Sole trader or limited company?!

[smcconnell1989]

I am renting a beauty room in hair salon due to open end of oct, little bit stuck on weather i need to be a sole trader or limited company? i think from what i've heard you can be either but obviously there's pros and cons to each.. i did hear something about having to pay employers national insurance if you are a limited company? don't know if that's right or not.. and i was also told it's easier to set up as a sole trader?

would be grateful of any info or advice, even somebody just to tell me the difference!

thanks, sarah x

 

[Martin Duffy]

I'm a sole trader (so don't have to be registered with Company House etc). As far as I'm aware if you're employing people you can't by definition be a sole trader, so will have to be a limited company. If you're employing people you have to have employer's liability insurance etc as well. If you go on the government website it has quite a lot of information on this, and you could also check with CAB.

 

[collin]

I am renting a beauty room in hair salon due to open end of oct, little bit stuck on weather i need to be a sole trader or limited company? i think from what i've heard you can be either but obviously there's pros and cons to each.. i did hear something about having to pay employers national insurance if you are a limited company? don't know if that's right or not.. and i was also told it's easier to set up as a sole trader?

would be grateful of any info or advice, even somebody just to tell me the difference!

thanks, sarah x

Hi Sarah,

welcome to Salon Geek

there is no specific ruling on what type of business you are in your particular situation.

Generally speaking most would be sole traders or partnership arrangements which does have its advantages over a LTD company when you are relatively small business..you can claim all work related expenses to offset against a tax gain liability...you are however liable for any debts the buisness may incure.

A LTD company "ring fences" your position and provides protection for you in the event the business fails or if it is you are establishing a "high risk" buisness (which you are not).

Normally LTD companies are set up from an already established sole trader business once the business grows substantially and the owners are potentially at risk..

There are also tax advantages to a LTD company compared to those of a sole trader business when it is medium in size.

My advice..go self employed initially as this is much easier and cheaper to set up initially.....however dont over expose yourself to personnel guarantees for rent/equipment funding etc and if the business does grow substantially then convert to a LTD company.

This has its advantages as when you make the conversion you can calculate the value of the business being transfered into the LTD company and include that amount as a directors loan account into the LTD buisness..you can then draw this down completely tax free....cute hey

 

[Ruth Mills]

Yes, you do have to pay employer's NI if you are a limited company. However there can be tax advantages if you are able to pay yourself dividends in addition to a salary - these will attract corporation tax (currently at 21% for small businesses but gets bumped up to 22% next April) - and if you are a higher rate taxpayer there will be an additional higher rate tax liability as well - but you do not pay NI on dividends. But be sure to speak to an accountant if you want to do this! Generally speaking, you need to pay yourself salary at at least the minimum wage, and could then take anything else on top of that as a dividend payment every quarter - but again speak to an accountant to be sure!

Then you also need to check if you should become VAT registered - this will depend on your company's annual turnover - again check with an accountant.

 

[Fitz]

I am seriously considering this at the moment, its such a debate imho. Anyway could anyone elaborate on this what Colin has stated: This has its advantages as when you make the conversion you can calculate the value of the business being transfered into the LTD company and include that amount as a directors loan account into the LTD buisness..you can then draw this down completely tax free

I find this very interesting considering that would probably be my situation.

 

[collin]

I'm a sole trader (so don't have to be registered with Company House etc). As far as I'm aware if you're employing people you can't by definition be a sole trader, so will have to be a limited company. If you're employing people you have to have employer's liability insurance etc as well. If you go on the government website it has quite a lot of information on this, and you could also check with CAB.

A sole trader can employ individuals just like a LTD company..the name is a little confusing but it simply means that you are not a limited entity .
HTH :hug:

 

[collin]

I am seriously considering this at the moment, its such a debate imho. Anyway could anyone elaborate on this what Colin has stated: This has its advantages as when you make the conversion you can calculate the value of the business being transfered into the LTD company and include that amount as a directors loan account into the LTD buisness..you can then draw this down completely tax free

I find this very interesting considering that would probably be my situation.

This is a complex issue to go through and it is imperative that you seek advice from your accountants and through them the inland revenue.

That said ,with the right advise from your accountants its also not that difficult and could well prove to be a worthwhile exercises from a tax mitigation perspective.

OK so a sole trader business has a value in its Tangible assets (stocks,equipment,pre payments etc) and then it has its "good will" value which is basically a value on what the overall business is worth.(what you would sell for and what someone would be willing to pay)

Tangible assets are easily valued as these are shown in your accounts..the goodwill value is the difficult one to value however generally its 3x the average annual net profit position as a general rule of thumb figure.

To get to the goodwill value you need to consider what you would sell your business for as well as look at the net profit position over the last 3 years trading.

There will no doubt be a considerable difference between what you feel the business is worth and what the net profit position valuation shows.

OK so you say you think your business is worth 100kyouraverage net profit is say £20k x 3 = £60k.

So you need now justify the difference between the two figures ..this is where it gets messy.....your accountants will talk this through with you and then once you have agreed a "realistic" figure they will then refer this to the inland revenue for their approval.

Once you have their approval you then can start properly.

So you agree a Tangable asset worth of say £10k and a goodwill figure of say £75k(which inland revenue have agreed) this means that when you establish the new LTD company that you are "transferring" or loaning to limited company £85k.

This £85k will be subject to capital gains tax however there are some good "offset" allowances available right now.

Now it is most likely that the new LTD company will not have £85k to pay you in one hit so this sum goes into your "directors loan account" with the LTD company .

You are free to draw this down whenever and however you wish without attracting tax..as you've already been taxed on this sum through your capital gain(as mentioned above).

The trick to mitigate taxable earnings is to draw down from the directors loan account as well as drawing a minimum wage through the payrole..this way you only pay minimal PAYE however your national contributions are paid and maintained up to date.

Now this all sounds good however it is only worth considering having taken professional advice from your accountants,followed inland revenue guidelines and that your accountants confirm that this would be a good means to "mitigate" tax deductions and that it is worthwhile from the perspective of future earnings and security(ring fencing)

Many people think or simply want to be a LTD company because it looks/sounds better and that they can say to everyone.."well im a Director you know" .

Well the truth of the matter it really doesnt matter one bit...what does matter is operating your business through a vehicle which is most tax efficient and protective to you as the business owner.

Therefore it is important not to make the change purely for vanity purposes...in many cases a sole trader business can be more tax efficient than a LTD company.

Hoping this hasn't confused you or bored the pants off you.

MOST CERTAINLY TAKE REFERENCE AND ADVICE FROM YOUR ACCOUNTANTS...thats what there there for and what you pay them for.

Good luck :hug:

 

[Fitz]

This is a complex issue to go through and it is imperative that you seek advice from your accountants and through them the inland revenue.

That said ,with the right advise from your accountants its also not that difficult and could well prove to be a worthwhile exercises from a tax mitigation perspective.

OK so a sole trader business has a value in its Tangible assets (stocks,equipment,pre payments etc) and then it has its "good will" value which is basically a value on what the overall business is worth.(what you would sell for and what someone would be willing to pay)

Tangible assets are easily valued as these are shown in your accounts..the goodwill value is the difficult one to value however generally its 3x the average annual net profit position as a general rule of thumb figure.

To get to the goodwill value you need to consider what you would sell your business for as well as look at the net profit position over the last 3 years trading.

There will no doubt be a considerable difference between what you feel the business is worth and what the net profit position valuation shows.

OK so you say you think your business is worth 100kyouraverage net profit is say £20k x 3 = £60k.

So you need now justify the difference between the two figures ..this is where it gets messy.....your accountants will talk this through with you and then once you have agreed a "realistic" figure they will then refer this to the inland revenue for their approval.

Once you have their approval you then can start properly.

So you agree a Tangible asset worth of say £10k and a goodwill figure of say £75k(which inland revenue have agreed) this means that when you establish the new LTD company that you are "transferring" or loaning to limited company £85k.

This £85k will be subject to capital gains tax however there are some good "offset" allowances available right now.

Now it is most likely that the new LTD company will not have £85k to pay you in one hit so this some goes into your "directors loan account" with the LTD company .

You are free to draw this down whenever and however you wish without attracting tax..as you've already been taxed on this sum through your capital gain(as mentioned above).

The trick to mitigate taxable earnings is to draw down from the directors loan account as well as drawing a minimu wwage through the payrole..this way you only pay minimal PAYE however your national contributions are paid.

Now this all sounds good however it is only worth considering having taken professional advice from your accountants,followed inland revenue guidelines and that your accountants confirm that this would be a good means to "mitigate" tax deductions and that it is worthwhile from the perspective of future earnings and security(ring fencing)

Many people think or simply want to be a LTD company because it looks/sounds better.

Well the truth of the matter it really doesnt matter one bit...what does matter is operating your business through a vehicle which is most tax efficient and protective to you as the business owner.

Therefore it is important not to make the change purely for vanity purposes...in many cases a sole trader business can be more tax efficient than a LTD company.

Hoping this hasn't confused you or bored the pants off you.

MOST CERTAINLY TAKE REFERENCE AND ADVICE FROM YOUR ACCOUNTANTS...thats what there there for and what you pay them for.

Good luck :hug:

Thanks Colin that looks superb advice, however I think I'm gonna make an appointment to see my accountant next week as there other issues that need addressing also. Given my circumstances I feel what you have said is most applicable to me but we will see.

 

[collin]

Thanks Colin that looks superb advice, however I think I'm gonna make an appointment to see my accountant next week as there other issues that need addressing also. Given my circumstances I feel what you have said is most applicable to me but we will see.

Most defiantly the right way to approach this issue to make sure its right for you/your business and that it is effected correctly and all above board.

Good luck with your appointment and do let us know how you get on :hug:

 

[smcconnell1989]

This is a complex issue to go through and it is imperative that you seek advice from your accountants and through them the inland revenue.

That said ,with the right advise from your accountants its also not that difficult and could well prove to be a worthwhile exercises from a tax mitigation perspective.

OK so a sole trader business has a value in its Tangible assets (stocks,equipment,pre payments etc) and then it has its "good will" value which is basically a value on what the overall business is worth.(what you would sell for and what someone would be willing to pay)

Tangible assets are easily valued as these are shown in your accounts..the goodwill value is the difficult one to value however generally its 3x the average annual net profit position as a general rule of thumb figure.

To get to the goodwill value you need to consider what you would sell your business for as well as look at the net profit position over the last 3 years trading.

There will no doubt be a considerable difference between what you feel the business is worth and what the net profit position valuation shows.

OK so you say you think your business is worth 100kyouraverage net profit is say £20k x 3 = £60k.

So you need now justify the difference between the two figures ..this is where it gets messy.....your accountants will talk this through with you and then once you have agreed a "realistic" figure they will then refer this to the inland revenue for their approval.

Once you have their approval you then can start properly.

So you agree a Tangable asset worth of say £10k and a goodwill figure of say £75k(which inland revenue have agreed) this means that when you establish the new LTD company that you are "transferring" or loaning to limited company £85k.

This £85k will be subject to capital gains tax however there are some good "offset" allowances available right now.

Now it is most likely that the new LTD company will not have £85k to pay you in one hit so this sum goes into your "directors loan account" with the LTD company .

You are free to draw this down whenever and however you wish without attracting tax..as you've already been taxed on this sum through your capital gain(as mentioned above).

The trick to mitigate taxable earnings is to draw down from the directors loan account as well as drawing a minimum wage through the payrole..this way you only pay minimal PAYE however your national contributions are paid and maintained up to date.

Now this all sounds good however it is only worth considering having taken professional advice from your accountants,followed inland revenue guidelines and that your accountants confirm that this would be a good means to "mitigate" tax deductions and that it is worthwhile from the perspective of future earnings and security(ring fencing)

Many people think or simply want to be a LTD company because it looks/sounds better and that they can say to everyone.."well im a Director you know" .

Well the truth of the matter it really doesnt matter one bit...what does matter is operating your business through a vehicle which is most tax efficient and protective to you as the business owner.

Therefore it is important not to make the change purely for vanity purposes...in many cases a sole trader business can be more tax efficient than a LTD company.

Hoping this hasn't confused you or bored the pants off you.

MOST CERTAINLY TAKE REFERENCE AND ADVICE FROM YOUR ACCOUNTANTS...thats what there there for and what you pay them for.

Good luck :hug:

woooo collin you are so smart, i think i kind of got lost half way through so next step is see the accountant. thank you x

 

[collin]

woooo collin you are so smart, i think i kind of got lost half way through so next step is see the accountant. thank you x

Definatley the best course of action ...good luck :hug: