Sole Trade -v- Limited Company

Discussion in 'Accounts & Finance' started by DFL, Mar 13, 2008.

  1. DFL

    DFL UKBF Newcomer Free Member

    1,026 333
    It's not better! That's the point - there is no 'better' it depends on the individuals concerned.

    You are right though that it is very easy to tell ltd co clients to take the salary / dividend route - the reason that it is easy is because it is the right advice. What can the taxman do about it? Dividends are paid from taxed profit and are also taxed on the individual once the basic rate threshold has been exceeded. This is a legal and sensible way to extract profit.
     
    Last edited: Nov 13, 2008
    Posted: Nov 13, 2008 By: DFL Member since: Aug 21, 2007
    #41
  2. DFL

    DFL UKBF Newcomer Free Member

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    You are correct - though as a limited co to borrow money you will usually have to personally guarantee the debt thereby negating the limitation benefit.


     
    Last edited: Nov 13, 2008
    Posted: Nov 13, 2008 By: DFL Member since: Aug 21, 2007
    #42
  3. cmj

    cmj UKBF Newcomer Free Member

    4 0
    Hi sorry to intrude just wondered if any one could answer my question.
    Myself and my husband were declared personnally bankrupt last week, my husband is in the construction industry......nightmare.
    We have a limited company which has subsequently ceased to trade since early october, obviously he has to now stand down as director but the company has corpoation tax bill of 7k and bank od of 2k, what happens to this debt will it be included in our BR? Need some advice not gettting anywhere with our accountant, and have OR interview monday.
    Much apppreciate any help.

    Thanks
     
    Posted: Nov 14, 2008 By: cmj Member since: Nov 14, 2008
    #43
  4. cmj

    cmj UKBF Newcomer Free Member

    4 0
    Hi just wanted some knowledge??
    Myself and my husband were declared personnally bankrupt last week, my husband is in the construction industry......nightmare.
    We have a limited company which has subsequently ceased to trade since early october, obviously he has to now stand down as director but the company has corpoation tax bill of 7k and bank od of 2k, what happens to this debt will it be included in our BR? Need some advice not gettting anywhere with our accountant, and have OR interview monday.
    Much apppreciate any help.

    Thanks
     
    Posted: Nov 14, 2008 By: cmj Member since: Nov 14, 2008
    #44
  5. MikeH

    MikeH UKBF Enthusiast Free Member

    594 58
    Can someone please move this to a new thread to keep the ST v LTD thread clean. This should also mean that cmj gets some answers.
     
    Posted: Nov 14, 2008 By: MikeH Member since: Aug 12, 2004
    #45
  6. DFL

    DFL UKBF Newcomer Free Member

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    Darren at BRS can give all the advice you need - call him on 07971 008505 and he will be happy to talk to you without charge.

    See www.brsassociates.co.uk
     
    Posted: Nov 14, 2008 By: DFL Member since: Aug 21, 2007
    #46
  7. Glenn Drake

    Glenn Drake UKBF Newcomer Free Member

    6 1
    Thank you for a very informative post.

    Please take a quick look at The Company Formation Wizard website should you require further information on the subject of setting up a limited company in the UK.
     
    Posted: Nov 15, 2008 By: Glenn Drake Member since: Nov 15, 2008
    #47
  8. 200386

    200386 UKBF Newcomer Free Member

    18 3
    Are you serious???
     
    Posted: Nov 21, 2008 By: 200386 Member since: Oct 30, 2008
    #48
  9. 200386

    200386 UKBF Newcomer Free Member

    18 3
    Unless the paperwork on the dividends are flawless and the payments are processed correctly, they will be disallowed.
     
    Posted: Nov 21, 2008 By: 200386 Member since: Oct 30, 2008
    #49
  10. Isabella_Smith

    Isabella_Smith UKBF Newcomer Free Member

    78 7
    An excellent thread.
     
    Posted: Nov 21, 2008 By: Isabella_Smith Member since: Nov 6, 2008
    #50
  11. DFL

    DFL UKBF Newcomer Free Member

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    A board minute, a dividend voucher and proof of profit is hardly difficult to get right is it? Those three elements are ALL that is required to make the dividend legal - dividends satisfying that criteria would/could not be disallowed.
     
    Posted: Nov 21, 2008 By: DFL Member since: Aug 21, 2007
    #51
  12. DFL

    DFL UKBF Newcomer Free Member

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    Yes he is serious - you (legally) run the company for the benefit of its members not the taxman.
     
    Posted: Nov 21, 2008 By: DFL Member since: Aug 21, 2007
    #52
  13. MikeH

    MikeH UKBF Enthusiast Free Member

    594 58
    Dividend voucher and board minutes are no problem. The point that needs to be stressed is proof of profit. If you draw frequent dividends be sure that your accounting records can support this. Also remember to consider any corporation tax due on the profit that is paid to the shareholders.
     
    Posted: Nov 21, 2008 By: MikeH Member since: Aug 12, 2004
    #53
  14. 200386

    200386 UKBF Newcomer Free Member

    18 3
    All I can say is that every year, I get at least 3 clients coming to me from other accountants complaining that they had to pay a huge tax bill, because their accountants recommended the ltd company route together with the salary/dividend mixture of remuneration and the taxman has disallowed the dividend on a technicality.

    There have been a lot angles that the taxman is tackling on this: such as the "husband & wife" issue etc.
     
    Posted: Nov 26, 2008 By: 200386 Member since: Oct 30, 2008
    #54
  15. 200386

    200386 UKBF Newcomer Free Member

    18 3
    Accountants recommend the ltd company option for a) the limited liabilty aspect and b) to save tax.

    Accountants also charge ltd companies more on the assumption of saving the directors tax.

    As the ltd liability aspect is becoming very academic these days, I can only conclude that the whole issue is to do with tax and the taxman.
     
    Posted: Nov 26, 2008 By: 200386 Member since: Oct 30, 2008
    #55
  16. MikeH

    MikeH UKBF Enthusiast Free Member

    594 58
    Accountants may charge more as they need to prepare company accounts and file more documents, CT600 tax return, 363 annual return, P11D etc. Whilst these documents are easily completed by some, other business owners prefer to leave this to their accountants. Their fees are normally based on the time spent preparing accounts, not on an assumption that they can save clients money.
     
    Posted: Nov 26, 2008 By: MikeH Member since: Aug 12, 2004
    #56
  17. DFL

    DFL UKBF Newcomer Free Member

    1,026 333
    3 clients a year? Staggering. There must be some very incompetent accountants in your area to allow this to happen!

    Husband and wife issue deffered again until at leat 2010 as they know that original plan of attack was completely unworkable.
     
    Posted: Nov 26, 2008 By: DFL Member since: Aug 21, 2007
    #57
  18. RidgewayStudios

    RidgewayStudios UKBF Newcomer Free Member

    1 0
    Hi everyone,

    I've just been reading through this very interesting thread. Sole Trader vs Limited Company is something I've considered a number of times over the past few years and, ultimately, I've opted to remain as a sole trader.

    Until now, that is. I have a couple of new business ventures in the pipeline and wanted to seek some advice on the best way to handle things going forwards.

    Some background...

    - I run my own web & print design business from home and have done so for nearly four years now. I'm a sole trader and enjoy all the benefits that come with being one - as outlined earlier in this thread. I'm VAT registered because I need to be, but keep my profit levels such that I'm just on the cusp of the 40% tax bracket, but, ideally not above it.

    - My wife also runs her own business as a sole trader and has done so for the past six years. Her profit levels are lower (typically £10k - £20k per annum) and, with an eight month baby girl to now look after, she's beginning to consider winding the business down. In other words, I can't ever see her income from her business exceeding current levels. If anything they'll be lower.

    So, why the dilemma? Well, we have an opportunity at present to become part of two new business ventures with different third parties. In order to ensure everything is above board with these businesses, and particularly with the contractual relationships between ourselves and the respective third parties, it's likely that these businesses will be set up a Limited Companies of which we will be Directors and shareholders.

    I estimate that our personal combined incomes from these two new business ventures could (hopefully) reach the £20k - £30k region quite quickly.

    Furthermore, with the prospect of needing to raise a mortgage for a larger house in under two years, I'm keen for mortgage lenders to look favourably on us as a couple which means having a profitable set of accounts to wave at them. For me, this immediately draws into question whether taking dividend payments from the new businesses is an option for us at all.

    My question then is how best to deal with the combination of these businesses from a tax / dividend point of view.

    Clearly it's in our interests to allow my wife to take a large proportion of the income from the new businesses, as well as the one from her own. If I were to take further income, I immediately move into the 40% tax bracket, whereas my wife is typically well under the 40% threshold at present.

    Is there any advantage in making all of the businesses into Limited Companies? Should we be looking for our new business ventures to pay us a salary (rather than dividends)? Can anyone see a better way to structure the different ventures to optimise our tax / income situation.

    Any advice greatly appreciated.

    Kind Regards
    Simon Lassam
     
    Posted: Nov 26, 2008 By: RidgewayStudios Member since: Nov 26, 2008
    #58
  19. DFL

    DFL UKBF Newcomer Free Member

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    Simon

    With respect as a first post I would not expect a mad rush of people to help you out on this one, especially as it requires further details and not just generic advice. You will need to speak to an accountant and pay for some advice - if yuou don't have one then there are some on here from your neck of the woods who i'm sure would be willing to take you on as a client.
     
    Posted: Dec 3, 2008 By: DFL Member since: Aug 21, 2007
    #59
  20. Spongebob

    Spongebob UKBF Ace Free Member

    2,192 1,105
    Most comments here seem to centered around the tax treatment of different business styles.

    In my opinion more important is the liability angle.

    Most businesses start off in a very small way - just one person as a sole trader. In my view the time to start considering the formation of a limited company is when a risk looks like developing.

    For example;

    You start supplying goods or services on credit - there is always the risk your customer won't pay.

    You borrow money to fund the business - there is the risk that you won't be able to pay.

    You take on staff - the leap in costs is always a dangerous time for any young business.

    You take on premises - see above.

    As somebody who has twice in a long business career had reason to be thankful for the protection that limited liability provides the business owner, the advantages of the limited company cannot be overstated.

    However, as I now trade by myself with no debts and extend no credit to my clients, I find that being a sole trader infinitley preferable.

    And I pay a LOT less tax than I did when I took a salary from my own limited company. The employers NI contributions alone were a killer!

    Bob
     
    Posted: Dec 9, 2008 By: Spongebob Member since: Dec 9, 2008
    #60