- Are you unsure as to whether to start your business
as a sole trader or a limited company.
Now, this video covers the benefits of a limited company,
the benefits are they sole trader,
deciding which is right for you from the outset,
and we've made a free downloadable tool
to help you make an informed decision
and finally converting from a sole trader
to a limited company.
Hi, I'm Tony Dhanjal of the Accounting and Tax Academy.
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Starting and trading through a limited company
is certainly a sensible and tax efficient option,
but it should not necessarily be your default option.
Operating as a sole trader does have its benefits,
and that we're going to provide you
with a balance evaluation of the benefits
of both a limited company and sole trader
beyond just the tax benefits.
Operating new business through a limited company
has many benefits, but as always,
it depends on your circumstances,
your business objectives and financial targets.
Nonetheless, the top five benefits in my opinion
of a limited company are as follows,
tax efficiency, yes, a limited company
is generally more tax efficient,
as long as tax matters are planned in advance
and the company's compliance and administration
is done on time and correctly.
However, in comparison to a sole trader,
there is a certain profit threshold to consider
before a limited company is more tax efficient.
And I'll discuss this later in the video.
Limited liability, a lot is made of this benefit,
and rightly so.
As a shareholder of a limited company,
your personal assets are not at risk
in the event of insolvency, or in other words,
if your company is going bankrupt,
but many lenders and creditors,
are the people that your company owes money to,
have clauses in their contracts
that potentially can by pass limited liability
and put your personal assets at risk so do check this.
Multiple shareholders and directors.
If you are looking to expand your business in the future,
bring in more directors to manage the company
and share the responsibilities, then a limited company,
certainly provides this scope.
Credibility, now, in my years of experience,
I have certainly witnessed
many medium to large organizations insist a supplier
is a limited company rather than sole trader.
A limited company does provide you
with a level of credibility, but be careful here.
You're only credible, if you have a trading history,
which is published on the Companies House Register.
Legal name, once you've registered your company legal name,
then it is protected, nobody else can use
or infringe on that legal name.
But do know this is quite different
from trademark protection of intellectual property,
such as brand names.
Now, in my personal opinion,
sometimes I feel too much weight is given to creating
and starting off a business as a limited company.
Part of what is driving is, is that it's so easy
to create a limited company in the UK today
and extremely cheap too.
It's a bit like getting married,
it's easy to get that marriage certificate,
but more painful going through the divorce,
if things don't work out.
What do you think?
Put your comments in below.
And that leads me to my five main benefits
of operating as a sole trader.
Flexibility, you can start your business as a sole trader,
and then if it takes off incorporate it.
Keep your affairs simple and fees lower in the early days
and if things don't work out, you can wrap things up
so much more easily and cost effectively.
Greater privacy, with a sole trader business,
your name and details are not in the public domain,
unlike a limited company.
Although there are ways of mitigating this
as a limited company through using
an accountant's registered office address, for example,.
Cheaper to run, the cost of accounting, compliance
and tax returns are lower
and affairs are simpler than those of a limited company.
As a sole trader,
you have to complete a self assessment return
by the 31st of January, following the end of the tax year,
5th of April.
Now be careful here because there is a section
in the self assessment return, which requires many accounts,
so it's not always straightforward.
Cheaper to close down.
If your business simply does not take off or you've come
to the end of your business's journey naturally,
then it's quicker and simpler to close down
your sole trader business.
Tax neutral, if your profits are in the region
of 20,000 pounds or lower, then there really isn't too much
difference between a sole trader and limited company
with regards to taxation.
There is class 2 in class 4 national insurance to pay
as a sole trader,
but then there is also class 1 primary
and secondary national insurance to pay.
If you take an optimum director salary
through your limited company at the personal allowance level
and do not qualify
for the National Insurance employment allowance.
There's no right or wrong answer here.
And a lot depends upon what stage of your business journey
you are at, your business objectives and financial goals.
What you need to do is make an informed decision.
I mean, I have witnessed somewhere,
in the region of 40% of new entrepreneurs,
jump into creating a new limited company
and all the associated companies house
and HMRC registrations without much thought or planning,
and eventually end up resolving their businesses
due to non-activity or things just not working out.
And then they get surprised at the fees
and time it takes to shut down that company.
We've done a video about how to dissolve a limited company
and spoiler alert, it's not really that straightforward.
As I mentioned earlier, it's become easy and cheap
to start a limited company in the UK and don't get me wrong,
that's not a bad thing at all.
Many formation companies offer nice freebies and incentives
so you to create a limited company in three hours or less,
but you should always pause and think,
is this the right option for me
at this stage in my business journey?
Just because McDonald's offer your kids a free gift
and cashback with a happy meal, does not necessarily mean
it's the right type of food for them.
And by the way, I have nothing against McDonald's,
it's just an analogy for me to use.
Now, if you're thinking,
but Tony I'll just make my limited company dormant
allow me to enlighten you to the official definition.
Your company is considered dormant by Companies House,
if it is hard, no significant transactions
in the financial year that you'd normally report.
Significant transactions do not include
filing fees, paid to Companies House,
penalties for late filing accounts,
money paid for shares when the company was incorporated.
So in other words, if you have made
any significant transactions in a company year,
your limited company cannot file dormant accounts.
And they've pretty much told you
what is not significant here,
so anything else could be classified as significant.
If you're testing your concept or the market,
then perhaps it's sole trader vehicle is a feasible option.
A lot is made of personal risk and so forth.
But if you're dealing with manageable amounts
that you can afford to lose,
then it's highly unlikely your house, car
or your kids will be repossessed.
Take a few minutes and think it through first,
we've created a free limited company
versus sole trader decision tool to help you.
You can download it by clicking the link
in the description box below.
It's a simple form of 10 questions,
and depending upon your answer, you either score a point
for sole trader or limited company
and which option gives the highest points total
provides you with a steer,
in making a more informed decision.
And herein lies the beauty of a sole trader,
yes, you can incorporate it or in other words,
convert your existing business into a limited company.
Any assets, contracts, customers,
cash you may have in your sole trader business
gets incorporated into a limited company.
And more often than not, you will only do this,
if you start gaining traction
with getting paying customers
and building an actual business.
But a word of caution here, there is a process to this,
and I strongly recommend that you use the services
of a reputable and trustworthy accounting service
who has experience in incorporating sole trader businesses
and things like goodwill, capital gains tax
and incorporation relief are involved
and above all the timing of incorporation
can make a difference.
So let's recap if you're unsure as to
whether a sole trader or limited company is right for you,
then pause and plan.
Take just a few minutes to use
our sole trader versus limited company decision tool.
It will facilitate some thought
and help you make a more informed decision.
If you're basing your decision just on tax efficiency,
then you have the option to start off as a sole trader
and then incorporate into a limited company,
when your business is earning a profit
of around 20,000 pounds per annum.
Now, there some variations to this, so do use this
as a guide threshold only.
After some thought and planning,
you may decide that starting a limited company
from the outset is the right decision for you
and your business for reasons other than tax planning.
So for example, securing a legal name that you want,
or perhaps your clients are insistently
only wants to deal with a limited company.
And there's nothing wrong with this at all,
so long as you've made a balanced and informed decision.
Finally, no two scenarios are the same,
so remember, this is just general advice.
I hope this video has helped you understand
some of the benefits of a sole trader and limited company
in a more balanced way and has taken you one step closer
to knowing your numbers.
As always let me know in the comments,
your thoughts in today's video,
or if there are any topics you'd like us to cover
in the future.
Finally, be sure to like and subscribe
as it really does help us to get our content out there.
This is Tony Dhanjal for the Accounting and Tax Academy,
and as always, thanks for tuning in.