Sole Trader or Ltd Company without VAT Registration

[ttmw]

I currently run a retail business (B2C) as a sole trader. Turnover this year should be in the region of £40-50K at worst, and £60-80K if growth continues along the same lines as previous years.

I don't think i'd benefit from being VAT registered at the moment, but I'm thinking about starting a limited company (I already have the name registered but dormant) but not being VAT registered just yet.

Chances are i'll be hitting the VAT threshold in a year or two anyway, which would require a LTD company and VAT etc.

I run my accounts through a personal bank account at the moment, but i've outgrown that and require a business one now either way. I seem to be opening accounts with different businesses (Royal Mail, Wholesalers, Payment Processing etc.) all the time as well...

So rather than have to change everything over in a year or two anyway, would it be better for me to open up my business bank account, build up my credit, business accounts, and reputation in a Ltd company name rather than my own?

Liability issues are a plus with a Ltd company, but not a huge deal for me currently.

I know there's extra accounting costs for a year, but i'm thinking it might be less hassle to do it this way? Comments appreciated! Is it just worth waiting it out until i reach that threshold, or do you think i should set up the Ltd company now?

 

You can be VAT registered as a sole trader - you don't need a limited company to register for VAT..

 

[ttmw]

You can be VAT registered as a sole trader - you don't need a limited company to register for VAT..

I'm not looking to become VAT registered as i said above, just a limited company.

Are you suggesting i could just stay as a sole trader and just become VAT registered when i reach the threshold? Is being a limited company required as i get above the VAT threshold (£72k?) too?

Should i be worrying more about the limited liability side of things possibly?

 

[internetspaceships]

If you're looking at passing the VAT threshold at some point in the relatively near future why don't you just register straight away?

That way you won't be completely re-evaluating your pricing structure and worrying over less margins later on when the VAT threshold is reached and you have to do it anyway?

There are a lot of forum threads here about people seriously worrying over their pricing once they reach the threshold. This way you would avoid that probelm completely and be able to plan properly.

 

[Bob]

... but you can postpone the requirement to register if you incorporate your business just before you reach the registration threshold. You must do it before the sole trader business is required to register and your VAT turnover clock then starts again at zero thus preserving your margins for a little longer. Only applies to B2C businesses and not B2B

 

[internetspaceships]

... but you can postpone the requirement to register if you incorporate your business just before you reach the registration threshold. You must do it before the sole trader business is required to register and your VAT turnover clock then starts again at zero thus preserving your margins for a little longer. Only applies to B2C businesses and not B2B

That's not the point I was making though.

 

[Bob]

That's not the point I was making though.

I do appreciate that, but I would approach it from a different perspective. I would be planning to sell at what would be my VAT inclusive price once I was registered and would just plan to make the extra profit until then. The strategy does of course depend upon the margin and the VAT liability as to whether it is worth it. For instance with an establishment like a restaurant, delaying registration can add £10K to the bottom line twice - once as a sole trader and once as a company.

 

[internetspaceships]

I'm afraid that you'd question that very strongly the first month your earnings dropped dramatically.

 

[ttmw]

Wouldn't it be better to make a little more profit up to the point where i HAD to be VAT registered, instead of registering VAT right now?

VAT registered isn't what i worrying too much about at the minute anyway. I was thinking of becoming a limited company now to avoid moving all my accounts over to a limited company when i'm required to do so shortly (a year or so) anyway.

Is it possible to do my Limited Company accounts myself easily? I know they're a lot more precise and intricate than sole trader accounts, but don't know if it's beyond my capabilities.

 

[internetspaceships]

They should both be as intricate and precise as each other. If you can do sole trader accounts you just need to get the LTD ones signed off by a qualified accountant.

 

[Bob]

They should both be as intricate and precise as each other. If you can do sole trader accounts you just need to get the LTD ones signed off by a qualified accountant.

There is no requirement for company accounts to be signed off by an accountant - qualified or not. They are approved by the directors. Different if subject to audit but with exceptions you would as an example need to have turnover in excess of £6.5 million. In that case they need to be signed off by a registered auditor and not a an accountant

 

[internetspaceships]

There is no requirement for company accounts to be signed off by an accountant - qualified or not. They are approved by the directors. Different if subject to audit but with exceptions you would as an example need to have turnover in excess of £6.5 million. In that case they need to be signed off by a registered auditor and not a an accountant

Fair enough, I wasn't aware of that. Thanks.

Mind you, anyone trading without an accountant behind them really should have one regardless of status.

 

[Bob]

Wouldn't it be better to make a little more profit up to the point where i HAD to be VAT registered, instead of registering VAT right now?

VAT registered isn't what i worrying too much about at the minute anyway. I was thinking of becoming a limited company now to avoid moving all my accounts over to a limited company when i'm required to do so shortly (a year or so) anyway.

Is it possible to do my Limited Company accounts myself easily? I know they're a lot more precise and intricate than sole trader accounts, but don't know if it's beyond my capabilities.

No problems with the day to day bookkeeping but, in all honesty, limited company accounts are complicated. Get someone like Elaine at cheapaccounting.co.uk to deal with the statutory matters and concentrate on making money including the extra profit you can make by deferring VAT registration/ Always bear in mind the effect that VAT registration will have when required

 

[Bob]

Mind you, anyone trading without an accountant behind them really should have one regardless of status.

Totally agree with that statement. A good accountant can often save their fees through proactive tax advice

 

[ttmw]

No problems with the day to day bookkeeping but, in all honesty, limited company accounts are complicated. Get someone like Elaine at cheapaccounting.co.uk to deal with the statutory matters and concentrate on making money including the extra profit you can make by deferring VAT registration/ Always bear in mind the effect that VAT registration will have when required

I've spoken to someone at cheapaccounting.co.uk already..seemed quite helpful to be fair, but with £35-£40 + VAT per month, then accounting software if needed at up to £16-20 per month, i could be paying around £720+VAT each year for accounts... which is above what i'd want to pay really. I know they could probably save me that or more, but it seems like an awful lot.

 

[internetspaceships]

I've spoken to someone at cheapaccounting.co.uk already..seemed quite helpful to be fair, but with £35-£40 + VAT per month, then accounting software if needed at up to £16-20 per month, i could be paying around £720+VAT each year for accounts... which is above what i'd want to pay really. I know they could probably save me that or more, but it seems like an awful lot.

I think that as I've said before, it depends how much you see your own time being worth.

 

Wouldn't it be better to make a little more profit up to the point where i HAD to be VAT registered, instead of registering VAT right now?

VAT registered isn't what i worrying too much about at the minute anyway. I was thinking of becoming a limited company now to avoid moving all my accounts over to a limited company when i'm required to do so shortly (a year or so) anyway.

Is it possible to do my Limited Company accounts myself easily? I know they're a lot more precise and intricate than sole trader accounts, but don't know if it's beyond my capabilities.

Can I ask why you say you are required to move to a limited company in a year or so? You have mentioned it twice now but there is no requirement I can think of unless there is something particularly applicable to your business. To reiterate though, a sole trade can voluntarily register for VAT or can register for VAT when they reach the threshold (£73k) and can carry on as a VAT registered sole trader . There is no requirement from a VAT point of view to become a limited company.


For a straightforward business limited company accounts and sole trader acccounts would be very similar. The main difference would be the additional paperwork for a limited company - the dealings with Companies House and as you would probably want to pay yourself at least partly by salary so you woud have to register for and operate a PAYE system.

 

[Bob]

The decision as to whether to incorporate or not should be taken in conjunction with professional advice as it can have tax benefits dependent upon your personal circumstances although it does also come with costs. There is no requirement that you incorporate in order to be VAT registered. However ina B2C situation there can be advantages in deferring registration as long as possible. Incorporating the business just before the sole trader reaches the registration threshold can start the clock running again i.e they can turnover almost £146K (£73K x 2) before registration is required

 

[elaine@cheapaccounting]

I've spoken to someone at cheapaccounting.co.uk already..seemed quite helpful to be fair, but with £35-£40 + VAT per month, then accounting software if needed at up to £16-20 per month, i could be paying around £720+VAT each year for accounts... which is above what i'd want to pay really. I know they could probably save me that or more, but it seems like an awful lot.

I cannot control the price of accounting software but I do know that we are one of the cheapest national firms of qualified accountants around.


The price is £34.99 for a turnover of £30k to 65K – that is just £419.88 for the year.


You can use our free software if price is an issue. There is no need to pay £15 / month for software if your budget is tight.


Some sole traders do their accounts themselves if they have the skills and the time to work out how to.



I guess it’s about priorities. If price is an issue then you compromise on other things – like which software system you use.

 

[ttmw]

At what point do most companies decide to become limited? I know its dependent on circumstance, but am i being a bit silly to remain a sole trader and risk personal liability if something goes wrong?

 

[elaine@cheapaccounting]

At what point do most companies decide to become limited? I know its dependent on circumstance, but am i being a bit silly to remain a sole trader and risk personal liability if something goes wrong?

Attitude to risk is a personal thing - only you know you attitude to risk and can decide when to form a limited company is limited liability is the key driver.

This is just one of the many important business decisions that you will need to take. Good luck.