Sole Trade -v- Limited Company

[harry_p]

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!

 

[NICHOLASM1987]

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.

 

[NICHOLASM1987]

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!

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 .

 

[HappyHarry]

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.

 

[gogsy]

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!).

 

[HappyHarry]

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.

 

[rutherford]

is it legal to adopt a zero wage, 100% dividend structure in a limited company for my potential single business owner/runner operation?

 

[Zeno]

is it legal to adopt a zero wage, 100% dividend structure in a limited company for my potential single business owner/runner operation?

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.

 

[JacobJ]

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.

J

 

[Williams lester]

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.

J

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.

 

[JacobJ]

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.

What 'full facts' would these be then?

 

[Ray Coman]

Are there any other options other than umbrellas or going ltd?

I have been combing the forums and websites but no one really saying if there is ir isnt?

You can form a partnership or a limited liability partnership

 

[Ray Coman]

What 'full facts' would these be then?

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.

 

[limessl]

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.

 

[Discountbannerprinting.co.uk]

Great info.

 

[JamesHidden]

Good company.But I always find dealing with a limited company more comforting it's proper entity.

 

[RBS]

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.

 

[martin001]

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.

M

 

[Merlion ABS]

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.

 

[David Griffiths]

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.

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.

 

[SoFar]

Although not all the details are out yet, it's looking like there will be cuts in corporation tax from the con-libs. With that said, if I have been putting off changing from sole trader to ltd, the tax savings are more likely to increase than decrease in the next few years aren't they?

I know this is a question I should be able to answer myself, but I'm tired.

 

[elaine@cheapaccounting]

Although not all the details are out yet, it's looking like there will be cuts in corporation tax from the con-libs. With that said, if I have been putting off changing from sole trader to ltd, the tax savings are more likely to increase than decrease in the next few years aren't they?

I know this is a question I should be able to answer myself, but I'm tired.

They are talking about a cut in Corporation tax paid by companies with profits over £300k - so it may not concern you.

 

[linda nicholson]

i am a bookkeeper is there any software package i can use for doing directors reports balance sheets /audit reports for companies house thought i had done 3 rd time they have come back cleint does not want to send to accountant cannot afford one yet

 

[marshrobin1]

Thank you for a very useful summary of this question.

 

[mat@msg]

You may also find this handy:

http://www.companiesmadesimple.com/sole-trader-v-limited-company.html

 

[bsmith]

The post is informative and useful.At some stage during your business career the question that most of us have to deal with is whether or not to form a limited company.

 

[Tax Specialist]

Hi,

I would just add that the limited company option might be attractive for reasons of not exposing one's assets to a possible claim. That is one reason (Quite apart from tax considerations) why many high-risk businesses trade via a Ltd Company. Remember, too, with a limited company your business financial data will be in the PUBLIC DOMAIN and thus easily accessable by competitors !

I strongly recommend you take expert advice on this before proceeding.
The money you spend on that will be very worthwhile, since you need to
fully understand the different choices.

Best wishes

Tax Specialist

 

[elaine@cheapaccounting]

Remember, too, with a limited company your business financial data will be in the PUBLIC DOMAIN and thus easily accessable by competitors !

Limited info available - abbreviated accounts plus details of reg office, directors etc

 

[safetyjunction]

Hi there,

I've been on the forum before with a previous supplier but now as my own new company.

I have been reading all of the comments here and all have valid points. However one comment near the start of the thread has been completely overlooked and that is one of perception.

Perception is important when trying to attract new suppliers and customers and my business will be predominatly web based. Being a sole trader in these circumstances limits conversion sales as many people like to see they are dealing with a 'perceived' larger business.

I've also experienced caution from suppliers who almost look at many sole traders (Rightly or wrongly) as scam artists. I'm sure people are just over cautious these days but I found it very interesting.

I have gone the Ltd route because I am looking at the bigger picture and aiming for fairly quick growth. Due to the amount of products I need to deal with and large volume of transactions I find it more useful to manage the liability through the Ltd route.

I think it depends on products or services you provide. Remember if you do provide products where there can be any issues in terms of distance selling, or any regulations where the business can be taken to court, fined etc then I would prefer the protection of going through the business.

Just my 2 pence worth, hope it helps as people seem to be just focussing on the amount of work the paperwork takes or tax. Surely the overall business model should be the main driver as in my case? All thoughts and opinions welcome

 

[90DC]

I chose to go into business as a sole trader and although it might be worthwhile going Limited, i wouldn't be happy in making that decision until i am atleast three years into business. I want to make a name for myself and not show my competitiors my finances until i am one of the leading companies in my area. I'd like to think i will keep the tax man happy in the meantime.

 

[Pdsayers]

Great post and many great replies.

I think Sole trader is still the way to go for me but everyone's situation is different.

The limited liabillity is a bonus but I have always thought this could be abused by high risk business (aka fraudsters) leaving behind creditors when they go under.

So glad I joined this Forum!

 

[mat@msg]

We've just launched our first iPhone app which deals with... "Am I better off as a sole trader or a limited company?"!

http://www.companiesmadesimple.com/tax-saver-uk-app.html

 

[Merlion ABS]

Nice simple little app. however, I think there could be a little problem with it.

when you first enter the net profits, it then goes to the comparison screen showing tax and ni due for both sole trader and ltd co and also states the savings gained by going ltd.

But the problem i encountered is that if you then enter a revised net profit at the top and recalculate, it still shows the tax and ni due etc.. for sole trader from the first go, yet shows the new calculated figures for the ltd company.

This therefore gives incorrect figures!!

 

[mat@msg]

Nice simple little app. however, I think there could be a little problem with it.

when you first enter the net profits, it then goes to the comparison screen showing tax and ni due for both sole trader and ltd co and also states the savings gained by going ltd.

But the problem i encountered is that if you then enter a revised net profit at the top and recalculate, it still shows the tax and ni due etc.. for sole trader from the first go, yet shows the new calculated figures for the ltd company.

This therefore gives incorrect figures!!

Thanks for the feedback. I've let the IT team know!

 

[ukconstructionguru]

Fantastic array of posts here, really helpful. For anybody that's looking for the main points in going limited I'd focus on:

1. Limitation of Liability

2. Different Remuneration (As above)

3. Increased administration cost / burden / time consumption

4. If you VAT register it is the entity that is VAT registered, not the individual. Providing the activity is not the same / very similar any other businesses ran as a sole trader will not be aggregated with the limited company (for VAT purposes).


This is a particularly tough topic for anybody and requires considerable thought; I'm a chartered accountant by trade but now in entirely different industy. I still had to rely on Elaine a month or so ago for some advice (thanks again Elaine!) - no decision should be made lightly and all angles should be considered.

Chris

 

[braddo]

Super informative thread. I haven't read all of it, but will.

I am NOT in business yet. I am about to launch a new product onto the market (within the next 2-3 months). Inititally, it will be a "trial". The product is unproven. It may sell. It may flop.

If it sells well, the business will be profitable within 3 months, as overheads are minimal and I'm aiming to distribute through large retailers, quite possibly on an "sale or return" basis.

This is what I'm thinking of doing with regard to ST vs LTD company:

I want to set up as a VAT registered Sole Trader for the trial period. Therefore when I purchase my stock, I'll be a sole trader.

My question is this:

If the product is selling well in the shops, I will most likely incorporate a LTD company, as I will need to buy a van, and start doing a lot of travel, and probably rent storage premises. If I incorporate as a LTD company after say 2 months (BEFORE the retailers pay me for the goods that have sold), and the retailers then pay my LTD company - am I still entitled to the tax benefits of the LTD company on that income?

 

[socialenterprisesearch]

great thread very usefull

 

[algin8]

just joined in
this post makes a good reading for every1
cheers

 

[Alan R Price]

My advice to any person starting a new business, if it is going to involve using any significant amount of credit, is to use the protection of limited liability. There may be tax advantages to being a sole trader but in my view the protection from personal liability is far more important.

 

[frauke]

Generally I'm a great believer in the advantages of Ltd company over sole trader - but there is one group who never, never, never should consider becoming a Ltd Company...

They are individuals who cannot ask for receipts and cannot keep records of any kind. They are difficult enough to deal with as a sole trader, but as a Ltd company impossible!