which a dividend can be legally paid etc.

There are of course times when a sole trader set up is more appropriate for the circumstance of a client but in today's litigious society a limited company will always be my first port of call.

From what you say in your post Borobabe, and taking in to account that you are seeking / have received outside investment, my instinct would be to say take the limited company route.

You are very welcome to PM me if you'd like to have a more in depth chat on the various issues.

Regards.

David.

borobabe · Jun 8, 2008

I have pm'd you, thanks.

DuaneJackson · Jun 8, 2008

If you want to talk to an accountant, we have a good one in Thorner, Leeds which doesn't seem too far from you. I'm sure he'd be more than happy to have an initial chat with you for free.

Let me know if you want me to put the two of you in touch.

It seems that the answers you've had address the question of whether or not you should be ltd/sole trader.

But I think a bigger issue is whether or not you should have these seperate business ventures under the same ltd company. It'd depend what he other ideas are (risks involved, whether your dad and your sister should have shares in them etc) but it could be worth considering having a seperate company for them. To my mind there could be a LOT of reasons to not have them in the same company.

borobabe · Jun 8, 2008

Thank you Duane, will have to give it some thought. I had already seen you have a friendly accountant in Leeds, it is a little distance from me but not too far, and if he is used to kashflow all the better.

I think it seems that the best thing for me is to go ltd, so will need to get onto it tomorrow. Would it be ok for me to run my other idea past you via pm so you can see what you think about keeping it under the same umbrella?

Gillie · Jun 8, 2008

Can I just point out this thing about limiting your liabilities etc .... yes if you are sued for damages and such like, yes being limited means its the business and not you that is held responsible etc, but as a new company, approaching banks and lenders in the current climate, you will be giving personal guarantees ... yep, which means if things go belly up, you are still responsible for the debts!!

So if this is your sole or main reason for going limited, think carefully!

dp0848 · Jun 8, 2008

Gillie is right, in the current climate I can't see a bank lending money to a new business without a personal guarantee. That said banks are always very cautious about lending to small one man limited companies and almost always insist on a personal guarantee from the directors of the limited company. Limited status should not be used as a method of avoiding liabilities but as a method of protecting personal assets if the worst comes to the worst. It is not a substitute for good management and should not be used in place of proper insurances etc.

borobabe · Jun 8, 2008

Thanks Gillie, that isn't the reason in this case, but I appreciate the warning. Its certainly something to give a lot of consideration to and not just rush in.

DFL · Jun 8, 2008

I know its family but think carefully before giving shares away just for investment. If they are putting more in than just investment then fair do's.

DuaneJackson · Jun 8, 2008

Even before the crunch I very rarely saw banks lending money to small businesses without a personal guarantee (or SFLG).

The accountant I was going to recommend is Richard Hall (not the American comedian) at ABS. Very approachable.

Feel free to PM me details

KM-Tiger · Jun 8, 2008

borobabe said:
I also want to let my dad and my sister have shares in return for the investment they have made.

Must second DFL's comment on this. You need to think this out very carefully or it will come back and bite you badly. One of the downsides of Ltd with multiple shareholders is that you must sort out a Shareholder's Agreement at the outset, or expect trouble later.

borobabe · Jun 8, 2008

KM-Tiger said:
Must second DFL's comment on this. You need to think this out very carefully or it will come back and bite you badly. One of the downsides of Ltd with multiple shareholders is that you must sort out a Shareholder's Agreement at the outset, or expect trouble later.

Would I be better to see them as loans then, as that's what they were really, I want to do it as they have helped me out. Is that a poor reason, they certainly aren't expecting any shares.

DuaneJackson · Jun 8, 2008

borobabe said:
Would I be better to see them as loans then, as that's what they were really, I want to do it as they have helped me out. Is that a poor reason, they certainly aren't expecting any shares.

I think it's not a great reason. Do them as loans so you can give them their money back without paying tax on it. Plus a bit of interest (tax free again) as a bonus - all assuming you go the ltd company route ofcourse.

Then do something nice for them once you start earning more money

Do NOT try setting up the new Ltd co yourself. You certainly have enough going on that an accountant could use to minimise future tax liabilities.

dp0848 · Jun 8, 2008

Borobabe

If your father or sister can bring something to the business other than just a small amount of cash e.g. some form of expertise that is valuable to the business, then consider giving them some equity as a way of incentivising them to work with you to grow the business. If on the other hand they are really just lending you the money then treat it as a loan. As Duane says, repaying them their capital will have no tax implications either for them (as they have made no gain) or for the business (as it has incurred no cost). However, if you pay them interest it will not be tax free as Duane has suggested, at least not for your father and sister. Any interest paid to your father and sister will be recorded in the company's books as a cost, reducing any profits generated by the business and therefore lowering the company's corporation tax liabilities. However, your father & sister will have enjoyed a gain by virtue of receiving interest on the monies loaned to the company and they will then need to declare this gain to HMRC via a tax return. If you want to reward / thank you father & sister for lending the money you may well be better off repaying them the exact amounts that they have lent you and then, as Duane suggested, doing something nice for them as a substitute for paying interest.

Regards.

David.

borobabe · Jun 8, 2008

I think simple is better, thanks to both of you, I will stick with them as loans. My dad is a good source of advice but I know any income from my business would mess his finances up so I don't think he would be happy. My sister on the other hand, would love to change her career and I have talked about her working for me, but not said anything to her yet. Might be best to do as you suggest, put them down as loans and pay back when I can.

DuaneJackson · Jun 8, 2008

Sorry, I should have been clearer about that. I meant that it'd be beneficial to the company from a tax perspective to be charged interest as a little "thank you" to them - as opposed to you giving them a little extra out of your own pocket (which would have come from the company and you'd have been taxed on it yourself at some point).

I should add a disclaimer whenever I ramble about tax and accounting. "I've got no formal training or qualifications so anything I say is probably complete rubbish!"

jholden · Jun 9, 2008

I can't believe you are being advised to incorporate when no one has really asked you about your situation.

You can incorporate any business later on, but consider, if you are making losses these can be carried back against earlier years PAYE thus resulting in a refund.

Please, please take professional advise from a suitable qualified and experience accountant before you go any further.

It has been seen that of late everyone says 'go limited' this is not always the best advise, sometimes Limited status is something for later on.

Here are some disadvantages of Limited status:

Disadvantages of limited liability

1. Additional costs (national insurance, audit, filing fees).

2. Increased administrative burdens (filing accounts, annual returns).

3. In some instances there may be an extra layer of taxation imposed where a company disposes of assets profitably and the net cash received is then required to be given or transferred to the shareholders.

There is more to deciding what trading structure to use than the here and now, which is what the tax angle really is because small company taxation is rising, yes it does give limited liability to you but only if you don't abuse it, it can be removed!

So, not as easy as other may say it is.

It may very well be that a Limited company is the way forward, but please take professional advise as it depends on what you are looking to do and as I say you may start off under a different trading entity.

Good luck.

Jason

borobabe · Jun 9, 2008

Thank you Jason,

What else needs to be considered then. I am not in a position to offset any loss (although I don't anticipate one) against previous years income as I haven't been employed since 2003. From the advice I have recieved so far my tax situation would be better as a ltd, what other things should I be looking at?

jholden · Jun 9, 2008

Your tax position may be better right now, but do not let this be your only guide, tax rates and law change, and with this government they change regularly.

As I said earlier, take professional advise, discuss what you want to do longer term, it may be the Limited company status sits well with your future goals.

Best of luck.

Jason

PS Choose someone who is qualified and suitably experienced to aid your goals.

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Still can't decide, and don't know any local accountants to ask. Should I go ltd?

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