Sole Trade -v- Limited Company

[DFL]

Since the £10k zero tax band was taken away from small ltd companies, it is better for most small businesses to be sole traders or partnerships (unless the ltd liability is a big issue). It is very easy to tell clients to take a small salary and the rest as dividends, until the taxman comes along. Not to mention company car tax, fuel benefits and dealing with ltd company regulatory demands by Companies House.

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.

 

[DFL]

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.

Interesting thread. If statistics are to be believed, most businesses (about 80% if I remember rightly) don't make it past 5 years. One of the key benefits of a limited company is limited personal liability, am I right in thinking that trading as a sole trader leaves you personally liable for all the businesses debts?

While you don't start a business anticipating failure, failure happens frequently, sometimes for reasons that are totally beyond the control of the business.

It seems to me to be a no-brainer, you should always look to limit your exposure to risk whenever possible, tax issues are very small beer in the great scheme of things, losing your home isn't.

Learning how to run a limited company is just part of the business skills set needed, its not that difficult really!

 

[cmj]

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

 

[cmj]

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

 

[MikeH]

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

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.

 

[DFL]

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

 

[Glenn Drake]

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.

 

[200386]

What has the taxman got to do with it? Nothing.

Are you serious???

 

[200386]

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.

Unless the paperwork on the dividends are flawless and the payments are processed correctly, they will be disallowed.

 

[Isabella_Smith]

An excellent thread.

 

[DFL]

Unless the paperwork on the dividends are flawless and the payments are processed correctly, they will be disallowed.

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.

 

[DFL]

Are you serious???

Yes he is serious - you (legally) run the company for the benefit of its members not the taxman.

 

[MikeH]

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.

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.

 

[200386]

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.

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.

 

[200386]

Yes he is serious - you (legally) run the company for the benefit of its members not the taxman.

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.

 

[MikeH]

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

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.

 

[DFL]

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.

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.

 

[RidgewayStudios]

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

 

[DFL]

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.

 

[Spongebob]

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

 

[Jenni384]

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!

SB, the point about having a Ltd Co is that, as the rules currently stand, you shouldn't pay any Employers NI on directors salary, as you should be extracting profits as dividends.
You've got to be making approximately £300k (I think, I forget the actual figure) before it becomes more tax efficient again to be a sole trader than a Ltd Co.

This is, of course, a generalisation and any individual should take advice tailored to their own circumstances.

 

[200386]

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.

Yes, three clients coming from other accountants (like yourself) a year that have been investigated and been asked to pay large tax bills! I think one is too many, as accountants should never let this happen to their clients. There is no need for sarcasm either, this is a serious forum trying to give people proper advice.

If you think that the husband and wife issue has been dropped by tax inspectors, your clients are going to get a big shock.

 

[DFL]

Firstly, I apologise if you read that as sarcasm, it certainly wasn't meant in that way that's not my style. I was genuinely amazed that you were picking up THREE clients a year in these circumstances.

As tends to happen on internet boards, strong opposing views sometimes result in less reasoned debate and becomes an argument. As we are poles apart, this seems to be what has resulted here.

I have no wish to continue in this way with you, so it's probably best if we agree to disagree - one final polite request though:

Yes, three clients coming from other accountants (like yourself) a year that have been investigated and been asked to pay large tax bills!

The above is factually incorrect and bordering on libellous. Our clients would never be exposed to such an outcome I am not going to make a song and dance about it but would respectfully ask that you acknowledge this.

 

[MikeH]

On a forum the written word is so easily interpreted differently by different users.

 

[EfficientEnergySolutions]

I have just read through this entire thread to seek knowledge on which route would be best for a business and the conclusion I have come to is.......

SEE AN ACCOUNTANT!

As obvious as that answer appears, it is the best thing you can do for your business instead of trying to second guess how business taxation works and ending up sending all your nice earned money in a gift wrapped envelope to Mr. Tax Man.

 

[mcarey]

efficient. I totally agree with you. That's the answer i have come up with. Look for a good accountant.

 

[EfficientEnergySolutions]

Just to show that it's very difficult to know which route to take between S/T and Ltd:

I'm trying to decide which route is better for a new venture, and after having explained in full to two accountants everything about my business, guess what each of their answers were?

 

[MikeH]

Just to show that it's very difficult to know which route to take between S/T and Ltd:

I'm trying to decide which route is better for a new venture, and after having explained in full to two accountants everything about my business, guess what each of their answers were?

Unfortunately some accountants do have a natural preferrence to one or the other. It would be great if they simply took an objective approach with eyes wide open. But guess what..... accountants are human too! It is of course possible that your business needs fit right in the middle of ST and LTD but they should be able to put up a sound argument why they suggest the particular route for your business.

 

[billie1]

Would you set up a bookkeeping business as a sole trader or Ltd Company? I'm starting out on my own with no loans but would like to expand the business a few years down the line, possibly employing an Accountant.

I guess their's no harm in starting out as a sole trader and later changing into a Ltd Company. How easy is it to change from one to the other?

 

[MikeH]

Again questions for an accountant. In your situation if you have very little exposure to liability then it is likely that a sole trader status would be OK.

 

[billie1]

I may have limited liability now, but what if I do decide to expand later down the line and employ an accountant or payroll clerk? Should all of these be taken into consideration?

 

[billie1]

Have not had an answer to question above, thus far.

 

[SoFar]

You've got to be making approximately £300k (I think, I forget the actual figure) before it becomes more tax efficient again to be a sole trader than a Ltd Co.

This is, of course, a generalisation and any individual should take advice tailored to their own circumstances.

I'm very interested in this. Can Jenni, or anyone else expand on it or point me to any other resources that explain more?

(I'm not earning £300k but it could influence whether to turn limited if it later becomes more tax efficient to be a sole trader again if £300k is ever reached.)

 

[SoFar]

Since I posted the above message I did a bit of research and found a LTD vs Sole Trader comparison calculator. I don't know how accurate it is, but the results surprised me:

£50k Gross Income - Ltd Tax saving: £3554
£100k Gross Income - Ltd Tax saving: £3679
£300k Gross Income - Ltd Tax saving: £4179
£600k Gross Income - Ltd Tax saving: £4929
£1.2m Gross Income - Ltd Tax saving: £6429
£2.4m Gross Income - Ltd Tax saving: £9429

This really makes me question the benefit of incorporating from a tax saving point of view alone, as if you're taking out all the profits from your business, the saving doesn't increase in proportion to your turnover.

 

[billie1]

It is clear that the benefits of forming a Ltd Company far outweighs that of a sole trader. I have come to the conclusion that if you have intentions of growing your business why not go Limited straight away instead of having to do so at a later.

 

[SoFar]

I've now found another Incorporation calculator, which gives different results:

When taking home 100% profit.

£50k Gross Income - Ltd Tax LOSS: £6,623
£100k Gross Income - Ltd Tax LOSS: £13,023
£300k Gross Income - Ltd Tax LOSS: £38,623

Of course, if you don't take out the whole profit, the results are different:

£50k Gross Income (£30k salary) - Ltd Tax LOSS: £397
£100k Gross Income (£30k salary) - Ltd Tax saving: £10,103
£300k Gross Income (£30k salary) - Ltd Tax saving: £52,103

 

[David Griffiths]

I've now found another Incorporation calculator, which gives different results:

When taking home 100% profit.

£50k Gross Income - Ltd Tax LOSS: £6,623

That's just wrong. Haven't checked the others. Most efficient method gives a tax gain of £3,418.

£10k out is a bit worrying.

 

[billie1]

Can I confirm that you have to be making £35k per annum (net) before it becomes tax efficient to form a Limited Company.

 

[SoFar]

That's just wrong. Haven't checked the others. Most efficient method gives a tax gain of £3,418.

£10k out is a bit worrying.

Here's the calculator I was using:

http://www.newmanandpartners.co.uk/resources/tax_centre/tax_calculators/incorporation.php

Most likely I may have mis-interpreted the results or it could be wrong.

 

[SoFar]

Ahh, yes I think I've made a newbie mistake by trying to take the same salary once incorporated as a sole trader would, which no-one would ever do. I.e. 50k in box one and 50k in box 3. I didn't realised that the Net income is worked out based on just box 1, so box 3 can be left at £5435.

So basically people, ignore all my previous posts sorry!