Changing LTD to Sole Trader?

[Poppylong]

Hi All

I have a limited business with my colleague. There was an initial reason for being limited, but our business has now changed. We have very few debts, & dont need to be ltd to continue dealing with our suppliers.

I've been reading about changing to a sole trader, and it says it might be a better option financially, depending on how much you earn. - Does anyone know what this means?

Also, does a partnership over any benefits over a sole trader? I have no concerns about us falling out, splitting money, etc etc, as my colleague is my twin sister and we have worked together for over 10 years.

Thank you all,
Poppy

 

[Gecko001]

Comparing a sole trader with a Ltd company:

Some of Advantages of Sole Trader:
-Fewer administration costs due to the less complexity
-No need to put details of directors and other details of the company in the public domain
-Some customers and suppliers will feel safer dealing with a sole trader as liability is not limited.

Some of Disadvantages of Sole Trader:
-You are personally responsible for all financial responsibilities of the business.
-Some customers and suppliers like to only deal with Ltd companies because they can remotely do due diligence on the business as there is more information about the business in the public domain.

Note when changing from a Ltd to sole trader your customers and suppliers will change from having contracts with a company to have contracts with a person.

 

[Mr D]

The forums have plenty of instances of family falling out.
At the very least you should have an agreement each of you sign to state what happens when. By the time trouble is here you won't be talking to each other and an agreement at least provides a basis for doing things. Hopefully you will never fall out and never need to use the contents of an agreement.

Partnership is like self employment for each of you and either one of you can sign the partnership up for stuff - with each of you separately responsible for all the debts.
Great when things are going fine, not so great if one is making mistakes or out to mess the other person over.
You don't get the legal protection in a partnership that directors have in a limited company.

 

[Scalloway]

does a partnership over any benefits over a sole trader?

Very few. As well as having unlimited liability each partner has the power to bind the business in any agreement, and each partner is jointly and severally liable for all partnership debts.

So in theory one partner could sign the partnership up to an expensive contract then disappear and leave the other one to face the music.

 

[Poppylong]

Thanks so much for your time. So financially, its about equal?
As a sole trader i pay tax on my earnings and profits.
As a limited company I pay tax on my earnings and corp tax - which is the same thing right?
Thanks again, Poppy

 

[Poppylong]

Also, we have to run a payroll system and pay paye every quarter, is this the same when self employed? thank you

 

[Gecko001]

If you are a sole trader, one of you will probably have to be an employee. If you form a partnership, you can both be self-employed and you will not have to set up a PAYE payroll.

If you form a partnership, then you should get a partnership agreement drawn up by a lawyer. Probably the most important part of a partnership agreement are the clauses which layout exactly who gets what when the partnership comes to an end. They can end due to a disagreement or change of circumstances of one of the partners (retirement, illness, death, etc) or because one of the partners want to do other things. Many last for decades.

 

[Newchodge]

Also, we have to run a payroll system and pay paye every quarter, is this the same when self employed? thank you

As long as you have applied for the employer's NI allowance, the PAYE you pay HMRC every quarter is only paying tax that would be due anyway, in advance. No actual cost to your business.

 

[Mr D]

Thanks so much for your time. So financially, its about equal?
As a sole trader i pay tax on my earnings and profits.
As a limited company I pay tax on my earnings and corp tax - which is the same thing right?
Thanks again, Poppy

As a sole trader / part of a partnership your income is the income (or your share) of the business. You and the business are the same. So a sole trader with £30k profit then your income is £30k and is taxed on your normal tax allowances.

As a director and shareholder in a limited company your income is only what is taken out of the company. So if company makes £30k profit and pays you a wage of £9k and nothing else your personal income is £9k and taxed accordingly.
The company pays corporation tax on its profit and you can leave money in it. Or issue a dividend which has its own small tax free allowance.

There's also protection to consider - a limited company debts belong to the company, self employed / partnership debts are personal debts.

 

[Radoslav Brodzinski]

Stay as LTD