Business Directions - Ltd or Sole trader?

Log in to reply
H

Henry Osadzinski

  • #1
    A common question that we've seen here in the Startup Clinic and across the site has been from people starting their own business who aren't sure whether to go down the path of working as a sole trader or setting up as a limited company.

    While it's important to remember that every situation is unique and that you should always consult a professional when figuring out the best approach, we've put together an easy to digest rundown of the initial facts and considerations.

    If you're in a position where you're trying to decide now or you have advice based on your experiences (accountants - we'd love to hear your expert opinions too!), let us know what you found to be the most important deciding factors and what helped you get started.

    bWDSD.jpg

     
    • Like
    Reactions: H_Martin and roz1437
    Y

    Yorkshire&Online

  • #4
    This is my take on the subject:

    Potential advantages of a limited company

    The directors of the company have limited liability. This means that if the company fails, the directors can only lose their original investment in the company. When a company is set up, the directors purchase shares in the company and if the company fails, their total loss would only be the value of the shares they bought in the company, plus any loans they made to it. However, in reality most lenders of finance will probably want personal guarantees from the directors in case the company fails.
    Depending on your circumstances and profits, a tax saving can be made by paying less NICs. By paying yourself a nominal salary (normally up to your tax free personal allowance) and taking the remaining company profits as a dividend at the end of the year, you could pay less tax and NICs. As a director, you can also benefit from other tax free payments that can be made to employees.

    You also have the option to restrict your income by not paying yourself a dividend in a particular year. This could be useful for other tax planning opportunities as your income will actually be less in that year.

    If you are buying a business or a franchise, limited companies can claim tax relief on the purchase of goodwill and on franchise fees, whereas self employed persons cannot.

    Trading as a limited company may add credibility to your business profile and help the company attract new customers or suppliers. However, a newly established limited company will not have any credit history and this may prove to be a disadvantage at times.



    Potential disadvantages of a limited company

    If you are just starting out in business and expect to make losses in your first four years of trading, you can offset self employment losses against other income, perhaps from a former employment, in the same tax year or the previous three tax years, instead of carrying the losses forward to offset against future profits that may never materialise. You cannot offset losses from a limited company against your personal tax, therefore trading as a sole trader or partnership may be more advisable in the early years.

    There is an increased administrative burden of operating as a limited company. You can therefore expect your administrative and accountancy costs to be higher. It will depend on your circumstances as to whether these additional costs will be offset by any potential tax savings.

    You cannot draw money out of the business in the same way as a self employed person can do. The company must pay you a salary through the PAYE system and/or you can only pay yourself a dividend if the company generates profits. There may be serious financial penalties and tax implications if you do not strictly manage your cash withdrawals from the business.

    There can be tax complications when transferring certain assets into the company name, such as cars and property. Company cars can create a taxable benefit in kind and transferring land and buildings into the company will create legal costs and may attract stamp duty. You will also lose the ability to utilise your personal annual allowance for capital gains tax when the company disposes of the property. It can therefore often make sense to leave some capital assets outside of the company, although this can have other tax implications too.

    If you are caught by the IR35 legislation for Personal Service Companies, it may not be beneficial to trade through a limited company. This legislation applies to those who offer their services to a client through a third party (eg a company) and the engagement is comparable to that of an employee.

    A formal procedure must be followed to close down a company. This can be expensive if the company becomes insolvent and has to be closed down by a professional liquidator.

    More information about the differences of operating as a sole trader, partnership or limited company can be found here:

    http://www.brown-royd.co.uk/resources
     
    • Like
    Reactions: Hillyer and DCIC
    Upvote 0
    TODonnell

    TODonnell

    Free Member
    Sep 23, 2011
    1,405
    210
    London (UK)
  • #6
    My personal opinion: don't set up an LTD while you are still a minnow. Get the business going and see if you have decent income. Start 'trading as' YourCuteName and see if it'll fly.

    Maintaining an LTD is a chore and so is shutting it down. It's a bit like those new companies that spend a fortune on stationery when they start up, and a year later they've used about 8 sheets.
     
    Upvote 0
    webgeek

    webgeek

    Free Member
    May 19, 2009
    4,091
    1,464
    Glasgow, Scotland, UK
  • #7
    Pony up the 100 quid a month and use a service like cloud9umbrella (or similar) and let them handle all the setup, filings, accounts, VAT, etc. There's no hassle, no chore and it makes the startup, ongoing management, and shutdown - all very easy.

    As far as registering for VAT... Set it up off the bat, get the flat rate program and suddenly you can pocket anywhere from 3-4% up to 9-10%, if labour is your primary cost, by using that flat rate system.

    The professional liability insurance being included in packages from these types of companies is another perk as well.

    I just can't understand taking the risk of sole trading when there are so many upsides to going LTD, but maybe I'm just being thick.
     
    • Like
    Reactions: HBC
    Upvote 0
    E

    Edd Dutton

  • #8
    I chose Ltd over Sole Trader as a startup, I don't regret it. I found being a Ltd and having a name on Companies House give my clients comfort as they are working with an organisation, not just an individual. Depending on your business, you might find the same.
     
    Upvote 0
    K

    Karimbo

    Free Member
    • Nov 5, 2011
    2,701
    1
    361
  • #9
    adamchy said:
    My personal opinion: don't set up an LTD while you are still a minnow. Get the business going and see if you have decent income. Start 'trading as' YourCuteName and see if it'll fly.

    Maintaining an LTD is a chore and so is shutting it down. It's a bit like those new companies that spend a fortune on stationery when they start up, and a year later they've used about 8 sheets.
    Click to expand...
    Funny hearing this from a company formation service provider. LOL

    I think if you want to get into business you really need to be DEAD SERIOUS about it. If you hare doubtful and not sure whether if it's going to make more than beer money then dont get into it.
     
    Upvote 0
    K

    Karimbo

    Free Member
    • Nov 5, 2011
    2,701
    1
    361
  • #13
    Anon said:
    Quick question,
    I'm registered as Self Employed (Online sale), what if I wish to open an online store in another sector.
    Should I apply for another UTR?
    Click to expand...
    no, you as an individual are 1 business entity no matter how many trades you do. if you could create more identities you could evade tax but making lots of micro businesses with £10000 profit.

    you need to have all your business in one utr. the exception is you can go ltd AND be self employed.
     
    • Like
    Reactions: Anon26357
    Upvote 0
    A

    Anna Chandley

    Free Member
    Jun 2, 2008
    1,612
    495
    Romford
  • #15
    Anon said:
    Quick question,
    I'm registered as Self Employed (Online sale), what if I wish to open an online store in another sector.
    Should I apply for another UTR?
    Click to expand...

    Don't forget that it is your combined turnover from all your self employed businesses that counts towards the VAT registration threshold.
     
    Last edited by a moderator:
    Upvote 0
    Log in to reply

    Latest Articles

    Join UK Business Forums for free business advice
    Top Bottom
    Community
    Articles
    Menu