Sole trader or LTD?

[pgi947]

I've looked over this a thousand times from various places and still can't make sense of it.

Basically I plan to start up by my self, I already have at least 2 clients waiting and ready to go.

I just can't decide what I need to do and how, set up as sole trader or LTD.

I do plan in the future provided all goes well to employ at least one person to keep up with workflow but what I've read about LTD suggests I need to open the busness with a partner?

Any and all advice welcome.

 

[Duke]

No you can be the only person in a limited company - I did it this way rather than being a sole trader although for what I was doing which was a mixture of home and business customers, either would have worked as I was under the threshold for having to go ltd which was 70k or something before. You can set the company up yourself or get an accountant to do it for you. If you are taking on mostly or all VAT paying business clients then it makes more sense to go ltd and register for VAT. Going ltd gives you more protection as although you own 100% of the shares in the company, it isn't "you" doing the work compared to sole trader where you can in theory lose personal money. I expect others can explain in more detail though

 

[booyaka]

If your serious about a business consider speaking to an accountant - makes life simple. If you run you own business, you want to reduce the workload of external things as much as you can.

I have my own Ltd company, I'm the only employee. I have no VAT issues to deal with.

 

[Freakbro]

An accountant friend of mine who used to have his own accountancy firm always gave out 3 pieces of advice to his clients

Never trust a solicitor
Never trust a bank manager
Always trade as Ltd



Now, as much as I agreed with him, I do have a slight caveat on the 3rd piece of advice. Some micro businesses can be perfectly ok running as a Sole Trader.

The main things to consider on whether to be Ltd or a ST imo is (and they are both based on the size / profitability of the business) :-

Pros :

Liabilities - With a Ltd company the company is the legal entity and thus liable for any debts. With a ST then you are the company and you are personally liable. So if you are working with extended credit lines from suppliers and customers, then the greater the amounts you are working with the greater the personal risk for a ST if the business fails.

Profit & Tax - It is much more tax efficient to be a Ltd company than a ST. With a ST, you get your personal allowance then you pay Tax & NI on everything above that and will go into the 40% band if you are profitable enough. With a Ltd company, you become the director and can pay yourself a minimum wage to just tick over your NI contribution for the state pension eligibility and then take any other money out as drawings which can be allocated out of the profits a dividends. The company just pays Corporation Tax on it's profits. They have tightened up the rules on this, but it is still more tax efficient over a ST, especially when profits start rising.

Cons :

There is more paperwork and bureaucracy involved in setting up and running a Ltd company than just setting up a ST, you will be best advised to employ the services of an accountant and the overall fees for submitting a Ltd companies accounts will be higher than for a ST.

As for doing it on your own and/or employing someone at a later date, there is no difference between a Ltd or ST - you can be the sole director of a Ltd company (though you will need a payroll scheme to run for just yourself - as you are an "employee" of the business) or work alone as a ST and you won't need a payroll scheme until you employ someone else.

You can always start as a ST, see how things go and convert to a Ltd company at a later date if you wish.

 

[Orionaut]

I think there is some confusion here between VAT registration and becoming a LTD company

You do not need to be a LTD company to be VAT registered. Nor do you have to have to be above a threshold to become VAT registered.

I am a VAT registered sole trader operating a "Hobby Business" with a turnover of less than £30,000PA

You must to be VAT registered if your annual turnover exceeds £85,000 however you can become VAT registered at any time.

I do not believe there is any threshold beyond which you must become a LTD company

 

[Freakbro]

No you can be the only person in a limited company - I did it this way rather than being a sole trader although for what I was doing which was a mixture of home and business customers, either would have worked as I was under the threshold for having to go ltd which was 70k or something before. You can set the company up yourself or get an accountant to do it for you. If you are taking on mostly or all VAT paying business clients then it makes more sense to go ltd and register for VAT. Going ltd gives you more protection as although you own 100% of the shares in the company, it isn't "you" doing the work compared to sole trader where you can in theory lose personal money. I expect others can explain in more detail though

There's no threshold for having to become a Ltd company, only a VAT registered threshold.

I worked at a company with a £6million turnover that wasn't Ltd - though I bet they wished they were when they went bankrupt...

And you can be VAT registered as a Ltd compnay or a ST - you can also voluntarily register under the threshold as well

 

[datalol-jack]

@Freakbro forgot the golden rule of finance: trust, but verify!

As for business progression, keep things simple OP: ST->(LLP)->LTD->PLC; only if and when required. Likewise for any tax optimisation regardless of status. For example, if you are not in a VAT refund position by nature of what you supply or making a consistent loss (not a good thing anyway!), premature VAT registration is not a wise move.

For a more in-depth dive speak to your local accountant.

 

[pgi947]

Thanks all, to sum it up see an accountant and go from there, thanks for the advice all, think going LTD is the way forward for me but we'll see what the accountant says

 

[Quartz]

but what I've read about LTD suggests I need to open the busness with a partner?

Definitely not true.

Remember this: a limited company has limited liability; a sole trader carries their own liability.

 

[datalol-jack]

A limited company can have one director: by default the largest shareholder who holds 100% of the company's shares. A partnership, limited or not, is 2+ partners.

 

[pgi947]

Thanks again guys, got a meeting with an accountant that specialises in new start ups on Monday