Do I start as a Sole Trader or Ltd Company? Accounts help...
Discussion
Hi there, I'm after a bit of advice from those in the know. Let me set the scene...
I am 29 years old and currently working in a London-based integrated global advertising agency as a Senior Creative/Designer. I have been in the industry just short of 10 years and in that time done a 9 month spell as a freelancer (sole trader), with the rest being full-time employment. I am about to start my own design and marketing consultancy along side my full-time roll with a view to making the jump from my job and giving the new venture my full attention once I have a built up an adequate client base. I am expecting this eureka moment to occur in 12-18 months time so until then I will progress with my career along side my current position as a safety net. I feel this is wise, especially given the current state of the economy.
So the question is...How do I best start the company? Should I start as a Sole Trader or a Limited Company? Initially the company will be myself only but with ocassional freelance support. As for the future I can't say for sure but would aim to build it to a point where I would need to employ a Junior and/or Middle-weight Designer and Client Account Manager within 2-3 years. Can I start as a Sole Trader and switch to a Limited Company in the future?
I guess there are two issues here. One being how best to set it up for the benefit of the business and the other how best to set it up on a financial level for me? Being in full-time employment I am currently paid by my employer a salary just short of £40K. I understand as a Sole Trader that the Inland Revenue will just add any additional earnings to my salary and I will be taxed on them accordingly, so it won't be long before I'm in the higher bracket. Will starting as a Limited Company prevent this?
Sorry to ask so many questions but this is the first time I have started a company with a view to building it into my future fill-time interest so understandably want to go about things in the right way.
Many thanks in advance to those who may be in a position to offer some advice...
Best regards,
James.
I am 29 years old and currently working in a London-based integrated global advertising agency as a Senior Creative/Designer. I have been in the industry just short of 10 years and in that time done a 9 month spell as a freelancer (sole trader), with the rest being full-time employment. I am about to start my own design and marketing consultancy along side my full-time roll with a view to making the jump from my job and giving the new venture my full attention once I have a built up an adequate client base. I am expecting this eureka moment to occur in 12-18 months time so until then I will progress with my career along side my current position as a safety net. I feel this is wise, especially given the current state of the economy.
So the question is...How do I best start the company? Should I start as a Sole Trader or a Limited Company? Initially the company will be myself only but with ocassional freelance support. As for the future I can't say for sure but would aim to build it to a point where I would need to employ a Junior and/or Middle-weight Designer and Client Account Manager within 2-3 years. Can I start as a Sole Trader and switch to a Limited Company in the future?
I guess there are two issues here. One being how best to set it up for the benefit of the business and the other how best to set it up on a financial level for me? Being in full-time employment I am currently paid by my employer a salary just short of £40K. I understand as a Sole Trader that the Inland Revenue will just add any additional earnings to my salary and I will be taxed on them accordingly, so it won't be long before I'm in the higher bracket. Will starting as a Limited Company prevent this?
Sorry to ask so many questions but this is the first time I have started a company with a view to building it into my future fill-time interest so understandably want to go about things in the right way.
Many thanks in advance to those who may be in a position to offer some advice...
Best regards,
James.
Many people start trading as a sole-trader and later convert over to a limited company as their business grows larger and more complicated.
Other start up as limited companies from the word go.
You are correct in that you will be taxed personally on your profits as a sole trader. If you are already near or above the 40% tax threshold, then those profits will also be taxed at 40% as they are simply added on to your other personal taxable income.
You will also be paying Class 2 and Class 4 National Insurance on those profits too.
If operating through a company, the company will be liable to its own tax on its profits (rather than you personally). This is called Corporation Tax and is currently 21% up to £300,000 of profit.
This seems to indicate that a company is more tax efficient. However, you will be taxed personally as soon as you draw money out of the company for yourself and you will pay whatever rate of Income Tax is apppropriate for your overall income levels in the tax year in which the withdrawls were made.
The clever thing about companies is that there is a certain amount of flexibility available to the proprietor. He may not need top draw any personal income from the company in any given year (depending on his own personal foinancial needs). This would eliminate any personal income tax liability at all.
He could chose to draw as much as he needs, thereby controlling the tax payable.
He can chose to draw either as salary or as dividends.
Salaries are subjected to tax and Class 1 NI.
Dividends are subject to tax only.
The main downside of limited companies is that they are more complex and therefore expensive to produce and they give rise to at least four times the bureaucracy and paperwork as a similar sized sole-tradership.
Other start up as limited companies from the word go.
You are correct in that you will be taxed personally on your profits as a sole trader. If you are already near or above the 40% tax threshold, then those profits will also be taxed at 40% as they are simply added on to your other personal taxable income.
You will also be paying Class 2 and Class 4 National Insurance on those profits too.
If operating through a company, the company will be liable to its own tax on its profits (rather than you personally). This is called Corporation Tax and is currently 21% up to £300,000 of profit.
This seems to indicate that a company is more tax efficient. However, you will be taxed personally as soon as you draw money out of the company for yourself and you will pay whatever rate of Income Tax is apppropriate for your overall income levels in the tax year in which the withdrawls were made.
The clever thing about companies is that there is a certain amount of flexibility available to the proprietor. He may not need top draw any personal income from the company in any given year (depending on his own personal foinancial needs). This would eliminate any personal income tax liability at all.
He could chose to draw as much as he needs, thereby controlling the tax payable.
He can chose to draw either as salary or as dividends.
Salaries are subjected to tax and Class 1 NI.
Dividends are subject to tax only.
The main downside of limited companies is that they are more complex and therefore expensive to produce and they give rise to at least four times the bureaucracy and paperwork as a similar sized sole-tradership.
Edited by Eric Mc on Wednesday 16th April 08:43
That's really helpful, thank you both.
So what we're saying is that from a tax point of view I am better off starting as a limited company although any money made will be within the company and not mine personally. I can build it up only taking what I need, if any at all and only pay for what is paid to myself. On the down side though will I not pay personal income tax and corporation tax on these earnings as opposed to just the income tax as a sole trader? So effectively a double hit!
I guess there are benefits as many of my current expenses can be chanelled through the limited company so I will effectively be paid in other ways and reduce the need for me to actually withdraw cash from the companies account.
When I was a sole trader before, I just opened a business account, started trading and submitted my tax return. With starting a limited company is there a lot more involved and how do I actually go about it.
I'm thinking that maybe the route to go for me could be start as a sole trader and convert in 12 months time. This would probably only take me just over the 40% threshold before making the change. Will switching make things more complicated? Would I be better to just go limited now?
Any further information would be greatly appreciated.
Many thanks,
James.
So what we're saying is that from a tax point of view I am better off starting as a limited company although any money made will be within the company and not mine personally. I can build it up only taking what I need, if any at all and only pay for what is paid to myself. On the down side though will I not pay personal income tax and corporation tax on these earnings as opposed to just the income tax as a sole trader? So effectively a double hit!
I guess there are benefits as many of my current expenses can be chanelled through the limited company so I will effectively be paid in other ways and reduce the need for me to actually withdraw cash from the companies account.
When I was a sole trader before, I just opened a business account, started trading and submitted my tax return. With starting a limited company is there a lot more involved and how do I actually go about it.
I'm thinking that maybe the route to go for me could be start as a sole trader and convert in 12 months time. This would probably only take me just over the 40% threshold before making the change. Will switching make things more complicated? Would I be better to just go limited now?
Any further information would be greatly appreciated.
Many thanks,
James.
Jimmy B said:
When I was a sole trader before, I just opened a business account, started trading and submitted my tax return. With starting a limited company is there a lot more involved and how do I actually go about it.
Get Yellow Pages. Ring an accountant. Tell himyou want to start a company. He will know what to do.
It will cost you about 100 quid. He gives you lots
of forms, you fill them in, off you go.
Jimmy B said:
Would I be better to just go limited now?
I think so. If you go over about 55-60K turnovera year, you need to register for VAT, which is
another big adventure on its own.
Personally, I'd restrict turnover to below VAT
threshold levels until you've been trading a
couple of years and got the hang of it.
Beware that if you take more than about 44K
a year out of the company, you'll get stung
for upper rate tax. There's no point paying that
tax - Gordon B has all sorts of silly schemes
for that money.
Much better to take less out of the company, and let
the accumulated capital accrue gross interest in the bank.
That is all extremely helpful guys, thank you so much for all of your input. I will have a chat with my accountant about this new venture and start the process of the initial set-up...
If anyone has anything else to add I would of course be grateful for your advice.
Greatly appreciated.
James.
If anyone has anything else to add I would of course be grateful for your advice.
Greatly appreciated.
James.
Hi James.
Been there - done that – same profession too!
Tax and stuff has been covered in other posts well. I’d also point out that a Ltd co’ does afford you a degree of personal financial protection and considering you are entering into a market that is currently on a sharp down-curve, you may want to factor this into your thinking.
I found that it could be sometimes difficult to get credit accounts with suppliers as a sole trader – it was possible but you needed to build up a rapport first (cash with order or COD). This can put pressure on your cashflow early on which then knocks on through the rest of the year.
Depending on what type of work you are going for, some clients (particularly public sector) won’t touch sole traders.
Beyond the structure, something I’d urge you to do is manage your time very well. Creatives don’t generally make good business managers (although I know a few “creative” business managers) and it’s so easy to get carried away with the work that you forget the business. Set aside an afternoon a week to do the books and keep to it no matter what. And get the invoice out the day the work is done!
As I say, been in exactly the same position as you. Big agency – freelance – business. Went bust too but has worked out fine in the end so I know the pitfalls. Happy to share these with you one-to-one so feel free to PM me if you wish (you never know – I might be able to put some biz your way!!)
Been there - done that – same profession too!
Tax and stuff has been covered in other posts well. I’d also point out that a Ltd co’ does afford you a degree of personal financial protection and considering you are entering into a market that is currently on a sharp down-curve, you may want to factor this into your thinking.
I found that it could be sometimes difficult to get credit accounts with suppliers as a sole trader – it was possible but you needed to build up a rapport first (cash with order or COD). This can put pressure on your cashflow early on which then knocks on through the rest of the year.
Depending on what type of work you are going for, some clients (particularly public sector) won’t touch sole traders.
Beyond the structure, something I’d urge you to do is manage your time very well. Creatives don’t generally make good business managers (although I know a few “creative” business managers) and it’s so easy to get carried away with the work that you forget the business. Set aside an afternoon a week to do the books and keep to it no matter what. And get the invoice out the day the work is done!
As I say, been in exactly the same position as you. Big agency – freelance – business. Went bust too but has worked out fine in the end so I know the pitfalls. Happy to share these with you one-to-one so feel free to PM me if you wish (you never know – I might be able to put some biz your way!!)
Stephen, thank you for your reply. It is encouraging to hear from someone who has come from a very similar career path and gone on to create something along the same lines. I think that you mention two extremely valid points with the benefits of being a Ltd company from the outset and these are two things that I had not yet considered.
Fortunately for me organisation is one of my strong points which my current employer has recognised and allowed me to develop a management side to my role. This will hopefully stand me in good stead for the new venture but I do of course appreciate the point you are trying to make and to exercise a great discipline from the outset.
If you are happy to share some of your experiences I would be really keen to take you up on the offer and pick your brains a little more once I have got this initial administration stage out of the way...
Best regards,
James.
Fortunately for me organisation is one of my strong points which my current employer has recognised and allowed me to develop a management side to my role. This will hopefully stand me in good stead for the new venture but I do of course appreciate the point you are trying to make and to exercise a great discipline from the outset.
If you are happy to share some of your experiences I would be really keen to take you up on the offer and pick your brains a little more once I have got this initial administration stage out of the way...
Best regards,
James.
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