Limited or Not

[abs]

This may have come up in the past but I'll ask the question anyway.

What are the advantages and disadvantages of going from Sole Trader to a Limited company?

Any input would be appreciated.

Theresia

 

[Gouldie0]

Hi Theresia,

It would depend on your level of turnover and what kind of profit you were generating on an annual basis.

By structuring your business as a limited company, you're automatically saving on class 4 NI contributions (paid currently at 8% on your annual net profit as a sole trader) and you can also take advantage of paying yourself through a lower salary topped up with dividends.

There are a few more legal obligations with being a limited company, for example you just can't draw profits from the business like you can as a sole trader. You need to calculate whether there is any money for you to withdraw after you have determined your corporation tax liability.

I see from your website Theresia that your registered with the ICB, what kind of bookkeeping services do you provide?

Kind Regards

Neil Gould

 

[Employment Law Services]

In general, Directors of Limited companies are protected from business liabilities whereas sole traders are not.

 

[Mike Lewis]

By far the most important advantage of a limited liability company is just what the name indicates: the company's liability is limited. In short, that means that if the company goes bust, the creditors can't expect repayment from the owners' (shareholders') personal assets.

In some cases - such as substantial loans, mortgages, etc. - the lender might insist on a personal guarantee from the owners, but that doesn't normally apply to day-to-day transactions.

Neil mentioned the saving on Class 4 NICs. Unfortunately, that's offset by the additional cost of Employer's NIC, at least on the salary element of your income. On the other hand, in the case of a small, private company, where the directors are also the owners, you can pay at least part of the directors' remuneration as a dividend rather than salary. You escape NIC completely on dividends, and the personal tax treatment is more favourable. The previous government were trying to change that, but I don't know if the present government have the same attitude.

Apart from the question of limited liability, the benefits of a limited company will depend a lot on the nature of the company and on the owner's circumstances, so it's worth getting professional advice if you are seriously considering the move.

Mike

 

[abs]

Hi Theresia,

It would depend on your level of turnover and what kind of profit you were generating on an annual basis.

By structuring your business as a limited company, you're automatically saving on class 4 NI contributions (paid currently at 8% on your annual net profit as a sole trader) and you can also take advantage of paying yourself through a lower salary topped up with dividends.

There are a few more legal obligations with being a limited company, for example you just can't draw profits from the business like you can as a sole trader. You need to calculate whether there is any money for you to withdraw after you have determined your corporation tax liability.

I see from your website Theresia that your registered with the ICB, what kind of bookkeeping services do you provide?

Kind Regards

Neil Gould

Thanks Neil,

I'll have to digest everything that's been said. May even meet up with Alison and discuss it over a glass of wine! How about it Alison?

I've only been registered with the ICB for about six months and at present offer manual or computerised bookkeeping (I use spreadsheets, Solar Accounts and a client's online software. I don't do Payroll yet although I did it as part of my HNC. I need to take the ICB exam before I will get it on the Practice Licence. It seems that I've done nothing but exams for the past two years!

Thanks for your input.

Theresia

 

[abs]

Thanks everyone for the quick replies. I will have to sit down and look into it in depth.

Theresia

 

[Gouldie0]

Neil mentioned the saving on Class 4 NICs. Unfortunately, that's offset by the additional cost of Employer's NIC, at least on the salary element of your income. On the other hand, in the case of a small, private company, where the directors are also the owners, you can pay at least part of the directors' remuneration as a dividend rather than salary. You escape NIC completely on dividends, and the personal tax treatment is more favourable. The previous government were trying to change that, but I don't know if the present government have the same attitude.

Mike

Hi Mike,

That is the reason for taking a lower salary to avoid paying the employers NI contributions.

The current government are also introducing a wee scheme for new companies that are incorporating (post 2010 budget),the scheme allows the company to avoid paying NI contributions for the first year of business. There is a limit to the number of employee's, I think around 50 and this should be up and running by September.

Regarding liability, most banks or 3rd parties will still require some sort of security so whilst your liability is restricted to what you offer as security you will still be liable for something should it go wrong.

Kind Regards

Neil

 

[cyberduck]

If you type ''sole trader or limited company'' into google and look at the results, you will find a lot of good advice on this subject. Also, click under blogs on the google page to find further information.

Personally, I would say that I think whether you should be a sole trader or limited company can depend on the inherent level of risk present within your business. If it is high risk, I would definitely consider becoming a limited company, as you have limited liability. Also, in industries where reputation is important, a limited company has huge benefits. It is true that becoming a limited company does tend to lead to greater bureaucracy, but this is not always the case.

 

[Mike Lewis]

One other benefit of a limited company is that it could help create a better impression. Putting "Ltd" after your company name could foster an impression of longevity and a business-like approach - at least in the eyes of some people.

Mike