Financial Matters

SOLE TRADER V LIMITED COMPANY?

Starting your own business is definitely very exciting. You are about to make your ideas a reality and start a process that can be very rewarding though not without risk. Your challenge is to take your enthusiasm, drive and skill set and turn them into a successful business. One of your first decisions is to decide to conduct your business either as a sole trader or as a limited company. If high profits of £50k+ per year are forecast only from years 2 or 3 (or never), then consider starting to trade as a sole trader. You can make a start as a sole trader, put your toes in the water, and then sell your business to your own limited company in the future if profits rise. Setting up a limited company immediately unleashes a legal responsibility along with higher levels of administration but the tax advantages of ‘being limited’ only really start to ‘kick-in’ with profits of around £50k per year. Also consider that because of the complexity of limited company accounts your accountant’s fees will be higher. So for some, a limited company may not be the appropriate entity at first. However the decision to be a sole trader or trade as a limited company sometimes is made based on factors other than profit levels and rates of tax. The limited company is a legal entity in its own right so if things do go very wrong it is the company in the spotlight not you. (Though a director of a company can be called to account if a company has been negligent or irresponsible in some way). The sole trader can be personally sued and risks their own assets if their business fails and owes creditors money. It may even be the case that you have a client or clients that you are about to work for and they stipulate that they can only engage you as a supplier if you are….and they tell you which entity they are only prepared to deal with. Starting as a sole trader is easy. You simply register with HMRC, make sure you have appropriate insurance cover and ideally set up a separate bank account for all your business transactions.

Setting up a company appears quite easy and there are many on-line offerings that can assist with the process but complexity lies in the details. A company can have different classes of shares and there could be advantages in starting the company with a few different share types allocated to yourself and your spouse (if you have one), and to children over the age of 18 years. Including family members as shareholders does not mean they are at risk nor responsible for the company in some way. They are simply shareholders, and therefore can be paid dividends directly from the company. Dividends of up to £2000 a year are tax free and therefore this is a fantastic method of extracting profits from your company. With a limited company, remember that it is a separate legal entity. It is not you! It must have its own bank account, must file annual accounts in a specific format as well as a corporation tax return. I began by suggesting that starting a business was exciting which it is, but make sure you make the correct decision of which trading entity to use. Let your accountant guide you because in addition to the points mentioned above, your own circumstances, and the type of business you are embarking on are also factors involved in making the right choice.

Peter Bevan Bevan & Co, Chartered Accountants peter@bevan.co.uk

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