Sole Trader to Ltd - general differences
Discussion
Of course, talk to my accountant. Yes, I will. Or find a new one. I'm not overly confident my accountant has his eye on the ball.
Anyway, trading 20+ years, turnover around £180k. My wife works in the business and I 'pay' her £250/week from my own drawing from the business. She has no other income. House keeping money if you like. I draw money from the business account each month, some more than others. Neither of us use the married person's allowance (is that still a thing?) I think there would be a much better way to do this. A more professional approach. Both of us directors of a Ltd Co perhaps?
So we both draw a salary, and take dividends to minimise tax liability, pay Corp tax on profits. How does that work? I go from self employed to employed by my company? What about putting capital into the business? How would that work? I'll obviously need to set up and register the company, and get a new VAT number, bank account, etc.
My year end is April. I'm guessing finish this year as a ST and begin trading as a Ltd Co next financial year? Can I set the company up before this and not trade until the new year?
Existing assets. Do I just 'buy' myself out for a nominal fee? Like I sell JBS t/as Rugby Boots to Rugby Boots Ltd for £1? And all the assets transfer?
Sorry, lots of questions that are probably obvious.
Anyway, trading 20+ years, turnover around £180k. My wife works in the business and I 'pay' her £250/week from my own drawing from the business. She has no other income. House keeping money if you like. I draw money from the business account each month, some more than others. Neither of us use the married person's allowance (is that still a thing?) I think there would be a much better way to do this. A more professional approach. Both of us directors of a Ltd Co perhaps?
So we both draw a salary, and take dividends to minimise tax liability, pay Corp tax on profits. How does that work? I go from self employed to employed by my company? What about putting capital into the business? How would that work? I'll obviously need to set up and register the company, and get a new VAT number, bank account, etc.
My year end is April. I'm guessing finish this year as a ST and begin trading as a Ltd Co next financial year? Can I set the company up before this and not trade until the new year?
Existing assets. Do I just 'buy' myself out for a nominal fee? Like I sell JBS t/as Rugby Boots to Rugby Boots Ltd for £1? And all the assets transfer?
Sorry, lots of questions that are probably obvious.
Consider that if you have a mortgage review coming up it can sometimes be harder when you have a change of trading style. Lenders want full 12 month tax accounts and sometimes the accountants move year ends with limited. Many lenders get their heads around it just being a trading style change.
I run a Ltd company similar in size and set up to your Sole Trader endeavour.
At this level, there's only two real principal benefits with LTD compared to ST.
One is the protection it affords you if something goes wrong and the business ends up owing significant sums.
The other is that it is generally easier to legally reduce you tax liabilities. The standard means, as you point out, is to pay you and your wife a salary below the income tax threshold. Top that up as needed with dividends (lower tax). Reduce your Corporation Tax by moving excess into a pension.
Also, should you ever wish to exit the business, doing so from a Ltd company is likely be easier and more rewarding, financially.
Transferring from ST to Ltd is painless. You can do it any time you like. I'm fairly certain you can use the same VAT number (but need to advise HMRC of the change in status). If you currently have a business bank account separate to your personal account and that there's no overdraft, or lending attached to it - and the business will use the same name - then you can continue to use that account. There's no legal obligation to 'sell' assets to the business and nor are there benefits in doing so (that I can think of). How much capital you move across is up to you. There may be some tax implications or advantages but that would be down to your personal situation and for you accountant to advise on.
There are some additional admin considerations but at that turnover, they won't be excessive. I pay my accountant £90 a month and she sorts out the VAT, PAYE and end of year accounts.
Is it worth it?
Depends. I think, to use your words, it 'looks and feels' more professional - more serious; which is entirely perceptional of course. Whether that matters to you or your clients, I don't know.
You've made it to 20 years and have what appears to be nice, tidy little enterprise which does beg the question as to why change?
If you're exposed to or will be exposed to high risk - definitely do it.
HTH
At this level, there's only two real principal benefits with LTD compared to ST.
One is the protection it affords you if something goes wrong and the business ends up owing significant sums.
The other is that it is generally easier to legally reduce you tax liabilities. The standard means, as you point out, is to pay you and your wife a salary below the income tax threshold. Top that up as needed with dividends (lower tax). Reduce your Corporation Tax by moving excess into a pension.
Also, should you ever wish to exit the business, doing so from a Ltd company is likely be easier and more rewarding, financially.
Transferring from ST to Ltd is painless. You can do it any time you like. I'm fairly certain you can use the same VAT number (but need to advise HMRC of the change in status). If you currently have a business bank account separate to your personal account and that there's no overdraft, or lending attached to it - and the business will use the same name - then you can continue to use that account. There's no legal obligation to 'sell' assets to the business and nor are there benefits in doing so (that I can think of). How much capital you move across is up to you. There may be some tax implications or advantages but that would be down to your personal situation and for you accountant to advise on.
There are some additional admin considerations but at that turnover, they won't be excessive. I pay my accountant £90 a month and she sorts out the VAT, PAYE and end of year accounts.
Is it worth it?
Depends. I think, to use your words, it 'looks and feels' more professional - more serious; which is entirely perceptional of course. Whether that matters to you or your clients, I don't know.
You've made it to 20 years and have what appears to be nice, tidy little enterprise which does beg the question as to why change?
If you're exposed to or will be exposed to high risk - definitely do it.
HTH
No exposure to high risk in the foreseeable.
I wish my accountant only cost £90/month! We use Quickbooks and do our own payroll and VAT but we still pay £1500+vat for business and my personal tax returns each year. Which is why I mentioned a change of accountant might be required.
No issues with mortgage either. I don't have one.
I think Ltd is the way to go, I've wanted to separate myself from the business for quite a while. I can't put my finger on it, but I am the business the business is me never sat quite right.
I wish my accountant only cost £90/month! We use Quickbooks and do our own payroll and VAT but we still pay £1500+vat for business and my personal tax returns each year. Which is why I mentioned a change of accountant might be required.
No issues with mortgage either. I don't have one.
I think Ltd is the way to go, I've wanted to separate myself from the business for quite a while. I can't put my finger on it, but I am the business the business is me never sat quite right.
Jordie Barretts sock said:
I wish my accountant only cost £90/month! We use Quickbooks and do our own payroll and VAT but we still pay £1500+vat for business and my personal tax returns each year. Which is why I mentioned a change of accountant might be required.
The £90 a month I pay mine includes a Quick Book subscription.Assuming the £1500 is annually, then I wouldn't say that's too bad. I'm probably going to have to have an awkward conversation with mine at some point as I feel my business has exceeded her sphere of focus. She's good but I get the impression she'd rather be dealing with small one-man-band kitchen-table-top type businesses. I've gone from that to working internationally, trading in different currencies and the like.
Sounds like you have a plan. I don't think you have to 'put your finger on it' to justify the move. If it feels right it generally is right.
Lots of considerations. If you have some capital losses to use I would be looking to create a directors loan account by transferring your business and assets in as high as possible.
This gives you an amount to draw on for a while outside of most tax regimes (other than cgt) in your personal situation.
It’s hard to answer, I don’t know if anyone has asked about your future plans, an exit / sale would likely be easier with a limited company.
On the limited facts I’d suggest a Ltd co makes most sense.
This gives you an amount to draw on for a while outside of most tax regimes (other than cgt) in your personal situation.
It’s hard to answer, I don’t know if anyone has asked about your future plans, an exit / sale would likely be easier with a limited company.
On the limited facts I’d suggest a Ltd co makes most sense.
I still run mine on a spreadsheet! Similar turnover to the OP but no staff so no PAYE/payroll.
I do my own vat and the accountants bill is about £400 for putting the end of year stuff together.
On the ltd co question I understood that any tax gains had been eroded significantly over recent years?
Probably not something that will happen again but I know my friends who had gone the ltd route with low salary were kicking themselves when they were all but bypassed on covid payouts………
It’s probably my preference for keeping things simple but I haven’t been tempted to change from SE.
I do my own vat and the accountants bill is about £400 for putting the end of year stuff together.
On the ltd co question I understood that any tax gains had been eroded significantly over recent years?
Probably not something that will happen again but I know my friends who had gone the ltd route with low salary were kicking themselves when they were all but bypassed on covid payouts………
It’s probably my preference for keeping things simple but I haven’t been tempted to change from SE.
Yes, I know it's difficult on a public forum, I don't want to give too.much financial detail away. We had a couple of years where I 'engineered' losses by buying stuff and to fend off an ex wife which has all been sorted out now.
Basically I kept things as they were because I had enough to deal with. Also part of why I've been a long time reader but not logged in to PH.
I'm now looking to 'start again' with a clean slate.
Basically I kept things as they were because I had enough to deal with. Also part of why I've been a long time reader but not logged in to PH.
I'm now looking to 'start again' with a clean slate.
For many years there were distinct tax advantages in operating through a limited company. Due to changes over the past few years in the taxation of company profits and dividends, these advantages are much diminished. Having said that, some tax advantages do remain.
To me the main one is the fact that you have, in most cases, an element of choice in deciding how much personal income you can extract from the company and in what form - salary, dividends etc. That does allow you to plan and anticipate your personal tax levels better than if you are simply having to pay income tax and NI directly on your sole trader profits.
The other (non-tax) advantages of operating through a limited company do still exist - with some restrictions.
To me the main one is the fact that you have, in most cases, an element of choice in deciding how much personal income you can extract from the company and in what form - salary, dividends etc. That does allow you to plan and anticipate your personal tax levels better than if you are simply having to pay income tax and NI directly on your sole trader profits.
The other (non-tax) advantages of operating through a limited company do still exist - with some restrictions.
Unfortunately nobody can say what works best for you without the numbers. But if you want to separate liability, then just go limited.
You need to consider goodwill. It may not be as easy as just transferring assets.
It appears your wife isn't on the payroll? How is she accruing state entitlement? That needs fixing asap if she's not, and you can backdate to some degree.
Is your year end 5th April or 30th April, because if it's the latter, you should know about the basis period reform rules and how they'll be affecting you in the next couple of months?
You need to consider goodwill. It may not be as easy as just transferring assets.
It appears your wife isn't on the payroll? How is she accruing state entitlement? That needs fixing asap if she's not, and you can backdate to some degree.
Is your year end 5th April or 30th April, because if it's the latter, you should know about the basis period reform rules and how they'll be affecting you in the next couple of months?
I do not think you should change tax status or trading style for perception or for how it feels - it is just a way of paying tax or protecting the business - nobody else cares and you will not actually feel any difference day to day.
You can make your trading name Mega-global-hyper-net if you want to feel like a grown up company.
You can make your trading name Mega-global-hyper-net if you want to feel like a grown up company.
Caddyshack said:
I do not think you should change tax status or trading style for perception or for how it feels - it is just a way of paying tax or protecting the business - nobody else cares and you will not actually feel any difference day to day.
That's not always the case.Like the OP, 99% of my client base is public sector, around half of which is international. The tenders we have to submit to win much of our work list the type of 'economic entities' that are permitted to bid. I'd say around 60% of UK tenders we see exclude sole traders and 100% of the international ones.
The (primary) reason is that Sole Traders are normally appointed to consultancy or 'individual expert' type assignments. Legislation exists that places responsibility on the contracting authority that is similar to those that would apply in an employee / employer context. So for the client authority, it adds a layer of unwelcome complexity to a contract.
Added to this is that as a Ltd company, I am permitted to bid for contracts that allow applications from Sole Traders. So, a Sole Trader would be restricted on what they can bid for whereas a Ltd company isn't.
This is happening increasingly with larger firms when they buy in products and services.
This all relates to a B2B context where I think a lot of business do care whether a supplier is Ltd or not, and where, in my view, Ltd status affords greater opportunities.
I think it's different in B2C where the need is less.
Edited by StevieBee on Thursday 25th January 14:57
Edited by StevieBee on Friday 26th January 07:37
Steve's reply is a good illustration of how many variables there are in the decision. What is suitable for one business may not be the best for another. I didn't have clients demanding they work with a limited company, and didn't need the liability aspect, so it simply came down to the bottom line. Your mileage may vary...!
I asked my accountant a few years ago to do a comparison of my existing partnership v incorporating into a Ltd company.
He prepared a little presentation showing the positive and negatives and the financial gains and losses.
On balance there was very little in it financially for us, and it just wasn’t worth the extra administrative hassle. It will obviously be different in most cases.
Definitely a worthwhile exercise and would recommend you do the same.
He prepared a little presentation showing the positive and negatives and the financial gains and losses.
On balance there was very little in it financially for us, and it just wasn’t worth the extra administrative hassle. It will obviously be different in most cases.
Definitely a worthwhile exercise and would recommend you do the same.
StevieBee said:
Caddyshack said:
I do not think you should change tax status or trading style for perception or for how it feels - it is just a way of paying tax or protecting the business - nobody else cares and you will not actually feel any difference day to day.
That's not always the case.Like the OP, 99% of my client base is public sector, around half of which is international. The tenders we have to submit to win much of our work list the type of 'economic entities' that are permitted to bid. I'd say around 60% of UK tenders we see exclude sole traders and 100% of the international ones.
The (primary) reason is that Sole Traders are normally appointed to consultancy or 'individual expert' type assignments. Legislation exists that places responsibility on the contracting authority that is similar to those that would apply in an employee / employer context. So for the client authority, it adds a layer of unwelcome complexity to a contract.
Added to this is that as a Ltd company, I am permitted to bid for contracts that allow applications from Sole Traders. So, a Sole Trader would be restricted on what they can bid for whereas a Ltd company isn't.
This is happening increasingly with larger firms when they buy in products and services.
This all relates to a B2B context where I think a lot of business do care whether a supplier is Ltd or not, and where, in my view, Ltd status affords greater opportunities.
I think it's different in B2B where the need is less.
Edited by StevieBee on Thursday 25th January 14:57
Gassing Station | Finance | Top of Page | What's New | My Stuff