It would be interesting to hear some thoughts. I've been self-employed before but was mainly working for someone else with very little to no expenses, so tax affairs were simple. This time I'm thinking of making a go of little business.

Quite a lot of websites with pros and cons but I'd like to hear from some people who've actually done both. What is the best option and why?

My manager where I work just now tells me it won't cost anything apart from the cost of setting it up and then I could leave it dormant until I start trading? I really need to do that because I've been on the verge of handing my notice in a few times over the past few months. The only thing keeping me where I am is the money which is quite good. Some days I really hate it. Sooner or later I will just take the risk and do my own thing.

 

I have not been a Ltd company but I have been a sole trader for 11 years.
Most of my business is online via websites or eBay shops.
I treat each site as a separate business for ease of bookkeeping/control, but my business name is my personal name. I therefore only need submit one set of accounts to the taxman.
Each little business is "my name" trading as "Business Name".

If in doubt which is the best solution for you, talk to a personally recommended accountant.

 

As a limited company you will firstly be limited in your liability.
Only pay corporation tax on your profits.
Better off tax wise
Pay naff all NI
Entitled to flat rate VAT
Maybe benefit from running your car through the company

Need to get PL insurance

Chip

 

Depending on your type of business and your turnover there are ups and downs to both with regards to the costs and what you can claim.

You need a basic business plan, which is nothing more than a spreadsheet of your estimated income and costs. A good accountant will advise you on the tax/financial aspects and find the best option for you.

 

What if it's me and just one employee to start with? Do you still think I'd be better off tax wise. Something around 60k turnover, the majority of which would be labour.

 

As a ltd company you will only pay corporation tax on PROFIT. As a director of said company you can earn up to £39k I think before paying any income tax (as you are paying corporation tax).

I was a sole trader for 4 years, formed a ltd company 18 months ago with another person. Never looked back.
Get yourself a good accountant that will explain everything to you in words you can understand. Our first accountant was completely useless and we almost missed out on the goodwill gesture of me 'selling' the rights and reputation of the client base I'd built up as a sole trader to the limited company. This goodwill gesture goes into a directors loan which you only pay 10% tax on.

 

Ah, that's one of the main things I was wondering about. Sounds pretty good to me. Of course I will speak to an accountant before I do anything, but I just wanted to get some opinions.

 

Deffo get a good accountant preferably through recommendation. He/she will explain all of the pros cons etc.

Like Neanderthal says I have not looked back after starting my own company 2 years ago. There is bit of paperwork to do and VAT if you turnover a bit more but its quiet easy after the first few times.

 

Flat rate VAT means you charge the 20% but only pay the revenue 14.5% I believe. In fact I think for your first year you only pay 13.5% back so you're making 6.5% on the VAT too.

You only have to come out of the flat rate scheme once turnover hits 200k I think. I'm only going by what I remember the accountant saying.

 

If a Company goes **** up. tough.

If a sole trader goes bust his house is at risk.

dl

 

At £60k pa turnover there will be no need to register for VAT.

Threshold is around £80K.

If your customers are the non VAT registered, ie. the general public, then you will be more competitive by not being registered, plus it can be a fair bit of work to keep up to date.

If you need to register, then I would suggest setting it up a cash accounting scheme, this will mean that it is only payable when you receive payment, rather than the traditional type where it is due upon issue of invoice. Can be very useful from a cashflow perspective.

 

Oddly enough, I spoke to an accountant about this only last week. He's convinced me that it could be well worth my while registering for VAT, as I'm a sole trader and my customers are all VAT registered Ltd companies.

Assuming I understood correctly, there are several major benefits:

- my customers shouldn't care if I charge them VAT because they can simply claim it back through their own VAT returns.

- with the flat rate scheme, I only pay HMRC 12% (or 11% in the first year), but I've been able to increase the value of my invoices by 20% at no cost to my customers. I can pocket the difference.

- under the flat rate scheme you can still claim back the VAT on capital expenses of £2000 or more.

- best of all, in my case: you can also claim back the VAT you've paid over the last 4 years on tools, equipment and similar, plus the VAT on the last 6 months' worth of services (such as accountants' fees).

The downside is some additional quarterly paperwork, but given the amount of money involved vs the amount of time it's likely to take, it should work out to be a very profitable way to spend the time. If your customers are all VAT registered then I don't really see the downside.

 

LTD vs Sole Trader, IMHO you have to be a pretty special case to justify being a ST these days.

Some other advantages not mentioned - that I saw:

Having several share holders, who are each paid dividends on profits.
Being able to deduct start up costs from profits.
Many, many things that are tax deductable - like fees, interest on loans etc.
Directors loans - free short term loans from your business.
Having an office at home, where you can deduct a % of your costs.
Pool cars / personal car use.
Pension advantages.
Easier to get trade memberships / trade accounts / credit accounts. (in some cases)

Some problems of being LTD:

Tax returns can be complex, and can be fairly expensive - but can be deducted.

Unless you are a single share holder, you dont own the entire company. Often causes problems if business partners fall out, or divorce etc.

Can be difficult to get bank loans etc as a LTD for the first few years, even then you need to be showing a good profit.

Personal finance might become a tad more difficult - esp borrowing for a house, as banks are now much more wary of company directors and now look at drawings - rather than profits. I.e if Company XYZ has profits of £50k a year but the director only drew £15k in divs, they will only loan on £15k not the £50k...

 

Without paying NI as well.
Get your Missus on the act and you can both pull a wage of £640 a month free of tax and NI.
You can also pull £5065 in dividends per month (after 20% corporation tax) without attracting any personal tax liability.
By my calculator, on an income of 88K you'd be paying tax of about 12K.
I guess for one person you could halve these amounts.
Above these amounts, the benefits will diminish.
When you look at it this way, I'd suggest at the very least that a chat with an accountant would almost certainly be in your best interest