The Thoughts And Ideas Of The Efficiency Coach

 It’s easy and quick to set yourself up as a sole trader, but it may save your time and money in the long run if you had set yourself up as a limited company to start with. Here are my thoughts on the differences between the two legal structures:

Personal tax return:

You will have to fill in one of these whether you go sole trader or limited

Corporation tax return:

This needs to be filled in if you go for a limited company structure but not if you are a sole trader (as this is covered by your personal tax return)

Companies House

All limited companies have to be registered with companies house, and subject to their rules & regulations. This means (amongst other things) you have to file your annual accounts with companies house

Tax liability

As a sole trader there is very little ways of lessening your personal tax liability. As a director of a limited company there are a myriad of ways of legally limiting your personal tax liability. For example:

1. If your income from all sources, salary, dividends + other will take you over the personal (40%) tax rate, leave some of the profits in the company
2. have more than one shareholder – i.e. spread the dividends around
3. pay yourself £96 a week, which will entitle you to NI contributions (paid by the government) but exempt you from income tax (if your tax free allowance is £6k)
4. As long as your income from dividends & salary does not take you over the personal income 40% tax rate, you will pay no extra tax on your dividend income. (It will have been taxed at the 10% corporation tax level, rather than the 22%, 40% or 50% income tax levels

Be aware that  company benefits such as company car, private medical insurance will all dig into your tax-free allowance. Once again, do seek professional advice if you have any questions or concerns.

Why should I choose sole trader?

A ltd company structure is not right for everyone. If you are not planning significant future growth and don’t anticipate making more than approximately £15k a year in profit, then you may find that the extra administration and accountancy fees involved in being ltd offset any tax advantages. Everyone’s personal circumstance is different so do seek further advice from a qualified accountant…

Liability for debts

If you are reading this article, you are taking helping to ensure that you make a success of your new venture. However, be aware that as a sole trader you are personally liable for all your business debts. As a director or a limited company you are not personally liable for your business debts. However, the recent credit crunch has meant that banks and finance companies now tend to ask for personal guarantees from a company’s directors before lending out any money…

VAT

You can be VAT registered whether you are a sole trader or limited company

Appearance of size

A limited company can give the impression that you are a bigger & more stable/reliable entity than if you trade as a sole trader. Indeed some sectors, such as IT or HR contracting will only deal with a Ltd company.

IR35

If you decide to trade as a limited company you need to know about this tax regulation. If HRMC thinks that you are in effect acting as an employee of a company you are working for, they can legitimately make your client pay NI & you pay income tax on your fees (as if you were employed for them) See business link article: 

http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1073862589

Accountant:

A good accountant is worth their weight in gold when setting up a Ltd. However, you can do it all by yourself. Take a look at companies house or business link for details. A small accountancy firm – or one-man band – will charge you approximately £1000-£1500 for first year fees (including company set up costs), and then on-going fees of about £800-£1000 a year. You may find that an accountant may set up your company for free for you) You can become your own accountant, but a good accountant should pay for him or herself.

Your local business link may offer a voucher scheme for startups which you can use to off set some of your professional adviser fees. (The East of England business link does)

Selling your business on

Thank you to Judith Morgan for this tip. You may not be thinking about life after your business at this point in time, but it is definitely worth thinking ahead. If you want to sell your business – which is where the real wealth creation is, you need to have the part that you want to sell as its own limited company.

From personal experience the early days of setting a new business are often a mad, fun but tough time. Sometimes it can be lonely and often you need someone to bounce ideas off and keep you focused on the end goal – which often seems a long way off. Many of my clients chosen to work with me for both the quality of my advice, but the ability to have to some quality time focused on their needs. How about dropping me a line (heather@theefficiencycoach.co.uk)  or giving me a call (+44 (0) 1234 48 0123 and seeing how we could work together?

If you are thinking about setting up your own business and have not yet lined up an accountant – I recommend Toni Hunter – partner at George Hay Chartered Accountants. Indeed, Toni checked over this post for me…

If you are in the early days of setting up your business, you will find some of my other blog posts to be useful:

setting up a business in a recession, are you mad?

10 things you must do BEFORE setting up a business

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