Sole trader or Ltd
Discussion
My partner has been a sole trader for the last 5 years, her current accountant has suggested it may be financially beneficial to become a limited company. Can anyone give me any idea of the pro's and con's ?
Mods - please feel free to move this post, I was going to put it in the business section but there is not much activity in there!
Mods - please feel free to move this post, I was going to put it in the business section but there is not much activity in there!
The main benefit of trading via a limited company has always been the limited liability bestowed upon the company's officers and shareholders. As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business, but this is not the case for a limited company.
As long as the business is operated legally and within the terms of the Companies Act, directors or shareholders personal assets are not at risk in the event of a winding up or receivership. And as often happens on occasion, such events are not always under our own control.
Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Quite often, larger organisations in particular will prefer not to deal with non-limited businesses
Many of the costs associated with managing and operating a limited company are no longer much greater than with a non-limited business. Accountants and other professional advisers often have conflicting views on when they consider the benefits of being limited to outweigh the advantages of being self-employed. In general terms, at least from the perspective of taxation and accountancy, changes to legislation over the last few years have meant much lower costs associated with limited companies.
There is no obligation for a limited company to commence trading within any set time period after its incorporation. This means that the formation of a limited company is one simple and low cost method to protect a business name. Whilst this does not in itself give any rights to use of the business name, many clients incorporate companies in anticipation of future development of new businesses or in order to protect the limited company name of an existing non-limited business for the future. No two limited companies can exist with exactly the same name.
If a limited company becomes insolvent and is wound up only the assets of the Company are used to try to clear its debts. The Officers of the Company have no personal liabilities, and are not made bankrupt, and are free to incorporate another company. However, the shareholders are liable only to the extent of any unpaid shares held.
By contrast, if you trade as a partnership or as an individual, the creditors can claim on all your property to satisfy the debts, and if this is insufficient you may be declared bankrupt. An undercharged bankrupt is forbidden to start another business or to become a director of a limited company.
As long as the business is operated legally and within the terms of the Companies Act, directors or shareholders personal assets are not at risk in the event of a winding up or receivership. And as often happens on occasion, such events are not always under our own control.
Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Quite often, larger organisations in particular will prefer not to deal with non-limited businesses
Many of the costs associated with managing and operating a limited company are no longer much greater than with a non-limited business. Accountants and other professional advisers often have conflicting views on when they consider the benefits of being limited to outweigh the advantages of being self-employed. In general terms, at least from the perspective of taxation and accountancy, changes to legislation over the last few years have meant much lower costs associated with limited companies.
There is no obligation for a limited company to commence trading within any set time period after its incorporation. This means that the formation of a limited company is one simple and low cost method to protect a business name. Whilst this does not in itself give any rights to use of the business name, many clients incorporate companies in anticipation of future development of new businesses or in order to protect the limited company name of an existing non-limited business for the future. No two limited companies can exist with exactly the same name.
If a limited company becomes insolvent and is wound up only the assets of the Company are used to try to clear its debts. The Officers of the Company have no personal liabilities, and are not made bankrupt, and are free to incorporate another company. However, the shareholders are liable only to the extent of any unpaid shares held.
By contrast, if you trade as a partnership or as an individual, the creditors can claim on all your property to satisfy the debts, and if this is insufficient you may be declared bankrupt. An undercharged bankrupt is forbidden to start another business or to become a director of a limited company.
Have a look round this site, its dead useful and should help with other questions you might have.
www.companieshouse.gov.uk/
www.companieshouse.gov.uk/
The main difference is liability. They are called 'limited' companies for a reason - the liabilities (what would be at risk should it be liquidated) would just be the assets of the business itself and not the owner.
For example, if a sole trader goes bust and has large debts which the business can't cover then he may lose his house and car. If a Ltd company goes bust then only the assets of the company (machinery, stock, etc.) will be sold to pay off debts and the owners personal posessions will be safe.
There are other tax reasons why it's preferrable but I can't remember them right now.
For example, if a sole trader goes bust and has large debts which the business can't cover then he may lose his house and car. If a Ltd company goes bust then only the assets of the company (machinery, stock, etc.) will be sold to pay off debts and the owners personal posessions will be safe.
There are other tax reasons why it's preferrable but I can't remember them right now.
dick dastardly said:
For example, if a sole trader goes bust and has large debts which the business can't cover then he may lose his house and car. If a Ltd company goes bust then only the assets of the company (machinery, stock, etc.) will be sold to pay off debts and the owners personal posessions will be safe.
Dead right.
But just beware, very often if a Ltd company has been Ltd for less than 3 years, the directors are often required to be Guarantors or Indemnifiers for a deal or finance arrangement, which sort of makes a mockery of going Ltd in the first place.
>> Edited by lazyitus on Friday 28th October 09:06
not sure on soletrader end of things but as a limited company, your basic salary is PAYE, so subject to normal income tax plus employees and employers NI ( after allowance)
where you can save a couple of quid is having a lowish salary and paying a quarterly dividend. the company pays tax on the divi as its classed as profit but unless you go over the 40% threashold you dont pay any more tax your self.
its all a bit of a balancing game.. but i prefer to operate from a ltd company. there isnt much more paperwork, and if i need to I can walk away from the company fairly easily..
Where you loose is being able to offset your personal expences, i.e. as a sole trader you can claim part of your car through the company. as a ltd company you get it for company car tax
where you can save a couple of quid is having a lowish salary and paying a quarterly dividend. the company pays tax on the divi as its classed as profit but unless you go over the 40% threashold you dont pay any more tax your self.
its all a bit of a balancing game.. but i prefer to operate from a ltd company. there isnt much more paperwork, and if i need to I can walk away from the company fairly easily..
Where you loose is being able to offset your personal expences, i.e. as a sole trader you can claim part of your car through the company. as a ltd company you get it for company car tax
lazyitus said:
Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Quite often, larger organisations in particular will prefer not to deal with non-limited businesses
while I agree this is certainly true, I really do wonder why? As mentioned it is far easier to walk away from a company and or milk it when things turn sour to leave large debts.
Cant really do this as a sole trader (especially when you have a house etc) and yet companies will shy away from dealing with you!
>> Edited by Smartie on Friday 28th October 13:56
Whilst some of the bureaucratic burden related to limited companies has been ostensibly lifted over the past 15 years, I can vouch for the fact that the preparation of a limited company set of accounts will take about twice as long to complete compared to a sole trader's acoounts of a similar size.
Most limited compnanies no longer need to undergo a formal "audit" but thre is still a raft of Companies Act and taxation legislation which requires much more disclosure in a limited company set of accounts. Ensuring that all there legally obliged disclosures are correctly made is the tecnically difficult part of preparing limited company accounts - and the main reason why a good, qualified, accountant is an absolute essential once you chose to operate as a company.
There are also far more tax and NI pitfalls that directors can fall into without good, ongoing, professional advice. Once you go down the company route, you may save some tax and NI but life DOES get a lot more technical.
Most limited compnanies no longer need to undergo a formal "audit" but thre is still a raft of Companies Act and taxation legislation which requires much more disclosure in a limited company set of accounts. Ensuring that all there legally obliged disclosures are correctly made is the tecnically difficult part of preparing limited company accounts - and the main reason why a good, qualified, accountant is an absolute essential once you chose to operate as a company.
There are also far more tax and NI pitfalls that directors can fall into without good, ongoing, professional advice. Once you go down the company route, you may save some tax and NI but life DOES get a lot more technical.
another factor to bear in mind is this: I buy and sell companies and cand confirm that buyers tend to have a higher comfort level if the company is a limited company. This is due to serveral reasons:
1) A more thorough audit;
2) Less concern about liabilities
3) Familiarity with limited companies and a perception of less reliant on the owner;
4) Customers are often more comfortable dealing with a Ltd company (although, paradoxically, they have less comeback than a partnership/sole trade than a company).
So, if I were looking at the pros and cons, and an exit strategy was a factor, I'd opt for a limited company.
1) A more thorough audit;
2) Less concern about liabilities
3) Familiarity with limited companies and a perception of less reliant on the owner;
4) Customers are often more comfortable dealing with a Ltd company (although, paradoxically, they have less comeback than a partnership/sole trade than a company).
So, if I were looking at the pros and cons, and an exit strategy was a factor, I'd opt for a limited company.
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