Staying a sole trader or going limited?
Discussion
Afternoon
Just sorting out my tax with the accountant and he suggested I go limited. I didn't go into any detail at the time but now I'm curious.
What are the pros and cons of limited and sole trader? I usually get I little rebate each year, so if it gets me a bigger one, I'll go limited!
Cheers
Just sorting out my tax with the accountant and he suggested I go limited. I didn't go into any detail at the time but now I'm curious.
What are the pros and cons of limited and sole trader? I usually get I little rebate each year, so if it gets me a bigger one, I'll go limited!
Cheers
Cheers for the reply will hire.
With this new accountant, I pay him to do the business for me as a sole trader. He reckons for a similar fee to what I pay him to do my accounts, I can go limited, I won't have anything to worry about as they'd do whatever needs doing for me (not sure what it entails though), and I'd get a bigger chunk at the end of the tax year.
I'd only be doing it for a bigger rebate at the end of the year. If it doesn't do that for me, I'll just stay as is
With this new accountant, I pay him to do the business for me as a sole trader. He reckons for a similar fee to what I pay him to do my accounts, I can go limited, I won't have anything to worry about as they'd do whatever needs doing for me (not sure what it entails though), and I'd get a bigger chunk at the end of the tax year.
I'd only be doing it for a bigger rebate at the end of the year. If it doesn't do that for me, I'll just stay as is
It is most likely that any limited company you would set up would qualify for audit exemption. A limited company is only required to have a formal audit if it meets the following criteria -
sales exceed £6.5 million
it has more than 50 employees
it's net assets are greater than £3.26 million
more than 10% of the shareholders have requested an audit
The vast bulk of small owner managed companies do not meet these criteria and consequently do not bother appointing an auditor.
However, even limited company accounts are pretty complex because, despite the fact that audits aren't required, they do have to comply with standards and layouts as set out under accounting standards, Company Law and Corporation Tax legislation. Because of that, most non-audit limited companies will still need to appoint a qualified accountant to ensure that the final sets of accounts prepared are compliant with all these rules and regulations.
Some directors of limited companies THINK they can do away with the need to avail of the use of a qualified accountant. But in my experience, EVERY set of company accounts I have ever seen that were prepared by a non-accountant were seriously deficient and non-compliant.
DISADVANTAGES OF A LIMITED COMPANY
The accountant's fee for preparing a small limited company set of accounts will be approximately at least twice the level for a similar sized sole trader set of accounts.
The proprietor of the company need to be far more disciplined in how they take money out of the company for personal use. They need to have a "strategy" i.e. they should decide in advance of each accounting or tax year how they are going to split their personal income from the company between salary, dividends and expense reimbursements.
This is usually decided on through discussions with their accountant.
Most small limited companies will also need to register for PAYE so that the treatment of the director's salary and reimbursed expenses and/or Benefits in Kind received from the company are properly accounted for under the PAYE rules.
Company Law sets out in detail the role and responsibilities of company directors. Most people who set up companies and consequently become company directors do not do enough homework to learn and understand what these roles and responsibilities are.
ADVANTAGES
The term "limited" is important because it indicates why companies exist i.e. the personal assets of the directors and shareholders of a limited liability company are protected to some extent if the company ever experienced financial difficulties or indeed went bust. This protection is not 100%. There are limited circumstances where "the veil of incorporation" can be lifted by the courts - but these circumstances are quite restricted.
Running a business through a limited company allows some degree of flexibility in tax planning - and this is often the only real reason why small business chose to incorporate. The tax advantages tend to come into effect when the individual is likely to have to pay higher rate income tax if their business profits were through a sole tradership.
So, when making a decision as to whether to incorporate or not, the points I would consider are -
how important is limited liability to you?
how "risky" is your business?
are you already close to a situation where the business profits would be subject to higher rate Income Tax?
how comfortable are you with acknowledging the responsibilities of being a company director?
how comfortable are you with having to comply with the more complex and onerous company and tax legislation that comes with operating through a limited company?
and, of course, you need to be prepared to pay quite a bit more for professional assistance.
Hope all the above helps.
sales exceed £6.5 million
it has more than 50 employees
it's net assets are greater than £3.26 million
more than 10% of the shareholders have requested an audit
The vast bulk of small owner managed companies do not meet these criteria and consequently do not bother appointing an auditor.
However, even limited company accounts are pretty complex because, despite the fact that audits aren't required, they do have to comply with standards and layouts as set out under accounting standards, Company Law and Corporation Tax legislation. Because of that, most non-audit limited companies will still need to appoint a qualified accountant to ensure that the final sets of accounts prepared are compliant with all these rules and regulations.
Some directors of limited companies THINK they can do away with the need to avail of the use of a qualified accountant. But in my experience, EVERY set of company accounts I have ever seen that were prepared by a non-accountant were seriously deficient and non-compliant.
DISADVANTAGES OF A LIMITED COMPANY
The accountant's fee for preparing a small limited company set of accounts will be approximately at least twice the level for a similar sized sole trader set of accounts.
The proprietor of the company need to be far more disciplined in how they take money out of the company for personal use. They need to have a "strategy" i.e. they should decide in advance of each accounting or tax year how they are going to split their personal income from the company between salary, dividends and expense reimbursements.
This is usually decided on through discussions with their accountant.
Most small limited companies will also need to register for PAYE so that the treatment of the director's salary and reimbursed expenses and/or Benefits in Kind received from the company are properly accounted for under the PAYE rules.
Company Law sets out in detail the role and responsibilities of company directors. Most people who set up companies and consequently become company directors do not do enough homework to learn and understand what these roles and responsibilities are.
ADVANTAGES
The term "limited" is important because it indicates why companies exist i.e. the personal assets of the directors and shareholders of a limited liability company are protected to some extent if the company ever experienced financial difficulties or indeed went bust. This protection is not 100%. There are limited circumstances where "the veil of incorporation" can be lifted by the courts - but these circumstances are quite restricted.
Running a business through a limited company allows some degree of flexibility in tax planning - and this is often the only real reason why small business chose to incorporate. The tax advantages tend to come into effect when the individual is likely to have to pay higher rate income tax if their business profits were through a sole tradership.
So, when making a decision as to whether to incorporate or not, the points I would consider are -
how important is limited liability to you?
how "risky" is your business?
are you already close to a situation where the business profits would be subject to higher rate Income Tax?
how comfortable are you with acknowledging the responsibilities of being a company director?
how comfortable are you with having to comply with the more complex and onerous company and tax legislation that comes with operating through a limited company?
and, of course, you need to be prepared to pay quite a bit more for professional assistance.
Hope all the above helps.
Edited by Eric Mc on Saturday 10th May 09:03
Eric Mc said:
However, even limited company accounts are pretty complex because, despite the fact that audits aren't required, they do have to comply with standards and layouts as set out under accounting standards, Company Law and Corporation Tax legislation. Because of that, most non-audit limited companies will still need to appoint a qualified accountant to ensure that the final sets of accounts prepared are compliant with all these rules and regulations.
This is our exact set up. It can also affect your credit rating.
Our Accountant undertakes an 'independent inspection and submission' each year (cost £500 or so) and we now ask that he ensures his full address details and a Directors' Report are submitted with the Balance Sheet.
Our credit rating has gone from Good to Excellent.
I mean, what sort of assumptions will a credit rating company make on DIY accounts ??
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