Discussion
I'm currently trading as a sole trader with a turnover of about £300k pa. and have been trading for 12 years.
My accountant has never been very open about becoming a limited company or been very positive about it. I'm curious. I know of quite a few new businesses that within a couple of months of staring up are 'advised' to become limited. Why?
I suppose there are many factors to take into account but what are the advantages/disadvantages?
My accountant has never been very open about becoming a limited company or been very positive about it. I'm curious. I know of quite a few new businesses that within a couple of months of staring up are 'advised' to become limited. Why?
I suppose there are many factors to take into account but what are the advantages/disadvantages?
Advantages
i) Limited liability. That's what companies are all about in reality. In the modern age, "limited liability" has been eroded to some extent but it is still a factor
ii) tax advantages. These also have been eroded in recent years but they are still there in a lesser form. The main aspect of how the tax advantages work is that there is a clear distinction between the tax liabilities of the company and the tax (and NI) liabilities of the individual. The main way tax advantages can be obtained is through the director controlling the way in which they extract their own personal income from the company - the chief method being judicious mixing of salary and dividend income
Disdvantages
the main ones are complexity and related bureaucracy.
i) Limited company accounts must comply with accounting standards and Company Law regulations. These include specific disclosure requirements i.e. facts which have to be stated in the notes to the formal accounts. Although some people claim otherwise (including certain posters here), a non-accountant is not really knowledgeable enough to know if accounts are compliant with these requirements .
ii) Corporation Tax - the company must file accounts and a Corporation Tax return each year.
iii) PAYE - it is highly likely that the company will need to register for PAYE so it can properly administer directors' salaries
iv) VAT the company needs to be registered for VAT in its own right. If you are already VAT registered as an individual, you either have to obtain a new VAT registration for the company or you could request that your old VAT registration be transferred to the company.
v) it's likely that you will still need to submit Self Assessment tax returns for your personal tax affairs (at least until HMRC scraps Self Assessment - currently slated for April 2020).
i) Limited liability. That's what companies are all about in reality. In the modern age, "limited liability" has been eroded to some extent but it is still a factor
ii) tax advantages. These also have been eroded in recent years but they are still there in a lesser form. The main aspect of how the tax advantages work is that there is a clear distinction between the tax liabilities of the company and the tax (and NI) liabilities of the individual. The main way tax advantages can be obtained is through the director controlling the way in which they extract their own personal income from the company - the chief method being judicious mixing of salary and dividend income
Disdvantages
the main ones are complexity and related bureaucracy.
i) Limited company accounts must comply with accounting standards and Company Law regulations. These include specific disclosure requirements i.e. facts which have to be stated in the notes to the formal accounts. Although some people claim otherwise (including certain posters here), a non-accountant is not really knowledgeable enough to know if accounts are compliant with these requirements .
ii) Corporation Tax - the company must file accounts and a Corporation Tax return each year.
iii) PAYE - it is highly likely that the company will need to register for PAYE so it can properly administer directors' salaries
iv) VAT the company needs to be registered for VAT in its own right. If you are already VAT registered as an individual, you either have to obtain a new VAT registration for the company or you could request that your old VAT registration be transferred to the company.
v) it's likely that you will still need to submit Self Assessment tax returns for your personal tax affairs (at least until HMRC scraps Self Assessment - currently slated for April 2020).
Gross profit is more important than turnover to answer the question. The profit on a 300k retail turnover is probably fine as a sole trader. However a high profit rate from say a service company with a low cost base would likely swing that the other way. A rule of thumb to further consideration is, do your earnings push you into the high tax bands, then a Ltd Company is probably worth a serious look.
You don't say what sort of business you are in but IR35 could be another factor depending on how you work. If you are a ST & HMRC decide you are actually acting as an employee of your client then the client has to pay the 'missing' Employers NI. If you are a Ltd company then your company is liable for the unpaid tax & NI.
As has been pointed out liability is another differentiator. If you are a ST & make a mistake then in theory everything you own is at risk.
As has been pointed out liability is another differentiator. If you are a ST & make a mistake then in theory everything you own is at risk.
Edited by Mr Pointy on Saturday 17th February 16:01
No Eric, paid £10/hr through the books. PAYE and NI deducted, etc.
Unusual I know, but I've tried the self employed driver thing before and you just end up with knobs. This way I get the cream, they get holiday pay and pension and I can pick and choose who I employ. All they do is drive.
The closest way to describe our set up would be like a transport company rather than a taxi company. Like a bus company or haulage company.
It would appear that from reading this thread, I would be better off staying as a ST. But I do get concerned about the liability thing. Not that I should, I've been trading successfully for over 12 years.
Unusual I know, but I've tried the self employed driver thing before and you just end up with knobs. This way I get the cream, they get holiday pay and pension and I can pick and choose who I employ. All they do is drive.
The closest way to describe our set up would be like a transport company rather than a taxi company. Like a bus company or haulage company.
It would appear that from reading this thread, I would be better off staying as a ST. But I do get concerned about the liability thing. Not that I should, I've been trading successfully for over 12 years.
Tyre Smoke said:
No Eric, paid £10/hr through the books. PAYE and NI deducted, etc.
Unusual I know, but I've tried the self employed driver thing before and you just end up with knobs. This way I get the cream, they get holiday pay and pension and I can pick and choose who I employ. All they do is drive.
The closest way to describe our set up would be like a transport company rather than a taxi company. Like a bus company or haulage company.
It would appear that from reading this thread, I would be better off staying as a ST. But I do get concerned about the liability thing. Not that I should, I've been trading successfully for over 12 years.
All sounds good. Unusual I know, but I've tried the self employed driver thing before and you just end up with knobs. This way I get the cream, they get holiday pay and pension and I can pick and choose who I employ. All they do is drive.
The closest way to describe our set up would be like a transport company rather than a taxi company. Like a bus company or haulage company.
It would appear that from reading this thread, I would be better off staying as a ST. But I do get concerned about the liability thing. Not that I should, I've been trading successfully for over 12 years.
I certainly would not dismiss a limited company out of hand,. Indeed, at the size you are at I think the advantages would outweigh the disadvantages.
I think I'll do a little more research.
I'm happy (ish) with my accountant, but the advice I get I sometimes think suits them better than me, if you see what i mean. For example, I pay them £1000+VAT or so per year to produce my accounts. I do all my own PAYE and VAT. At the last meeting, they advised I should try Quikbooks or similar. Which I did, and wasted around three days trying to set it all up for my company. In the end I gave up. But I can see that had I got it all working, the accountant would simply have had to log in, have a look and produce my accounts with little effort.
Because I try to keep stuff simple, I have basically two Excel spreadsheets, one for income, one for expenses. On the expenses one, I have an extra column for how paid, whether cash, bank transfer, company credit card, etc. On the income one, the invoices for account customers is listed, the credit card payments (lifted directly from Worldpay invoice) and cash. Nothing complicated. I'm leaning a little towards going limited, but also perhaps talking to a different accountant.
I'm happy (ish) with my accountant, but the advice I get I sometimes think suits them better than me, if you see what i mean. For example, I pay them £1000+VAT or so per year to produce my accounts. I do all my own PAYE and VAT. At the last meeting, they advised I should try Quikbooks or similar. Which I did, and wasted around three days trying to set it all up for my company. In the end I gave up. But I can see that had I got it all working, the accountant would simply have had to log in, have a look and produce my accounts with little effort.
Because I try to keep stuff simple, I have basically two Excel spreadsheets, one for income, one for expenses. On the expenses one, I have an extra column for how paid, whether cash, bank transfer, company credit card, etc. On the income one, the invoices for account customers is listed, the credit card payments (lifted directly from Worldpay invoice) and cash. Nothing complicated. I'm leaning a little towards going limited, but also perhaps talking to a different accountant.
Unfortunately, with the significant changes to VAT being introduced in April 2019, you will almost definitely have to get to grips with some sort of recognised double entry book-keeping system - and one that is compatible with HMRC's Making Tax Digital VAT system.
You should really be seriously looking at this issue now.
You should really be seriously looking at this issue now.
Two other factors to help shape your thinking.
The first is that I often see tenders from large companies and public sector organisations for 'ground transport services' which translates to 'taxis'. IN almost all these cases, only Ltd companies can bid for these contracts so as a ST, you may be denying yourself of greater opportunities.
And at some point in the future, you might be approached by another company with a view to acquiring your business. Selling a Ltd company is a darn sight easier than a Sole Trader business - in fact, I'm not sure you can!
The first is that I often see tenders from large companies and public sector organisations for 'ground transport services' which translates to 'taxis'. IN almost all these cases, only Ltd companies can bid for these contracts so as a ST, you may be denying yourself of greater opportunities.
And at some point in the future, you might be approached by another company with a view to acquiring your business. Selling a Ltd company is a darn sight easier than a Sole Trader business - in fact, I'm not sure you can!
StevieBee said:
Two other factors to help shape your thinking.
And at some point in the future, you might be approached by another company with a view to acquiring your business. Selling a Ltd company is a darn sight easier than a Sole Trader business - in fact, I'm not sure you can!
Absolutely you can.And at some point in the future, you might be approached by another company with a view to acquiring your business. Selling a Ltd company is a darn sight easier than a Sole Trader business - in fact, I'm not sure you can!
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