Sole Trade -v- Limited Company

[alex-a]

As an accountant; I would always advise the Ltd Company route.

Other considerations are:

Claiming Tax Credits (you show low salary and easy to show wage slips and P60's than self employed accounts; also private account does not show business transaction)

Liability against personal claims especially if doing building work and can damage client's property though you should have insurance cover anyway but often this insurance would not cover you.

Inland Revenue investigate more self-employed accounts than Ltd Corporation Tax Returns by about 10 times.

With the economic climate as it is and going to be in 2009; it is much easier to sign on if no work by issuing a P45.

Hi
I have to agree, most people i know who work in the construction industry are now LTD due to being charged £22.00 per week through a payment company so they can get there wages.
I have to disagree that a director can claim tax credits, theses credits are for people who are on poor wages but the law is the law.

Thanks

Alex-a

 

[LocalGuy]

I am employed full time on PAYE.
I am looking to start a web design business in my spare time and I am thinking I should go the ltd company route for the following reasons.

If I took all the profit as dividends I would not have to pay extra income tax, I realise I would pay the company tax but, as my allowance has already been used in my PAYE employment I would have to pay income tax on any "salary" I took, I would also have to pay additional national insurance on the part time salary if I took a salary I believe.

Profit from this web design business is only likely to be in the region of £1000 a month I think.

Should I also make my wife, who doesn't work, not claiming benefits and therefore is not using her tax allowance, a director or employee, perhaps company secretary and pay her a wage as long as it's less than her tax allowance? would she then have to pay national insurance?
I don't want to complicate matters though if this is going to give me lots of headaches as an employer.
Do wages paid out get deducted before the companies tax is calculated?

many thanks for your views.
Clint:|

Also remember that dividends do only get charged at 10% tax before the higher rate tax of 32.5%. I would also make use of the tax free allowance which is £9440 this year.

Also yes the wages are deducated before the companys tax is calculated because it is technically an expense of the company.

 

[teddys]

Those interested in the differences between these two structures may find some useful information on our blog here

 

[naomi.beamish]

Hi there,

I myself am not an accountant however I have just recently published a blog on when it's better to be Ltd and had to run through lot of figures with accountants. As, a marketeer I did find this a little long winded so I've put my short & simple conclusion below.

The overwhelming conclusion is that it is better to become a Ltd (taking into account 2014s tax regulations) when you are making £25K profit per year. It is at this point that you'll save in tax AND this takes into consideration the additional accountancy fees (for the extra bit & bobs a LTD needs to do).

Message me if you would like to see (really easily & simply) the calculations and savings involved.

I hope this helps

 

[MyAccountantOnline]

Hi there,

I myself am not an accountant however I have just recently published a blog on when it's better to be Ltd and had to run through lot of figures with accountants. As, a marketeer I did find this a little long winded so I've put my short & simple conclusion below.

The overwhelming conclusion is that it is better to become a Ltd (taking into account 2014s tax regulations) when you are making £25K profit per year. It is at this point that you'll save in tax AND this takes into consideration the additional accountancy fees (for the extra bit & bobs a LTD needs to do).

Message me if you would like to see (really easily & simply) the calculations and savings involved.

I hope this helps

Hello Naomi

I am an accountant and with the greatest of respect I DISAGREE.

The decision to incorporate should not be based solely on profits.

A business can also save tax (and that's not a saving that is outweighed by accountancy fees) when profits are less than £25,000.

My advice, as an accountant, is that anyone running a business should get proper professional advice from a qualified and experienced accountant when deciding whether to incorporate.

 

[naomi.beamish]

Hi Nicola.

Thanks for this. I have been though the calculations many times and of course know there is more to it then basing a decision solely on profit. However, I also know that this issue often gets muddied by many accountants trying to show off there superior knowledge on the issue (no offence).

Instead, I would prefer just the headlines if I was looking on here. I would not want to look on here and then be told to talk to someone else. Of course after getting the information then chat to an accountant about it if you decide to go ahead. The thing is most people will want to know a bit about it beforehand and get different points of view before chatting to an accountant.

Plus - good accountants should be PROTECTIVELY looking at what is best for your business anyway.

 

[MyAccountantOnline]

Hi Nicola.

Thanks for this. I have been though the calculations many times and of course know there is more to it then basing a decision solely on profit. However, I also know that this issue often gets muddied by many accountants trying to show off there superior knowledge on the issue (no offence).

Instead, I would prefer just the headlines if I was looking on here. I would not want to look on here and then be told to talk to someone else. Of course after getting the information then chat to an accountant about it if you decide to go ahead. The thing is most people will want to know a bit about it beforehand and get different points of view before chatting to an accountant.

Plus - good accountants should be PROTECTIVELY looking at what is best for your business anyway.

No offence taken Naomi.

The trouble with your headline is that it is quite simply wrong. I personally dont see how that helps anyone.

The simple fact is savings can be made, taking into accountancy fees, when someone makes profits that are less than £25k.

......and as an accountant, and having been an accountant for 25 years plus working with small businesses it is actually a calculation I've done just a few times

 

[naomi.beamish]

Hi Nicola,

What part of my headline is wrong...saving can be made, taking into consideration accountancy fees, when someone makes profits of more than £25K. Have I said that they can't also be made at lower profits? In MY humble opinion GENERALLY a business will be better prepared and better able to make the transition from sole trader to Ltd at this figure. Below this figure the savings are in no way as big and GENERALLY the business finds it a tougher transition.

 

[MyAccountantOnline]

Hi Naomi

You stated ''...when you are making £25K profit per year. It is at this point that you'll save in tax AND this takes into consideration the additional accountancy fees (for the extra bit & bobs a LTD needs to do).''

As an accountant I am telling you, you can save tax taking into account accountancy fees, when you have profits less than £25k.

 

[MatthewRJones]

Interesting post I am currently deciding whether to go Ltd or stay as a Sole Trader so this information helps. Thanks

 

[Jeremiah@RHJ Accountants]

Interesting post I am currently deciding whether to go Ltd or stay as a Sole Trader so this information helps. Thanks

You should seek professional advice from an accountant as each situation is different.

You could also do a comparison of sole trader or limited and see which is best for you in terms of tax efficiency and many other things.

 

[spursberry]

Hi

Just read through most of whats on here - after reading lots on this subject online - and I'm none the wiser! lol It's so very confusing!

I'm in the process of starting up by myself. I want to start three very similar business but they have to trade under different names for appearance reasons (all above board it's just they don't cross over into each other very well). I believe I've found that I can be a sole trader and have three business names - but do I have to register them with the tax office or just do it all under my name as a Sole Trader?

It seems the questions I have have been asked a million times and the answers fall on both sides of the equation - Ltd or Sole Trader, either or.

So I was just wondering how much a good accountant - on average, a ball park figure, an estimated guess only - would charge for a sit down session to go through options with me?

 

[Scalloway]

You can have three separate businesses as a sole trader. It just means you have to complete three sets of self employment pages in your tax return.

 

[Yorkshire&Online]

A good accountant should offer you a free consultation to go through the pros and cons and help you decide. This also gives you a good opportunity to decide if you like the accountant and if you think they could benefit you and your business in other ways.

 

[spursberry]

Guys - thank you so much! Already greatly helpful!

 

[Jeremiah@RHJ Accountants]

I agree with Scalloway You can have three sole trader businesses and as long as you keep accurate records there is no issue with this in terms of self assessment etc.

I would recommend you do speak to an accountant as you will want to get the structure and tax planning correct form the outset.

Also it should be a free consultation as mentioned, also i would say meet a few accountants and see which one you get on with best and who can benefit you and your business.

Good luck

 

[spursberry]

Perfect - thank you very much, that is what I think I shall (have to) do

 

[DFL Accountants Ltd]

Hi.

Also bear in mind that you can have 3 (or more) trading names for one Ltd Company - so taking into account the potential tax savings and Limited Liability advantages you should discuss this with whichever accountant you visits.

I agree that the intial consultation should be free - after that charges differ from accountant to accountant and region to region - ask for Fixed Fee quotes!

 

[spursberry]

Will do - and once again that you everyone this has been really helpful today!

 

[spursberry]

Hi everyone

I've met with an accountant today (free consultation - thanks for the heads up everyone) and it was really helpful. I'm going to set up as a LTD and go with the accountant.

Thanks for the information - really appreciated

 

[Deleted member 53208]

Maybe not as important in Financial Services as Director guarantees mean that the legal protection afforded to directors in most other fields doesn't apply in FS, however having said that in accountancy terms as long as your accountant isn't charging a fortune because you've got "company accounts" the company route can save you quite a bit of money.

 

[DFL Accountants Ltd]

Although Sole Trader is the most basic form of buisiness structure, when the Net Profits exceed about £18k (depennding on accountants fees!) there can be a saving on National Insurance if trading as a Ltd Company and it need not cost too much to set up a Ltd company, you can do it yourself through the Companies House website for just £18 but some parts of the form are quite difficult if you are not an accountant I'm afraid.

 

[FD Analytical Accountants]

Morning all,

A great deal has already been discussed on this topic! There is no doubt that there are significant tax advantages through a salary / dividend mix, the claiming of expenses such as mileage allowances etc. But, the enhanced admin burden from incorporating a limited company can be a huge change from that of a sole trader - if this isn't done correctly any "tax advantages" can easily be reversed in the event of a tax investigation; for example ; if dividends aren't recorded correctly, if "dividends" are paid to non shareholders (paying dividends to directors rather than shareholders is a common error) and that's before we look at directors loan accounts!

So my summary would be Ltd Companies can be incredibly tax efficient, but take good advice, plan your remuneration correctly and prepare monthly management accounts to support any dividend payments!

 

[fastprint.co.uk]

Limted company is also more secure from outside sources

 

[Project Yoda]

I am happy to be educated and corrected, however, this is my personal experience...and I have found that unless you are earning in excess of £100K a year in profit and you have a accountant who works diligently to make you take advantage of every possible tax savings, for the vast majority of people the tax savings may not always be worth it when you consider the extra expense in accounting and all the extra admin and possible headache you may have to go through. If you as an example are planning on being or staying a "small business" or one man band, then I am not sure if limited company will really save you much money.

I have read many articles like the one below, and I question the number of "small businesses" or one man bands that make good enough profit to warrant being a limited company.

(I realise I can't post links, sorry)

If the figures are right on the above link, then making a £100K profit, then you need to pay save £5K, and you pay say an accountant about £1,200 then if you genuinely put a price or value on your time, then you may see the extra money you could have earned if you did not have do the accounting so thorough for a limited company make equate to more than the £4K that you save. And for the vast majority of people the accountant may not be so motivated to look at making every possible tax saving for you!

However, as I said I am happy to be educated and proved wrong.

 

[cheaper accountant]

Don't overlook the limited liability benefits as these can be huge!

We worked with a boat trip company director who was afraid of losing her house. We suggested restructuring to a Ltd company from a sole trader to protect personal assets should the business take a dive in takings.

 

[Spongebob]

The main reason for operating as a limited company is the benefit of limited liability. Any potential tax advantages are merely a bonus.

Most people starting up a small business don't expect it ever to get into serious debt. Consequently they don't always appreciate the importance of limited liability at the outset. Wind forward a few years however, and it is very easy to find oneself with a thriving business that permanently owes thousands in supplier credit and tax not yet due for payment.

All it takes is an unforeseen catastrophic event or a sudden downturn in trade (perhaps because of a new competitor opening up nearby) to tip an expanding business into a tail-spin. With limited liability one's home and personal assets are protected - without it you can easily lose the lot.

Most businesses fail sooner or later. Mainly sooner. Protect yourself.

I can think of very few businesses that should not be set up as limited companies.

 

[john1989]

The main benefit of operating via a limited company depends on a variety of facts. If someone is going to be operating in a very low risk industry then the benefits are likely to be tax motivated and not liability motivated.

 

[jf-financial]

With the dividend allowance coming in next year some of the tax savings have been reduced but the limited liability benefit remains a big advantage over a sole trader.

That said there are some people who are simply not suited to the responsibility of running a limited company - a good accountant can only take them so far.

 

[wood1e2]

I have always believed unless you were turning over more than the VAT threshold there is no benefit from a tax point of view being a limited company.

Obviously there are liability benefits.

So even though self employed appears to be more tax it doesn't pay Corporation Tax... which even though not a personal tax in a OMB Limited company it might as well be.

 

[john1989]

I have always believed unless you were turning over more than the VAT threshold there is no benefit from a tax point of view being a limited company.

Obviously there are liability benefits.

So even though self employed appears to be more tax it doesn't pay Corporation Tax... which even though not a personal tax in a OMB Limited company it might as well be.

There are many limited companies that are not near the threshold for VAT.

Profit is far more important than turnover for determining whether or not a business should incorporate.

 

[wood1e2]

Of course there are, I was only talking as a general rule of thumb. And I should think it is lower threshold than that.

Along with increased accounting costs, VAT returns, business management, company management.

As tax has to be paid, it always seemed less complicated and cheaper to remain a sole trader.

And the fact that accountants are great at saying 'dividends is best' as lower tax rate, but...

I would rather pay slightly more tax, than have to pay for or complete myself a PAYE return every month or even once a year, and certainly don't want anything to do with VAT.

Although if I had to register I would go for fixed rate and make a few quid of the difference.

 

[james3000]

Is been able to retain profits not a huge advantage of been a Ltd company rather than a sole trader? .

 

[eastcoastbaby]

You can retain profits if you're a sole trader too. There's no tax advantage in that, since they are retained after tax. Just put them in a reserve account.

 

[james3000]

With retained profits on a Ltd company tax is 20% so if the company makes say 150,000 profit a year ,Only 20% tax will be deducted ,Where as a sole trader anything over 42k will be taxed at 40% + ni

 

[eastcoastbaby]

ah yes, that's true. Thanks. Though the profits belong to the business, and if you plan on taking any cash out it's going attract tax, either on dividends or income tax on drawings.

If the profits are staying in the business, then it makes perfect sense to set up as a limited company.

 

[jam_the_doughnut]

This is great advice, I fell into starting up as a LTD company and am really regretting it now as the process of getting my tax straight seems overly complex...I want to pay what I owe and be honest...I don't want to hide or do any clever accounting tax avoidance

The problem I'm having now is I just want rid of my LTD as I have started permanent employment after working as a contractor for a few days less than a year.

An accountant I enquired with wants around £700 to do my accounts and dissolve my company, which I cannot really afford to pay out right now, so I'm trying to work things out myself.

Doing my self assessment at the moment.

The 2014-2015 tax year, I initially started as employed and by November 2014 when I started my LTD, I had earned over the £10,000 Personal Allowance.

I don't care about tax benefits as I just want the easiest way to pay what I owe and shut down my company.

I also don't want anything to do with IR35.

Although, when I signed up with the agency that paid my invoices and put me out to work, I signed an IR35 opt out of regulation form, I have heard this is worthless and HMRC can still investigate you for compliance.

I am the sole owner of my company and issued myself 2 shares when I incorporated.

To avoid IR35, could I just pay myself a salary and no dividend?

I have already used up my Personal Allowance in the 2014-15 so there is no benefit to issuing dividends as far as I am aware.

Sorry if I posted this in the wrong section...Trying to stop banging my head against the wall trying to figure all this out

 

[Scalloway]

Trying to do your own limited company accounts is not recommended. Shop around for quotes from accountants.

 

[wood1e2]

@jam_the_doughnut - you should shop around as mentioned previously, but at some point you will get to a price where it just cannot be completed for less.

I would think that £500 is about as low as you would get, having said that there maybe a freelancer website that will complete cheaper, if they are starting out. Or drop me a message

 

[john1989]

£700 seems very reasonable.
An accountant usually absorbs a lot of admin costs in the first year such as issuing engagement letters and complying the MLR.
If there is no prospect of them getting any more business from you, they have to factor in the admin time into the fee.