Just about to take the leap into a life of self employment. Contracts from the first year are likely to bring in £35,000 to £40,000 a year. So far accountant advise is mixed over sole trader V limited company so I’ve lined up a couple more for advice. The contracts I’ve won so far don’t mind which.

In the meantime what does STW think?

I should have said. It’s my mind, experience and contacts I’m selling so outgoings will be tax, accountant, insurance and minimal bills. No stock etc. to fund.

sole trader (*as I understand it) means you are liable (and therefore so is everything you own in a worst case scenario)

Limited Company == Limited Liability

I was ltd as I could have potentially been sued.

edit after JD below, JD are you sure ?
http://www.bbc.co.uk/schools/gcsebitesize/business/aims/partnershipsrev1.shtml – disad 4

and therefore so is everything you own in a worst case scenario

No, unless you have borrowed on the back of something, your own stuff is your own stuff.

If you aren’t running up lines of credit, paying for premises, running up large tax bills, or generally borrowing anything in the business name, the benefits of being a Ltd Company are generally not relevant.

The downsides are still present though, paperwork, accountancy fees etc.

I would start with sole trader if your business won’t be borrowing any money or running up credit accounts.

You can always change later if it becomes relevant.

I don’t foresee any borrowing.

I’m sole trader, admittedly not complex, just my time, very little materials (software). Not LTD Co, not VAT registered – do my own accounts / tax return.

Last I asked an accountant (admittedly my turnover is less than yours) he reckoned if I could do my own accounts and stuff, then there was little in getting him involved (and I’d hazard that LTD Co would involve an accountant at least at start)..

See how you go at first, yes.

Good luck!

One of the main reasons people opt for Ltd is the perceived protection from creditors if it all goes pear shaped.

However, for a new Ltd, you’re unlikely to have anything of value in the business to give security over, so you’ll end up personally guaranteeing any substantial debt anyway.

The companies act has relaxed somewhat in respect of reporting requirements etc for small businesses, so it’s not exactly an administrative nightmare.

Depending on the nature of your business, an Ltd can offer greater protection against legal actions to recover losses which aren’t covered by PI etc. But again, if that’s a risk, those contracting with you will know that and will want some sort of protection in place.

And look at something like FreeAgent to do your invoicing/books etc – amazingly easy.

And I’ll give you a referral code if you want – gets us both 10% discount for life.

Another bonus of being a sole trader is that you can run your car via the business as a legitimate business expense (ie, the cost comes off your profits so you don’t get taxed on that portion of income – with a Limited Company, you would be taxed on it as a benefit in kind).

Some mixed advice above. Ltd liability applies to credit lines but also claims for liability / damages.

i.e. if you are a surveyor and you write a report saying a building is structurally fine and it then falls down you would get sued for damages. If you opted for ltd company the company gets sued, if you are a sole trader you get sued. If you are a ST and you get sued you could lose all your assets and be made bankrupt.

Can you afford to lose your house if you are sued? Unlikely event but possible. If not then LTD is probably best. You also can make the tax system more favourable as LTD.

you pay less income tax as a ltd company and this is the ‘loophole’ that the press goes on about with Jimmy Carr for eg. As a soletrader all your declared income is subject to income tax. As a ltd company you have a salary (usually set at the personal tax threshold) and dividends, which is your profit from the company. You pay less tax on dividend income than earned income so the outcome is less tax to pay. As a ltd company you own the company and are it’s sole employee. It’s all totally legal. Of course there are other ways to fudge the figures, your petrol bill can be a lot higher than reality for ex, the tax office aren’t to know how much driving is involved in your job. The downside of all this is that it will a lot harder to get a mortgage, without a huge deposit most lenders will ask for you to provide 3yrs accounts before being acceptable for mortgage purposes.

The downside of all this is that it will a lot harder to get a mortgage, without a huge deposit most lenders will ask for you to provide 3yrs accounts before being acceptable for mortgage purposes.

Even as a sole trader, it’s pretty hard to get a mortgage so this point is pretty moot!

I just got a mortgage as a partnership – very easy, pretty much any of the high street lenders and on very good terms.

And that was with the last three years accounts showing rubbish figures for two of them – just the last completed year was enough for them to lend to me.

The talk here is all about the liability aspect, which sounds like it’s not an issue for you OP.

My business sounds similar to yours and I went Limited Company status from Sole Trader when I took a partner on.

We have been pleasantly surprised by the tax implications.

As Jekyll states less the fudging of accounts.

As a sole trader you will pay income tax and NI on all income above your personal allowances. As a limited company you would take a basic salary up to your tax allowance so no taxes paid at that point. You would then take the balance if profits as a dividend and no tax again up to the higher rate tax threshold. The company would however pay 20% (in your case) corporation tax on all profits. Limited company accounts need to be submitted in a prescribed format and cost more to do than sole traders.

Separation of the business/trade from yourself as a limited company as mentioned above

Further to craig’s informative post, the nub of it seems to be that Ltd status really starts making sense as you head into higher tax bracket territory.

But maybe your accountant told you that anyway.

It’s all as clear as mud. If I thought my turnover was a bit higher I’d go for Limited. If I though it was a bit less. I’d go sole trader.

Chapaking – would you go straight to limited or see how it goes as sole trader first?

johndoh – If you don’t mind me asking what are your accounting costs on top of the software. I like the look of it so may contact you for a code.

i.e. if you are a surveyor and you write a report saying a building is structurally fine and it then falls down you would get sued for damages. If you opted for ltd company the company gets sued, if you are a sole trader you get sued. If you are a ST and you get sued you could lose all your assets and be made bankrupt.

Real world: You are a surveyor, therefore you have professional indemnity insurance. They pay. Your premiums rise as a result of the claims history. Limited liability company or sole trader status pretty much irrelevant.

There might be an issue of status, or perception of status. Some people get sniffy about “sole traders” and somehow think that having “Ltd” after your name and a number from Companies House means that your business is more credible. You’ll know better than me whether or not that could be an issue for your situation.

I work via a VAT reg’d Ltd company. I make money on the VAT via the flat rate scheme (I collect at 20% but only pay the taxman %13). Being a Ltd company is better for reducing tax liability.

There is more admin to do but I pay an accountant to do everything. I just have to pay VAT / Corp tax bills on time. They have saved me quite a few quid by advising me on tax issues, more than their monthly charge so it pays for itself.

I also couldn’t get the liability insurance I needed unless I was a Ltd company (underwriters wouldn’t offer it to a sole trader) and some contracts I have won required a Ltd company or they wouldn’t have dealt with me.

Depends on your business but it’s definitely beneficial to me.

I keep looking at this. I suspect I would be financially better off as a ltd but sole trader is so easy. No need for an accountant, just fill the forms out and pay the tax man once a year. I’m also slightly sceptical about how limited the liability is with a ltd company. In your situation I’d certainly start out s sole trader and see how it goes. I’ve had a few potential customers be a bit funny about my status as sole trader but it’s not been a big issue yet

You can’t protect your company name as a sole trader. If you get up and running then two years down the line someone else sets up a limited company with the same name they can force you to stop using it for your own business!

I’d probably go Ltd I think, just because it works well now. Is your business likely to grow?

Also remember as a limited company the dividends are issued to the shareholders so you can make you wife a shareholder to take more profits out if the business without paying additional taxes.

You can’t protect your company name as a sole trader. If you get up and running then two years down the line someone else sets up a limited company with the same name they can force you to stop using it for your own business!

Are you sure about that? Source etc?

Technically, I don’t think it would be possible anyway, since I believe a limited co. needs to have “limited” in the name, and conversely you can’t call your business “limited” if it isn’t?

Regarding brands, that’s an IP (Intellectual Property) matter, and ownership of trademarks etc. is totally separate from company names etc. Certainly in that area, if you haven’t registered, but can prove precedence (i.e. you got their first) you can contest someone else trying to register / enforce theirs.

Some mixed advice above. Ltd liability applies to credit lines but also claims for liability / damages.

i.e. if you are a surveyor and you write a report saying a building is structurally fine and it then falls down you would get sued for damages. If you opted for ltd company the company gets sued, if you are a sole trader you get sued. If you are a ST and you get sued you could lose all your assets and be made bankrupt.

Nah, it comes back to my original point – if the person you are contracting with could be facing an uninsured loss, you’ll need to demonstrate some other sort of security/protection.

The example above, although often cited as a great advantage of ltd structure, has limited value in the real world for most sole traders making the move to a corporate structure.

No one will contract with a surveyor who has insufficient (or no) PI cover in place, without some other form of assurance that he would be able to pay out damages. Even then, I’d certainly still run a mile, since if the business became insolvent you’d be screwed if you needed to claim.

Again, it all comes down to who you are contracting with. If you’re laying a patio for Joe Bloggs then he probably doesn’t care what insurance you have in place and if you end up with a claim against the company then yes, it will be personal to the ltd. But how many claims from people who don’t know about the industry will be likely to shake the business?

Compare that to those claims you DO need to be concerned about, those which will be of higher value. Chances are, the people/companies which are liable to such losses will be expecting to see greater forms of security from you/ltd before contracting, in which case an ltd structure with nothing behind it will fool no one.

TP, at my work we’ve just gone from sole trader to LTD company this year.

Have been told to expect our end of year accountancy fees to be in the region of 2-2.5k ex VAT.

we have 5 staff and turnover 400k ish so I would expect your accountancy fees to be less.

johndoh – If you don’t mind me asking what are your accounting costs on top of the software. I like the look of it so may contact you for a code.

I pay an accountant £800 a year to sense-check what I do, file my VAT and Self Assessments (x2 – me and my partner) and all other bits n bobs. Most of which I could do myself (you can file directly to HMRC through FreeAgent I believe) but he does it at mates rates (lifelong friend) and I like having someone else double check my accounts.

someone else sets up a limited company with the same name they can force you to stop using it for your own business!

Or buy the Ltd domain and just file it as dormant each year – we do that to have the Limited option whenever we decide to change (ie, when we decide the the business gets too big to run in current manner).

Johndoh…

That’s what we did.

Since we are on the topic of starting small business …

I plan to start my own business next year probably in February.

My business will be coffee and tea distribution. Starting at a very small scale to test the market. This is to supplement my part-time income at the moment.

If my net business income is between £5K – £9K per year do you think I need to registered for VAT? I do not understand the meaning of “informing the HRMC of my business …” (read something about this)

Some said that it would be better if I VAT registered as it would look legit. What do you think? Risky business as Tea and coffee distributor?

🙁

p/s: anyone want to try some coffee and tea?

VAT register if you have a lot of kit to outlay on, then you claim the VAT back. If not, you could still register for the flat rate scheme, in which you get to keep a proportion of the VAT you charge (about 7%).

You don’t have to register for VAT until your earning reach £79k PA (IIRC). However you can register for it below that threshold.

Registering for it means you can claim back VAT on everything you buy for the business that is subject to VAT and is allowable (ie, a desk would be allowable, your warm meal on a lunchtime normally wouldn’t be).

It does mean you have to charge VAT on every sale though so if you are selling your coffee and tea to individuals, they automatically have to pay another 20% over your sale price (assuming it is VATable, I don’t know if it is) so the price may put them off. If you are selling mainly to businesses they won’t care because they could (normally) claim the VAT back anyway as they will be VAT registered…

Trademarks are a whole other subject (and independent of your company name). Fair point about the limited bit on the name but how many people actually use that? You don’t say “I’m popping down to Tesco Limited for some milk”!! If I go to companies house and the name I want isn’t already registered then I pay £40 or so and its mine for ever more. As a sole trader there is no system to register your company name.

gwj72 & johndoh,

I think tea and coffee are not VATable the last time I checked (3 months ago).

Good info that Johndoh … I am selling to Business first.

The outlay probably will be:
A small coffee grinder (Eureka Mignon Mk II Instantaneous Grinder) (£280),
teapot (£10),
milk,
Sweet condense milk,
sugar,
sieve,
My car (private use but not sure if it is VAT claimable)
Petrol (not sure how much to spend yet)
name card,
Mobile phone (PAYG)
Laptop. (£400 max)
Small rented warehouse.
Freight forwarding charges.

That’s all I can think of at moment.

🙂

Insurance 😉

And not sure what you mean about the car – do you mean you are using your own car for the business? If so, you can claim around 42p per mile (no idea on current limit) for using it – you can’t claim for fuel (or any other running costs) on top of this though.

However you could alternatively gift it (or sell it and write of the purchase cost as a business expense) to the business then run it entirely through the business (ie, tax, insure, fuel, repairs etc) but you can’t claim ‘per mile’ that way.

Thanks all.

The latest accountant thinks ltd company, I’m meeting him on Monday to find out more/why he thinks this but he is sure, even with the income I predict, that the increased admin costs will lead to greater savings overall and because one of my areas is Oil and Gas then being limited doesn’t stop growth One more to speak to on Monday and then its decision time.

I haven’t thought about growth yet. I figured I’d first establish myself as one contract is taking me into a slightly different area and then take stock in a year or so. Plus at present my working week is spoken for as soon as I’ve worked my notice period so growth equals staff or a partner.

45ppm for first 10k miles then 25ppm thereafter…

if you run your car through the books you then have to declare it as a pool car, keep mileage records etc or have it as your company car and then pay benefit in kind tax based on it’s list price x emissions….

easier to go down mileage route, simpler and tax free

Also remember as a limited company the dividends are issued to the shareholders so you can make you wife a shareholder to take more profits out if the business without paying additional taxes.

Maybe in the 90’s but HMRC are pretty wise now.

tbh If you are only talking £40k pa, then your expenses plus below-code salary and then dividends should mean the only tax you’ll pay os corp tax as a Ltd. VAT-wise, it depends on turnover, but if you are dealing with big companies they’ll pretty much expect that you’re vat-able.