Limited company vs sole trader?
Discussion
A good friend of mine is going into business in the hot foil label sector.
He's going to run it with his missus. He's had conflicting advice as to whether he should do it as a sole traderr, or as a limited company. Turnover will be about £50k in year one, rising to 100k in year 3-4.
Any thoughts from the PH business massive as to which was he should go? Advantages/disadvantages of both?
Andy
He's going to run it with his missus. He's had conflicting advice as to whether he should do it as a sole traderr, or as a limited company. Turnover will be about £50k in year one, rising to 100k in year 3-4.
Any thoughts from the PH business massive as to which was he should go? Advantages/disadvantages of both?
Andy
Sole trader
Simpler
Less technical accounts to produce
Higher risk for the individual (unlimited liability)
Less restrictions on drawing money from business
Tax and National Insurance paid on profits of business BEFORE personal drawings are deducted
Ltd Co
More complex
More technical accounts to prepare
Need to submit accounts to both HM Revenue and Customs AND Companies House
Reduced risk to proprietor (Limited Liability)
A number of restrictions exist on drawing money from company
Company pays Corporation Tax on its profits AFTER deduction of Directors' salaries but BEFORE deduction of dividends paid to shareholders.
More flexibility in how directors/shareholders pay themselves giving rise to tax planning opportunities not available to sole-traders - within the restrictions mentioned above..
However, this is a very complex area nowadays with all sorts of technical and legal pitfalls that the directors/shareholders need to be aware of and to avoid.
Because of the complexity of limited companies, the annual accounting fees are usually around double what a similar sized sole-trader would be.
If he is going into business with his wife, it is probable that a "Partnership" set up would be more appropriate than a "sole-trader". Partnership income is taxed in a very similar way to sole-traders with the profits of the business being split and allocated to the partners in their agreed Profit Sharing Ratios.
Partnerships are slightly more complex than an equivalent sole trader - they have their own separate tax return, for example, but are generally less complex than Limited Companies.
Simpler
Less technical accounts to produce
Higher risk for the individual (unlimited liability)
Less restrictions on drawing money from business
Tax and National Insurance paid on profits of business BEFORE personal drawings are deducted
Ltd Co
More complex
More technical accounts to prepare
Need to submit accounts to both HM Revenue and Customs AND Companies House
Reduced risk to proprietor (Limited Liability)
A number of restrictions exist on drawing money from company
Company pays Corporation Tax on its profits AFTER deduction of Directors' salaries but BEFORE deduction of dividends paid to shareholders.
More flexibility in how directors/shareholders pay themselves giving rise to tax planning opportunities not available to sole-traders - within the restrictions mentioned above..
However, this is a very complex area nowadays with all sorts of technical and legal pitfalls that the directors/shareholders need to be aware of and to avoid.
Because of the complexity of limited companies, the annual accounting fees are usually around double what a similar sized sole-trader would be.
If he is going into business with his wife, it is probable that a "Partnership" set up would be more appropriate than a "sole-trader". Partnership income is taxed in a very similar way to sole-traders with the profits of the business being split and allocated to the partners in their agreed Profit Sharing Ratios.
Partnerships are slightly more complex than an equivalent sole trader - they have their own separate tax return, for example, but are generally less complex than Limited Companies.
Might he have been recommended a Limited Liability Partnership? Different from a Ltd Company and taxed as I understand in pretty much the same way as a Partnerships but with the advantages of some Limited Liability as well. We only became fully Ltd when turnover was above about £120k, below that it did not appear to be cost effective (although it is profit rather than turnover that dictates anyway so will be different for each company) - for the first year it would seem sensible to keep it simple and then reassess for year 2 or 3 when the business is established and more accurate trading figures are known.
Some people you deal I think could get into all sorts of problems running a Limited Company......As a rule, the kind of people you see bringing their books to their accountants this time of year! (Not all of course)
I don't 'generally' incorporate those ones!
However, and i'm sure Eric would agree, a lot needs to be considered, and a good accountant would do that for them.
I don't 'generally' incorporate those ones!
However, and i'm sure Eric would agree, a lot needs to be considered, and a good accountant would do that for them.
Hi
I was asking these same questions a couple of months ago. I plumped for a partnership with my wife. There are a couple of tax benefits to going this way rather that purely as a sole trader.
Initially I thought I would have to set up a limited company, but the general consensus was that additional expense and admin meant it was not the best option for me as a start-up.
Best advise would be get along and have a face to face with an acountant, first meetings are usually free.
Good luck to your friend.
Cheers
I was asking these same questions a couple of months ago. I plumped for a partnership with my wife. There are a couple of tax benefits to going this way rather that purely as a sole trader.
Initially I thought I would have to set up a limited company, but the general consensus was that additional expense and admin meant it was not the best option for me as a start-up.
Best advise would be get along and have a face to face with an acountant, first meetings are usually free.
Good luck to your friend.
Cheers
personally, i would always go Ltd co.
there is far too much risk on you personally if it all goes wrong as a partnership or sole trader. if you have any bank lending it will be by personal guarantee from the start regardless of whether its ltd or sole/partnership so that will make no difference at all.
a cousin of mine was trading as a sole trader recently when it went wrong. client knocked him for money, that had a knock on effect with his main supplier. he couldn't trade his way out, and the supplier had him by the balls despite being part of the reason for the overall failure. he paid his way out of it as the liablility was entirely his. had he used a ltd company he would of had more room.
not sure about LLPs. all the people I've met who have LLPs are pretentious s-o-bs.
now for the contentious bit - i think a Ltd company looks better when trading than being a sole trader operation. i think it shows you are a bit more serious as you've made the choice to do it this way and that you have responsibilities. sole trader operations just seem to me to be the ones that slink away in the night.
there is far too much risk on you personally if it all goes wrong as a partnership or sole trader. if you have any bank lending it will be by personal guarantee from the start regardless of whether its ltd or sole/partnership so that will make no difference at all.
a cousin of mine was trading as a sole trader recently when it went wrong. client knocked him for money, that had a knock on effect with his main supplier. he couldn't trade his way out, and the supplier had him by the balls despite being part of the reason for the overall failure. he paid his way out of it as the liablility was entirely his. had he used a ltd company he would of had more room.
not sure about LLPs. all the people I've met who have LLPs are pretentious s-o-bs.
now for the contentious bit - i think a Ltd company looks better when trading than being a sole trader operation. i think it shows you are a bit more serious as you've made the choice to do it this way and that you have responsibilities. sole trader operations just seem to me to be the ones that slink away in the night.
Not so sure about that.
Most rogue traders prefer limited companies as it DOES give them the freedom to walk away leaving debts uncleared.
Obviously, there is legislation to prevent out and out crooks from running their companies into the ground and leaving their customers and suppliers in the lurch, but it amazing how many times a director can get away with this type of behaviour before any sanctions are taken against him. And even then, many of the sanctions can be easily sidestepped.
Most rogue traders prefer limited companies as it DOES give them the freedom to walk away leaving debts uncleared.
Obviously, there is legislation to prevent out and out crooks from running their companies into the ground and leaving their customers and suppliers in the lurch, but it amazing how many times a director can get away with this type of behaviour before any sanctions are taken against him. And even then, many of the sanctions can be easily sidestepped.
My understanding is that you are only liable if you trade whilst insolvent. Also, it helps if you pay your liquidator as well.
A customer of ours was a ltd company and tried to turn us over for £13k. To be honest he succeeded as we couldn't do anything about it.
However, a couple of years later, his domain names were still in the Ltd companies name, so we enquired with the liquidator what was going on with the company. They checked into their files, and found that after a couple of years the case was still open, and that they had not been paid a cent. They then sold the domains to us, and passed his case to the Official Receiver.
The last we heard was that the OR decided that the company had traded whilst insolvent and that he was no liable personally. We think he had to go to the High Court which bankrupted him personally, and on a second hearing wound up his new company for exactly the same reason (trading whilst insolvent).
A customer of ours was a ltd company and tried to turn us over for £13k. To be honest he succeeded as we couldn't do anything about it.
However, a couple of years later, his domain names were still in the Ltd companies name, so we enquired with the liquidator what was going on with the company. They checked into their files, and found that after a couple of years the case was still open, and that they had not been paid a cent. They then sold the domains to us, and passed his case to the Official Receiver.
The last we heard was that the OR decided that the company had traded whilst insolvent and that he was no liable personally. We think he had to go to the High Court which bankrupted him personally, and on a second hearing wound up his new company for exactly the same reason (trading whilst insolvent).
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