Sole trader to Ltd

[Tigris]

Hi guys,

for those of you who started as a sole trader when did you decide to go Limited?

I have a local service based business (2 years old) and work as a one man band with no property that I own.

Just wondering what makes people change from sole trader to limited? I know Limited companies offer protection when it comes to property etc.

 

[MBE2017]

Turn things round, why would you want to go Ltd? Are you hitting any problems as a sole trader or had any discussions with your accountant?

 

[Tigris]

Turn things round, why would you want to go Ltd? Are you hitting any problems as a sole trader or had any discussions with your accountant?

Not personally, no. Just out of interest really. I know Ltd offers certain protection but for me I feel sole trader is working well. Easier to manage, accounting is easier as well as being more private than a Ltd company.

 

[MBE2017]

Not personally, no. Just out of interest really. I know Ltd offers certain protection but for me I feel sole trader is working well. Easier to manage, accounting is easier as well as being more private than a Ltd company.

Maybe you have your answer.

 

[DontAsk]

I changed when the proportion of overseas sales increased to the point where it made sense. I increased UK prices slightly (nothing like 20%) but was immediately able to offer better prices for export sales and it also allowed UK dealers to offset the input VAT. Overall my profit was up. COVID then screwed things up a bit but it was the right decision.

 

[LPB 123]

I changed when the proportion of overseas sales increased to the point where it made sense. I increased UK prices slightly (nothing like 20%) but was immediately able to offer better prices for export sales and it also allowed UK dealers to offset the input VAT. Overall my profit was up. COVID then screwed things up a bit but it was the right decision.

I think the OP is asking about changing from sole trader to LTD rather than becoming VAT registered.

 

[Tigris]

I think the OP is asking about changing from sole trader to LTD rather than becoming VAT registered.

Just curious that's all. (Yes it was more Limited companies rather than VAT)

Did talk to my accountant about being VAT registered 12 months ago but it's not worth it for me currently.

 

[MyAccountantOnline]

Hi guys,

for those of you who started as a sole trader when did you decide to go Limited?

I have a local service based business (2 years old) and work as a one man band with no property that I own.

Just wondering what makes people change from sole trader to limited? I know Limited companies offer protection when it comes to property etc.

It's generally done to save tax (National Insurance) as a sole trader you pay Income tax and National Insurance on your sole trade profits (subject to the level of your profits) If you trade via a limited company a company pays no NIC on its profit, and you can look at taking a tax efficient salary from your company as a director, and dividends as a shareholder which aren't subject to NIC and are subject to lower rates of tax.

It's definitely something to ask your accountant about - it's something I always look at for my sole trader clients.

 

[estwig]

At some point some numpty builder whilst doing a loft conversion, is going to drop a steel right through the middle of a house. Now whilst that won't be my fault, anyone involved is going to be in the firing line, with the builder at the top of the list and me a close second.

At some point someone is going to try and sue me, or I should say sue my ltd company, I'm an employee. If it happens, I have the option to shut shop and take a break. Thats why I limit my liability.

 

[DontAsk]

I think the OP is asking about changing from sole trader to LTD rather than becoming VAT registered.

Oops

 

[Tigris]

It's generally done to save tax (National Insurance) as a sole trader you pay Income tax and National Insurance on your sole trade profits (subject to the level of your profits) If you trade via a limited company a company pays no NIC on its profit, and you can look at taking a tax efficient salary from your company as a director, and dividends as a shareholder which aren't subject to NIC and are subject to lower rates of tax.

It's definitely something to ask your accountant about - it's something I always look at for my sole trader clients.

Do you find this works out best once the sole trader hits a certain salary?

 

[Scott DLE]

I kinda wish I was a sole trader instead of Ltd company, but the benefits of being Ltd far outweigh that of being a sole trader. Here are some:

Less NI (if you take basic salary and dividends)
Limited liability
There is also more things can be offset for tax.
Some B2B clients shall only deal or take you seriously if your LTD.

During covid lockdowns it was easier to get furlough and grants compared for sole trader friends. Also the knowledge that should things continue with lockdowns, you could pretty much walk away.

For your answer on how much turnover before going for it, well you want to be making more than £12500 profit before getting much benefit. There is loads of online calculators out there that show you based on your profit how much it’s worth it or not.

 

[Lucan Unlordly]

I had some cross over customers using our online software services and buying retail products all under one banner. The opportunity came up to sell just the services side and whilst that didn't happen it made sense to set up as individual Limited Companies should any future offers come in.

 

[Tigris]

For your answer on how much turnover before going for it, well you want to be making more than £12500 profit before getting much benefit. There is loads of online calculators out there that show you based on your profit how much it’s worth it or not.

Thanks Scott, just used a calculator and it says i'm better of being a sole trader. I am over £12,500 (tax threshold). 70% of my total sales are expenses.

 

[Heyes]

Thanks Scott, just used a calculator and it says i'm better of being a sole trader. I am over £12,500 (tax threshold). 70% of my total sales are expenses.

Constructively... for me, part of my reasoning for operating through companies has been more than simply 'for financial advantage, or liability protection' - it's a mindset-thing... one that I can't explain.

It's not a case of being better or worse than sole trader/partnership/etcetera - simply different.

 

[Scott DLE]

Constructively... for me, part of my reasoning for operating through companies has been more than simply 'for financial advantage, or liability protection' - it's a mindset-thing... one that I can't explain.

It's not a case of being better or worse than sole trader/partnership/etcetera - simply different.

Quite possibly the same mindset as a lot of people have. Customers I would say take you more seriously if you’re a Ltd company rather than sole trader.

It’s a weird one as you’re more liable should anything go wrong when being a sole trader. The simplicity of being a sole trader is great and a lot of the benefits in the past of being Ltd v sole trader seem to be dwindling. To be fair it’s also a lot easier to be Ltd even as a small one man band. Micro accounts for instance to simplify the process.

What I see a lot of people do is still run their business as a sole trader but register and be dormant for the name.

My final thought on the OP, don’t rush into being a Ltd company as it will cost you more in accountancy fees and time in my experience.

 

[Ozzy]

Personally I really like keeping business and personal separate, and I don't let the tax tail wag the dog so to speak. The cost difference in accountancy/admin between the two is negligible (IMHO) so for me it is personal preference.
I have traded as both and when operating as an IT consultant I was a sole trader but for everything else where I ultimate had plans to exit the business I always started it as a separate legal entity.

 

[Tigris]

Many thanks for the replies. Will ask my accountant next year about being Ltd. I did ask 6 months ago but for now it's not worth it with the fees etc.

I feel not being VAT registered has held me back more over the past few years of business. Had a few potential clients ask if I can provide a VAT invoice but I am not VAT registered then didn't hear back.

 

[Scott DLE]

Many thanks for the replies. Will ask my accountant next year about being Ltd. I did ask 6 months ago but for now it's not worth it with the fees etc.

I feel not being VAT registered has held me back more over the past few years of business. Had a few potential clients ask if I can provide a VAT invoice but I am not VAT registered then didn't hear back.

Well that’s a different kettle of fish. I was VAT registered before hitting the threshold for the same reason. Most of my clients are B2B and made sense the way my industry works. If you’re not near the threshold then I wouldn’t unless its seriously is affecting you getting more bigger customers.

 

[Heyes]

I feel not being VAT registered has held me back more over the past few years of business. Had a few potential clients ask if I can provide a VAT invoice but I am not VAT registered then didn't hear back.

A relevant consideration here is the amount and ratio of your labour charges to parts cost, and also between private clients and businesses which are themselves vat-registered.

If you're not vat registered your labour charges can be significantly lower because you're not having to add extra for the vat.

This of course is an advantage when selling to those who're not vat-registered.

But, if your parts costs are relatively high, and many of your clients are vat-registered, then the situation is of course different... the extra on your labour charges is of little consequence because they'll reclaim it, but them not being able to reclaim the vat element of parts you've used/supplied to them is of course a disadvantage.