Sole Trade -v- Limited Company

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

  1. harry_p

    harry_p UKBF Newcomer Free Member

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    I hope this is the right place to put this question:

    I own a business that has ceased to be profitable and was previously operating in the world of online advertising. The company has around £110k in its company account, £65k of which is a directors loan from myself to the company. I wish to start using this money to buy run down properties, renovate them, and then letting them out. I am looking at properties all the way from £50k up to £120k. My question is, would it be better to try and get all of the money out of the company account and into my own personal account (legally and obeying all tax obligations of course) and investing in property as a self-employed individual, or would it be better to simply use the company as a vehicle to do this?

    Personal tax thresholds are lower than a business's I understand (£34,600 vs £300,000) but then again personal tax has a £6475 tax free allowance, and the rate of tax is 1% lower (20% vs 21%). So it appears to me that unless my new property venture started generating more than £35,000 profit per annum, I would be better off investing as an individual. However I recently read about the benefits of "capital allowances" without really understanding what they were. I was hoping someone here could explain if and how they might apply to my situation!

    Thank you in advance for any help!
    Posted: Nov 8, 2009 By: harry_p Member since: Nov 8, 2009
  2. NICHOLASM1987

    NICHOLASM1987 UKBF Newcomer Free Member

    94 4
    i think it depends how big you are, and if you value your own possesions if your business fails on a huge scale, but for a business that only turns around £50k a year sole trader would be the option.
    Posted: Nov 8, 2009 By: NICHOLASM1987 Member since: Oct 31, 2009
  3. NICHOLASM1987

    NICHOLASM1987 UKBF Newcomer Free Member

    94 4
    lol i asked myself this question the other day literally, you should start your own thread on this and put it in general business section. if you renovate as an individual if you have 2 properties you will pay 40 percent profit on the second property unless you can get other people involved who you trust , but this is a question and a half .
    Posted: Nov 8, 2009 By: NICHOLASM1987 Member since: Oct 31, 2009
  4. HappyHarry

    HappyHarry UKBF Newcomer Free Member

    5 0
    I'm planning to push forward with a business plan. keeping my employed job but going part time, from around April. I'm not expecting to get rich quick, but as long as I can replace my lost income (which is not that great) then I'd be happy enough.

    My big decision will be Sole Trader or Ltd. Co., and I thank you for the above post and comments. There are obviously many considerations to run through. My feeling was to start as sole trader, due to the fact that profit levels won't be high enough, certainly for a year or two, to worry about income splitting, and the accounting/reporting costs involved. Will need to balance that against the status/image of "Ltd" viewed by customers.

    Either way, Director or Sole Trader, I don't suppose it's a problem to be on a job on PAYE at the same time??

    I'd like to prepare for launch, but there are many things to do, and if I weren't to start selling for a few months, then it seems tidy in accounting terms to wait util April to register at Companies House and or decalre my new staus to Her Majesty. If I were to incur costs now, like stock, storage, leaflets, would I be able to offset those in the first years accounts, i.e backdate costs to before I officially started up?

    I'd like to avoid a tax return for this year if I can.

    Many Thanks.
    Posted: Jan 8, 2010 By: HappyHarry Member since: Dec 31, 2009
  5. gogsy

    gogsy UKBF Newcomer Free Member

    6 0
    Yes you can be PAYE and self employed (if sole trader) at the same time.

    Yes you can declare pre-start costs as business expenses in the next FY - I'm sure somebody better qualified than me can advise how far back you can go. They may also be able to advise the HMRC definition of "start date" - not the planning stage but could include pre-trading marketing?

    I would recommend at least talking to an accountant about maximising allowances, particularly in year 1. They will almost certainly save you more than they cost in fees (I'm not an accountant!).
    Posted: Jan 8, 2010 By: gogsy Member since: Sep 15, 2009
  6. HappyHarry

    HappyHarry UKBF Newcomer Free Member

    5 0
    Thanks for your reply. Encouraging that I may be able to backdate some costs. On holiday in China at the moment, so will be able to do more research when I return. May also post as a new thread, rather than on the end of an old one. Regards, Harry.
    Posted: Jan 9, 2010 By: HappyHarry Member since: Dec 31, 2009
  7. rutherford

    rutherford UKBF Newcomer Free Member

    26 0
    is it legal to adopt a zero wage, 100% dividend structure in a limited company for my potential single business owner/runner operation?
    Posted: Jan 23, 2010 By: rutherford Member since: Jan 23, 2010
  8. Zeno

    Zeno UKBF Newcomer Free Member

    4,501 1,223
    Yes, perfectly legal but possibly not entirely tax efficient.

    If this is your only source of income them it woud usually be preferable to pay yourself of around £6k a year which it tax deductible for the company but has no liability for personal income tax or national insurance yet maintains you entitlement to basis state benefits.
    Posted: Jan 24, 2010 By: Zeno Member since: Jun 12, 2008
  9. JacobJ

    JacobJ UKBF Newcomer Free Member

    8 0
    I'd like some advice on ST vs LTD please

    Not yet set up because I'm undecided about the best route for ME -

    This is how things currently stand.... Wish to set up a IT support/graphics design consultancy business operating from home. Clients are largely going to be home users and possibly a few small businesses. A website will be set up offering services ranging from laptop repairs, remote software assistance to graphic and web design. I intend to go out and do all IT repairs (drive) (on a recovery/on-call basis due to being based at home) and design work over the phone/email etc (as this is virtual, face to face isn't necessary). I'm a qualified IT support/help desk engineer

    I imagine a lot of the repairs will be paid for in cash and the remote services and web online/ through the website (shopping cart etc). I will be doing this alone and probably not make a huge amount to start with but I think an avg of 100-150 per day would be an achievable target based on labour rates and workload. I wont stock parts, only order in on spec to reduce monies tied up.

    Hmm, not sure what else to add - Are there any particular benefits for ME going either way that I should know about/really consider? What would you guys recommend? If there's anything else I need to add but have forgotten, please say.

    Ps, I'm not crap at paperwork, want to avoid huge tax deductions and like the idea of the image a ltd company brings, but wouldn't want to put myself forward for the ltd route if my personal gains aren't likely to be that influential/reflective of my 'set up'.

    Pps, what about earnings, payments from other sources - I sometimes play instruments on songs for major record company signed artists. How would I deal with/declare this income in both scenarios?

    Thanks for your help in advance - Look forward to some very useful tips.

    Posted: Feb 2, 2010 By: JacobJ Member since: Feb 20, 2009
  10. Williams lester

    Williams lester UKBF Newcomer Full Member

    2,251 343
    Your best starting point would be to book an appointment with a local accountant, as most offer a free initial meeting. They would be able to advise you based on your personal circumstances, the best route for you.

    Personally, I would be telling you to go the ltd route for the IT business and keeping the musician income as self employment, but without the full facts it is difficult to make a judgment.
    Posted: Feb 3, 2010 By: Williams lester Member since: Oct 16, 2008
  11. JacobJ

    JacobJ UKBF Newcomer Free Member

    8 0
    What 'full facts' would these be then?
    Posted: Feb 3, 2010 By: JacobJ Member since: Feb 20, 2009
  12. Ray Coman

    Ray Coman UKBF Newcomer Free Member

    144 17
    You can form a partnership or a limited liability partnership
    Posted: Feb 9, 2010 By: Ray Coman Member since: Dec 15, 2009
  13. Ray Coman

    Ray Coman UKBF Newcomer Free Member

    144 17
    One important consideration would be whether one activity is loss making and the other profit making. Another consideration would be whether there is a market for the business that you have built up and therefore any goodwill to transfer on incorporation. Limited liability also offers greater protection form being sued or from your creditors.

    If you would like to discuss these and other potential issues of having a limited company then I would be happy to offer a free, initial consultation.
    Posted: Feb 9, 2010 By: Ray Coman Member since: Dec 15, 2009
  14. limessl

    limessl UKBF Newcomer Free Member

    141 10
    I don't know whether this makes any difference, but I always find dealing with a limited company more comforting, as it is a "proper" legal entity and the owners have gone to the trouble of setting up and are happy to accept the hassles (co house, annual account filings, etc) which go along with it. Yes, I know that ltd companies as customers might well be worse, but as suppliers I find it different.

    Also, with a ltd company if something does, god forfid, go horribly wrong with the company then at least you can walk away from most situations without it infringing on your personal life.
    Posted: Feb 13, 2010 By: limessl Member since: Jan 10, 2010
  15. UKBF Regular Full Member

    194 9
    Great info.
    Last edited: Mar 1, 2010
    Posted: Mar 1, 2010 By: Member since: Feb 27, 2010
  16. JamesHidden

    JamesHidden UKBF Newcomer Free Member

    1 0
    Good company.But I always find dealing with a limited company more comforting it's proper entity.
    Posted: Mar 4, 2010 By: JamesHidden Member since: Mar 4, 2010
  17. RBS

    RBS UKBF Ace Free Member

    2,644 326
    In my opinion being sole trader is looking too "cheap" and small. Other businesses might not take sole trader so serious as ltd. Also, what about suppliers - do they take me as business or some kind of individual/one man band? Sole traders usually are not VAT registered - how it will affect my quote for business customer if it wont have VAT on it? They are better off with VAT invoice. As I understand I can still register for VAT, but then extra paperwork and higher accountant fees.

    Liability is scary bit. Lets say, you installed some power sockets, then his premises burned down and they think because you run wrong size power cable. It means they can claim all losses on you personally? Or your public liability insurance will pay them? In which case personally you will be liable for something? Imagine you worked very hard for years, bought nice car, computer, furnished my flat, then one day they come around your house and take everything.
    Posted: Mar 5, 2010 By: RBS Member since: Jul 13, 2009
  18. martin001

    martin001 UKBF Newcomer Free Member

    685 123
    I have always been a limited company, and probably a lot of it relates to the above comment. Basically ego, status, look - 7 years on, I'm a little more mature and would say that 'image' is no reason to go limited.

    In 2003 Gordon Brown was convincing every sole trader to go limited with it being much more tax-advantageous, and sure enough most of those perks have been eroded.

    If you're looking soley at the tax advantages, and get someone qualified to highlight to you the saving you'd make on earning say £30k self-employed, and 30k LTD - not a lot I am sure, then be tied to the annual accounts submission and all the rest of it. - I make the following statement with the greatest of respect to all accountants on here, but if you're looking to pay out more money than you have to each year, then by all means go LTD.

    Now I know there are scenarios where a LTD company would be more advantageous, but I think the common mistake is many 'small traders' go LTD because somehow it 'sounds more cool' or they think other businesses / people are more likely to trade with them?

    Why? - a Ltd company (that's limited liability company) has far more opportunity to not pay you, liquidate / start again, than a sole trader T/a whatever.

    My main point, is DO NOT go limited on the bases of image / credibility. If someone wants the service you offer they will buy it from you.

    Posted: Mar 16, 2010 By: martin001 Member since: May 28, 2008
  19. Merlion ABS

    Merlion ABS UKBF Newcomer Free Member

    66 11
    surely the tax savings of 20% soletrader to 10% on dividends is more than enough to tempt some people, especially if earning close to the 40% bracket.

    But running a Ltd company and the increased Accountancy Fees and addtional form filling and submission does grind on some people and can actually erode the money benefits of it.
    Posted: Apr 13, 2010 By: Merlion ABS Member since: Apr 8, 2010
  20. David Griffiths

    David Griffiths UKBF Legend Full Member - Verified Business

    11,426 3,561
    The comparison is not 20% sole trader with 10% tax on dividends. It's with the 21% corporation tax that the company pays before it can pay any dividends.

    The 10% tax on dividends is completely notional. Net dividends are grossed up and the notional tax is covered by a tax credit attributed to the dividends. Nobody at any time ever pays the 10% as such

    If you don't understand that, with respect, you need to be more cautious about advising others on tax.

    The savings in fact come from the savings in Class 4 NIC, and has little to do with tax rates.
    Posted: Apr 13, 2010 By: David Griffiths Member since: Jun 21, 2008