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Accountants in Preston

Sole Trader or Limited Company?

Ainsworth Accountants present this page as a discussion document which does not constitute advice.

There are many professions represented by the issues on this page, and each should be consulted for specific advice.

 

Considerations

Sole Trader

 

Limited Company

 

Legal

 

 

 

 

The Business

The owner and the business are regarded as the same entity in law

 

A company is a 'person', with a separate legal identity

 

 

 

 

 

 

Ownership

If a partnership - then written agreements are advisable

 

The ownership of companies is determined by the issue of shares

 

 

 

 

 

 

 

 

 

 

 

Owners / Officers

Sole Trader

 

Limited Company

 

Number of owners

There is no limit

 

There is no limit to the number of shareholders

 

Officers

   

A private company must have at least one Director

 

Rules of Personal Conduct

 

 

Directors responsibility defined in law

 

 

 

 

 

 

 

 

 

 

 

Risk and Liability

Sole Trader

 

Limited Company

 

Personal Assets

Fully open to business risk

 

Directors are protected if they are law abiding and not negligent and not trading when insolvent. Shareholders protected (in their capacity as shareholders) to the nominal value of the shares

 

 

Business owner may be forced to sell personal property, including his or her own home; even if it is jointly owned with another person

 

Directors may secure loans on personal assets, for which they will be liable

 

 

Personal guarantees are sometimes required by banks

 

Personal guarantees are often required by banks

 

 

Partners are joint and severally liable

 

 

 

 

 

 

 

 

Credit Rating

Personal credit rating more likely to affect business credit rating

 

Personal credit rating less likely to affect business credit rating - but it may still do so

 

 

 

 

 

 

 

 

 

 

 

Liability

Sole Trader

 

Limited Company

 

Personal liability

The sole trader is personally liable for the liabilities of the business

 

The shareholders are not liable for the liabilities of the company, beyond the nominal value of the shares. However, the company and/or its directors may become liable if they act illegally or negligently or trading when insolvent

 

Confidentiality & Privacy

The sole trader has more control over the privacy of the business's finances

 

Small companies file 'Abbreviated Accounts' with Companies House, which are available to the public

 

 

 

 

 

 

 

 

 

 

 

Tax


 

 

 

Business Tax

Sole Trader

 

Limited Company

 

The Business

Income Tax calculated on adjusted Profit

 

Corporation Tax calculated on adjusted profit

 

The Owners

No salaries for owners

 

Salaries are subject to PAYE and are a tax deductable expense

 

 

Drawings are not taxed

 

Dividends are considered to be paid net of tax and are not a tax deductable expense

 

 

 

 

 

 

Owners Remuneration

The owner is taxed on business profits, not on that which the owner withdraws

 

Director's are taxed salary and any benefits

 

 

 

 

Shareholders are taxed on dividends

 

 

 

 

 

 

Conversion to Ltd Co

Sole Trader

 

Limited Company

 

Goodwill on conversion

Potential tax breaks on conversion to limited company

 

Potential tax breaks on conversion to limited company

 

 

 

 

 

 

PAYE Scheme

Required for employees

 

Required for directors and employees

 

 

Not required for owners

 

Not required for shareholders

 

 

Online filing now compulsory

 

Online filing now compulsory

 

 

 

 

 

 

VAT

There is little difference between sole traders and limited companies

 

There is little difference between sole traders and limited companies

 

 

Online filing now compulsory

 

Online filing now compulsory

 

 

 

 

 

 

Employed or Self-Employed ?

HMRC use the Badges of Trade to decide if a person is employed or self employed

 

HMRC use IR35 rules to decide if a person is acting an employee on a contract

 

 

 

 

Possible to get specialists to run it for you - at a price - Umbrella companies

 

 

 

 

Contract by contract basis

 

 

 

 

 

 

Expenses

Sole Trader

 

Limited Company

 

What is allowable?

Wholly, necessarily and exclusively

 

Wholly and necessarily

 

Entertaining

Not allowable

 

Not allowable

 

 

 

 

 

 

P11D / Benefits

P11D may be required for employees, but not for the owner

 

P11D is required for Directors - this is a complicated and frustrating process for most businesses

 

 

 

 

 

 

Car

 

 

If owned by company - Benefit In Kind on Car and Fuel

 

Who owns the business car?

The business owner

 

Either the director or the company

 

 

45p / 25p can apply

 

45p / 25p can apply

 

 

Private fuel scale tables for VAT

 

Private fuel scale tables for VAT

 

 

 

 

 

 

CIS

Slight differences in registration

 

Slight differences in registration

 

 

 

 

 

 

Employment Agencies for contractors

Will apply PAYE

 

Will accept the company and might pay a slightly higher rate to you to compensate for NI and Holiday Pay

 

 

 

 

 

 

 

 

 

 

 

Accounts & Financial

Sole Trader

 

Limited Company

 

Accounts

 

 

Statutory Accounts for shareholders

 

 

 

 

Abbreviated Accounts for Companies House

 

 

Simple profit and loss, and possibly Balance Sheet for HMRC

 

Statutory Accounts + extra information for HMRC

 

 

Good online software and filing options

 

Good online software and filing options

 

 

 

 

iXBRL format for filing now compulsory for HMRC not Companies House

 

 

 

 

 

 

Solvency and Liquidity issues

No specific restrictions on trading at a loss, but owners should remember that they are personally liable for the debts of the business

 

Solvency and liquidity are under scrutiny - if a company trades whilst insolvent its directors become personally liable for the debts incurred

 

 

 

 

 

 

Accounting Records

HMRC now starting to use their powers

 

Defined by Company Law

 

 

 

 

 

 

 

 

 

 


Branding & External Relationships

 

 

       

 

 

Sole Trader

 

Limited Company

         
 

Clients and Customers

What do they want

 

What do they want

 

 

 

 

 

 

Creditors

Less gravitas?

 

Feel more vulnerable because of the limited liability, but possibly a little more protected because of the publication of Accounts

 

 

 

 

 

 

Credit Agencies

Personal information available from credit agencies

 

Will publish their assessment of the company


 

 

 

 

 

Brand

More likely to be seen as "you"

 

More professional in appearance?

 

 

 

 

More prestige?

 

 

 

 

 

 

Stationery

The individual must be named and easily identified on all business papers

 

Legal requirements - company registration number - address - directors

 

 

 

 

Also a requirement for emails

 

 

 

 

 

 

Raising Finance

Possible issue with credibility

 

Issue shares

 

 

Loans / personal guarantees

 

Loans / personal guarantees

 

 

 

 

 

         

 

Costs

Sole Trader

 

Limited Company


Administration Time

 

 

More expensive - particularly in time - board minutes, annual returns, registers, etc.

 

 

 

 

 


Accounting & Tax Fees

Simpler accounts format saves Accounting Fees

 

Statutory accounts have specific formatting and disclosure requirements

 

 

 

 

Small companies do not need an audit

 

 

 

 

 

 

Bank charges

Check with bank

 

Check with bank

 

 

 

 

 

 

Future

Tax changes?

 

Tax changes?

 

 

 

 

 

 

 

 

 

 

 

Selling Up / Looking Ahead / Future Issues

 

 

 

Ownership

Partnership Agreements - potentially more costly and difficult to change or break up

 

Shares - easier to exchange

 

 

 

 

 

 

Sale value

Potentially more difficult to value as the owner and the business are 'one'

 

Potentially easier to sell - clean share purchase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


We hope we have been able to help with the following questions:

 

 

 

Should I trade as a Sole Trader or Limited Company?

 

 

 

Should I trade as a Limited Company or a Sole Trader?

 

 

 

 

 

..