Limited Company V Sole Trader

[SpencerC123]

Hi all,

18 months ago I started an online business. After an initial struggle for about 5 months, I have started to earn anywhere from £7500 to £12000 per month consistently, and hoping this will continue. The expenses to the business are around £1200 per month.

I am now at the stage where I am thinking about whether I should run the business through a limited company or remain a sole trader. I have no preference personally….but it has crossed my mind was for three reasons…

1) Would I be financially better off?
2) My friends who are successful all have their businesses within a limited company, and whilst I know all circumstances are different, I am wondering if there is a particular reason they have gone down this route
3) If the business continues to be successful and potentially sellable…I thought it could be easier to sell within a limited company. Again I could be wrong but just my thought process!

I am paid by three separate sources currently, and each payment that comes in I divide in the following way…

-40% into a wages account (which I put £2500 into my current account on the 10th of each month)
-25% into an account for tax (in a high interest account)
-15% into a business expenses account
-20% into an account for my personal bills

I am not sure how I came up with the above way of dividing the income, but it seems to work well for me currently. Although you may look at this and think I am doing it wrong, there was a logic to it at some point!! Feel free to point out if you feel this is the wrong way too.

In case this help…my situation is that I am 48, a widow, with children 16/18 – not sure if this helps with any advice!

Thanks for letting me ramble!

 

[Daybooks]

1. Possibly; can depend upon your overall circumstances. The best way to know is to crunch the numbers for both scenarios and then you can make an informed decision.
2. Limited liability for one.
3. In the two situations what would you be selling? If you were the buyer what would you want or consider the better option?

The decisions shouldn’t just be financial as administration can be a big factor too. There are pros and cons for both. There may be changes ahead in the Budget which although ordinarily shouldn’t influence your decision there possibly is no disadvantage right now in holding off a decision. Continue your research and do what is most comfortable for you.
Good luck.

 

[Baines Watson]

Hi all,

18 months ago I started an online business. After an initial struggle for about 5 months, I have started to earn anywhere from £7500 to £12000 per month consistently, and hoping this will continue. The expenses to the business are around £1200 per month.

I am now at the stage where I am thinking about whether I should run the business through a limited company or remain a sole trader. I have no preference personally….but it has crossed my mind was for three reasons…

1) Would I be financially better off?
2) My friends who are successful all have their businesses within a limited company, and whilst I know all circumstances are different, I am wondering if there is a particular reason they have gone down this route
3) If the business continues to be successful and potentially sellable…I thought it could be easier to sell within a limited company. Again I could be wrong but just my thought process!

I am paid by three separate sources currently, and each payment that comes in I divide in the following way…

-40% into a wages account (which I put £2500 into my current account on the 10th of each month)
-25% into an account for tax (in a high interest account)
-15% into a business expenses account
-20% into an account for my personal bills

I am not sure how I came up with the above way of dividing the income, but it seems to work well for me currently. Although you may look at this and think I am doing it wrong, there was a logic to it at some point!! Feel free to point out if you feel this is the wrong way too.

In case this help…my situation is that I am 48, a widow, with children 16/18 – not sure if this helps with any advice!

Thanks for letting me ramble!

AI Generated Post

Hi Spencer,

First of all, congratulations on building a successful online business! Starting your own venture is no small feat, and it's great to see that you're now in a position to consider the next steps for your business structure.

When deciding between remaining a sole trader or transitioning to a limited company, there are several key factors to consider beyond just financial outcomes. Here are some points that may help you make a more informed decision:

1. Financial Impact: While forming a limited company may provide financial benefits, such as potential tax savings through dividends and other allowances, recent tax changes have made the sole trader vs. limited company decision less clear-cut. It's essential to run the numbers to see if this structure would actually improve your financial situation. Consulting with an accountant can provide clarity based on your unique circumstances.
2. Limited Liability: One of the primary reasons many business owners choose to operate as a limited company is the limited liability protection. This can shield your personal assets if the business incurs debts. It might be worth asking your friends why they opted for this route, especially if they’re in similar industries. They may have valuable insights relevant to your situation.
3. Business Sale: While there isn't a significant difference in selling a business as a sole trader or via a limited company, some buyers and lenders may prefer the transparency that comes with a limited company, as key financial information is publicly available via Companies House. That being said, this will depend on your specific business and buyer preferences.

Regarding your current financial management, it's great that you’ve developed a system for dividing income. However, I would strongly recommend reviewing it with a qualified accountant, especially in terms of:

• PAYE & Payroll Registration: If you’re not payroll registered, the wages you pay yourself would likely be considered drawings, which will need to be reported on your self-assessment tax return. This also applies to the 20% you allocate for personal bills. It’s crucial to ensure that everything is being accounted for correctly to avoid any issues with HMRC.
• Tax Efficiency: Given your current income level and family circumstances, there may be opportunities to manage your tax liabilities more effectively, particularly if your children are involved in the business. A qualified accountant can offer tailored advice on how to optimize your financial strategy.

In summary, while it's great that you're thinking ahead, seeking professional advice at this stage is vital. An accountant will help ensure you're making the right decision for both your current situation and future business growth, and they'll assist with managing your tax obligations efficiently.

Best of luck, and feel free to reach out if you need further guidance!

 

[DontAsk]

What is your business? Have you taken the VAT threshold into account?

 

[Tables Force]

• PAYE & Payroll Registration: If you’re not payroll registered, the wages you pay yourself would likely be considered drawings, which will need to be reported on your self-assessment tax return. This also applies to the 20% you allocate for personal bills. It’s crucial to ensure that everything is being accounted for correctly to avoid any issues with HMRC.

As a sole trader, what difference does it make if OP is payroll registered?

 

[Baines Watson]

As a sole trader, what difference does it make if OP is payroll registered?

It doesn't, just wanted to ensure the OP understands that money taken as wages will be taxed via Self Assessment as there is no tax deduction via payroll him being self employed

 

[WaveJumper]

Well first I would think about the liability question, what are you selling online are you likely to be hit with a high level claim (these things can happen) have you taken out adequate insurance to protect yourself, obviously with a Ltd you will have more protection.

Do you do your own accounts at present, personally I would find an accountant you are happy to work with (don't pick the first one you meet) and go through all your numbers and then decide what is the best option for you personally tax wise, you don't want to be giving out friends at HMRC more than you need too

All good advice from those above and I would also further add to that, keep an eye on that VAT threshold can sneak up on you

Best of luck with your new venture

 

[SpencerC123]

Thank you so much everyone for taking the time to reply...I really do appreciate it. I will look into everything as mentioned above...the VAT threshold is something I haven't thought about...so thank you for pointing that out

 

[pentel]

I have started to earn anywhere from £7500 to £12000 per month consistently

the VAT threshold is something I haven't thought about.

You may have an issue unless you are supplying zero rated or exempt supplies. I would recommend you see an accountant asap.

 

[Lisa Thomas]

It will all depend on the numbers, the tax position for your scenario, and the fact there is large protection for you personally if a limited company enters insolvency. If you are a sole trader you will be personally liable for the business debts.

 

[Tables Force]

You may have an issue unless you are supplying zero rated or exempt supplies. I would recommend you see an accountant asap.

Would OP not need to register if supplying 0% supplies?

 

[Argentum Tax]

You may have an issue unless you are supplying zero rated or exempt supplies. I would recommend you see an accountant asap.

The OP would have an issue if they are making zero rated supplies.

Zero rated supplies are included when calculating whether one has exceeded the VAT threshold.

I do agree, though, that the OP should consult an experienced and qualified accountant or tax adviser without delay.

 

[MyAccountantOnline]

Hi all,

18 months ago I started an online business. After an initial struggle for about 5 months, I have started to earn anywhere from £7500 to £12000 per month consistently, and hoping this will continue. The expenses to the business are around £1200 per month.

I am now at the stage where I am thinking about whether I should run the business through a limited company or remain a sole trader. I have no preference personally….but it has crossed my mind was for three reasons…

1) Would I be financially better off?
2) My friends who are successful all have their businesses within a limited company, and whilst I know all circumstances are different, I am wondering if there is a particular reason they have gone down this route
3) If the business continues to be successful and potentially sellable…I thought it could be easier to sell within a limited company. Again I could be wrong but just my thought process!

I am paid by three separate sources currently, and each payment that comes in I divide in the following way…

-40% into a wages account (which I put £2500 into my current account on the 10th of each month)
-25% into an account for tax (in a high interest account)
-15% into a business expenses account
-20% into an account for my personal bills

I am not sure how I came up with the above way of dividing the income, but it seems to work well for me currently. Although you may look at this and think I am doing it wrong, there was a logic to it at some point!! Feel free to point out if you feel this is the wrong way too.

In case this help…my situation is that I am 48, a widow, with children 16/18 – not sure if this helps with any advice!

Thanks for letting me ramble!

When looking at a sole trade v a limited company most will consider the tax savings (and you definitely have potential for tax savings) and limited liability.

Something to consider (and it may or may not be important to you) are the planned changes to the information a small company will have to disclose at Companies House. If the planned changes do go ahead all small companies will be required to file a profit and loss account with Companies House which anyone can view. I know I have some clients who feel very strongly about this and will probably revert to being sole traders if the change does go ahead.