Just wondering how many of you have set up a limited company for your own business rather than just running it as a sole trader.
I was just going to go down the sole trader route but I've noticed that quite a few of my competitors have formed companies, and wonder whether that might influence potential clients...
Would anyone like to share what you opted for any why?
Thanks!
-- Edited by Jo Gordon on Tuesday 29th of November 2011 03:54:05 PM
I opted for a sole trader. This was mainly because I expected to make a loss in the first 2 years and thought it might be a nice idea for the tax man to send me some money for a change.
I toyed with incorporating a wee while back but haven't made a final decision yet. Partly because I'm also toying with the idea of changing my business model slightly to work only with sole traders and thought it's probably best to be like the clients.
My limited company comes from my other business area so it wasn't set up specifically for bookkeeping and accountancy work (where that's the case you need to change your company profile with companies house).
Going limited to my mind gives a more serious impression of your business but in exchange your taking on additional Bureaucracy and opening up your personal details to the world.
Going limited only slightly protects the owners of the entity as you will still find that you need to give personal guarantee's for just about everything. The veil of incorporation really does seem more like a very flimsy single ply paper towel!
However, being limited does completely segregate work from personal and other business affairs.
You may wish to have several limited companies running completely seperate businesses.
Trying to do that as a sole trader is a complete mess just asking to happen... But of course people in our line of work can make a pretty penny out of people attempting to do that!
Right, that's my two penneth to get the ball rolling.
Talk in a bit,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
sounds as though we could quite happily co exist as I'm trying (and so far succeeding) to only work with limited companies!
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I like the idea of being a sole trader and being able to do it all myself. I don't like the thought of having to involve another accountant to do my year end accounts etc.
Also, the paperwork involved in being limited scares me a little...
Can't see me reaching the 40% tax bracket in the next few years so wonder if at this stage going limited might be more bother (and cost) than it's worth...
Do potential clients really look at your business structure before appointing you? I don't think it comes into it.
My view is use a structure you are comfortable with but in my opinion a Limited Company will always save you tax and therefore give you more money in your pocket.
For those of you who are not farmiliar with Limited Companies and the accounts and tax, my advice is go and learn about them. Without you are limiting the clients you can act for efficiently.
Jo - if you are the business owner you can do your own year end accounts etc without employing an accountant. There is less paperwork than you might think...
I'm Bruton Young Limited trading as Bruton Young Bookkeeping (hence the BYB logo - BYL didn't look as good) and I am running the business as a limited company solely for tax purposes really. OK, I grant you that the reporting requirements are a little more onerous but it's nothing that any good bookkeeper couldn't handle in their sleep.
You do have to remember that you and the business are not the same thing but that's a small thing really.
Because I operate quite a bit in St James in London I find the limited status possibly gives me just a smidgen more credibility than sole trader might.
Has anyone else picked up business as a result of other bookkeepers (usually unqualified) being rubbish? I pick up loads that way and 100% of those bookkeepers have been sole traders. CLients have had their fingers burnt once and want the security (as they see it anyway) of someone who isn't a chancer who will disappear at the first sign of trouble!
Do potential clients really look at your business structure before appointing you? I don't think it comes into it.
My view is use a structure you are comfortable with but in my opinion a Limited Company will always save you tax and therefore give you more money in your pocket.
For those of you who are not farmiliar with Limited Companies and the accounts and tax, my advice is go and learn about them. Without you are limiting the clients you can act for efficiently.
I disagree, I think that the structure could impact on the clients you are likely to attract.
Regards the limited company always being the better vehicle for tax, I thought this for a while too but it's not quite so simple. If you are likely to make a loss even for the first few years, then sole trader can be better as a way to get your hands on the hard cash.
I'm not expecting to make a loss in my first year, but I doubt I would be hitting the 40% bracket either.
It's been a while since I worked in practice and have never set up a company before. I totally agree that I do need to brush up on my limited company stuff, including accounts and tax. Any suggestions on how best to do this?
I know that I could do my own year end accounts, but would I not still need an accountant to audit them and do the tax side? As I say it's many years since I worked in practice, and back then that's what was required.
If you make a profit in your first year, you'll be doing well. I'm in year 2 and expect break even or a very small profit this year, but certainly last year I had quite a big loss.
Once you take into account office space, phones and lines, stationery, advertising, software, hardware, licences, insurance, heat, power, mileage, furniture, web design, hosting, logos and the 101 other things it can amount to quite a lot in the first year or two.
Why would you need an accountant to audit your accounts and do the tax?
Unless is a statuory audit, which i would very much doubt, there is no need to have an audit done and you can do the accounts yourself. It is a misconception out there in the big world that people need an accountant to do their accounts. In the majority of cases the owners could prepare and submit their own limited company accounts if they had the knowledge and relevant software to do so.
Dont know if you intend offering your services to just unincoporated businesses or also limited companies. But if you intend offering services to limited companies and are unable to work out your own companys tax liability then dont think you are in the right line of business.
I have my own limited company for the following reasons
1. More standing that a sole trader business in the eye of the general public
I know that I could do my own year end accounts, but would I not still need an accountant to audit them and do the tax side? As I say it's many years since I worked in practice, and back then that's what was required.
Gosh, I've got some serious catching up to do...
Jo, the requirement for all limited companies to have an audit was removed a few years ago.
If you make a profit in your first year, you'll be doing well. I'm in year 2 and expect break even or a very small profit this year, but certainly last year I had quite a big loss.
Once you take into account office space, phones and lines, stationery, advertising, software, hardware, licences, insurance, heat, power, mileage, furniture, web design, hosting, logos and the 101 other things it can amount to quite a lot in the first year or two.
Kris
Kris, you have a good point about offsetting the loss in the first year against (presumably) salary income in the same year. However, if you break even in the second year, you'll have not benefitted from your personal allowance. If you'd have traded in the second year as a limited company, you could have paid yourself a salary to use up the personal allowance, then carried the loss forward to offset against future profits.
However, if you break even in the second year, you'll have not benefitted from your personal allowance. If you'd have traded in the second year as a limited company, you could have paid yourself a salary to use up the personal allowance, then carried the loss forward to offset against future profits.
Thats interesting, but I would actually have lost out here too. I would not have had the cash available to pay myself this year so I would have had to build up much of my salary in a directors loan account.
Although I didn't get the money in my hand it would still have been classed as my wage for this year, and therefore would have had an impact on my child and working tax credits calculation.
Where I would have saved a small amount, I would ultimately have lost out on a lot more.
The point I think I've been trying make is that it's foolish to say that in every instance a limited comany is the best vehicle for everyone as suggested by Rob earlier. I also thought this for a time, until I started doing my calculations.
Kris... Thats wrong. I've either misunderstood something or you've got it the wrong way around.
If your a sole trader then everything that your business gets is deemed to belong to you.
If your a limited company then it is the company (having totally seperate legal identity to the owners) that earns the money and pays you a salary (if it can afford to. Directors of limited companies being outside minimum wage legislation).
It seems from your answer that your thinking of a company along the same lines as though it were your money rather than the companies.
Tax credits are based on your salary and other forms of income. Not money that rightly belongs to a third party (the company).
If you don't have the money in the company to pay a salary then you don't have to unless your terms of employment state that you do but terms of employment for directors is generally where a director is hired as such rather than for owner directors.
If you do have the money to pay a salary then there are tax credit rules that take precedence to ensure that people do not cheat the system but we are talking about a case here where there is genuinely insufficient funds available.
That the company went overdrawn to pay a salary means that you took money personally and the tax credits will be based on that as though the money actually existed rather than being a loan which seems to be the way that your doing it as a sole trader.
Surely if you sat down and calculated it out it would be more cost effective to reduce salary to a level that the business could handle and take out a personal loan to carry you through to profit rather than your business taking out a loan to pay you a salary?
This does break down under IR35 but in general terms the two entities (you and the company) must be considered totally seperately.
For tax credit purposes you should not be any worse off being an employee under a limited company than you are as a sole trader.
I agreee that a limited company is possibly not right for everyone but I just thought that your reasoning for taking the path that you have in this instance opened up a whole different can of worms.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Shaun, I think you might have picked it up slightly wrong. I'm honestly not confused in the separate legal entity or how the money is managed differently. Nick pointed out that by being a sole trader and breaking even I have not made use of my personal allowance. The only way I could make use of the personal allowance as a limited company would be to pay myself a salary. Given that the business had no cash the salary would have gone into the directors loan account.
Even though I didn't have the cash in my hand (it's in the DLA) it would still have been classed as salary for the purposes of the HMRC for WTC's.
As it is, the business breaks even, therefore no tax and no impact on WTC's, and all I lose it the chance to use my personal allowance.
I'm not really sure (for the first time) what you're saying Shaun.
Kris
-- Edited by kjmcculloch83 on Wednesday 30th of November 2011 02:38:36 PM
Kris, you've highlighted one of the biggest issues of posting answers to questions on forums; not having all the facts.
Presumably, your family is receiving tax credits at a point where any earnings you receive will reduce any WTC/CTC awards you may have.
So, in the the scenario I suggested (ignoring the issue with not having sufficient cash!), you would be paying yourself a salary from a ltd co and receiving tax relief in the company @ 20%.
BUT from a personal perspective, this income would be clawing back your tax credits at a rate of 41%.
On a personal note, I hate tax credits. I believe they create a disincentive to earn more. In general terms, a sole trader who is earning in excess of £7,475 typically has a marginal tax rate of 70% - 20% income tax, 9% NI and 41% reduction in tax credits. But that's another thread! :)
Absolutely, and while I'd love to break out of the WTC/CTC system, I couldn't afford to do it unless I had the cash in my hand and not sitting in a DLA I may get at a later date.
The point, that I think has been made more than once on the thread is that no magic 'one size fits all' exists for business structures.
MarkS - Ouch! Thanks for pointing out I'm in the wrong line of business!!!! I've already said that it many years since I worked in practice (16 to be exact). Back then all companies had to be audited.
Nick - Thank you. Your comment was more informative and a little less harsh.
Now guys - whats the best way for me to brush up on my knowledge - and fast??? I had assumed I would be doing this as part of my ICB exams but can't see at what level that comes. I'm taking Level II exams next week. Passed my AAT and ACCA several years ago. Don't really want to do any more after ICB if I can help it...
What particular skills are you looking to brush up on. ICB level 2 takes you to final accounts for sole traders, level 3 is draft final accounts for LTD co's.
I think it's the bit beyond the TB that I need updating on.
Drafting final accounts - yes I could use a refresher but think I'll be okay anyway.
The areas that are worrying me now are - calculating tax, which companies do/don't need an audit, what paperwork needs to be filed and when, rules around payment of dividends, and anything else... Not sure if I will need to know all of this or not, but it would be helpful to know.
-- Edited by Jo Gordon on Thursday 1st of December 2011 12:52:53 PM
-- Edited by Jo Gordon on Thursday 1st of December 2011 12:53:47 PM
I worked in practice for 15 years up to 6 months ago when took the leap into industry. So if 16 years since you been in practice you will find a lot has changed.
Even since i have left practice there has been major changes such as IXBRL filing of tax returns.
My advice would be to get a few years experience in practice to get yourself up to speed then look to go yourself (easier said than done)
