Sole trader or company

Published: 21 Dec 2013

Updated: 30 Jan 2014

 

When you are self-employed a limited company is often worth considering. To help you decide, an accountant responds to some of the usual queries.

 

I am not sure whether the tax savings will make it worthwhile.

 

A company can be suitable for various reasons. Your accountant should help you to understand if and when a company would be right for you.

 

Is having a company going to take up a lot of my time?

 

You would probably spend an extra hour a year being a company rather than a sole trader. This could be a worthy investment of time when compared with the benefits and tax savings of having a company.

 

There would be more penalties

 

Yes, there are penalties for late filing of accounts with Companies House, which would not apply to a sole trader. The deadline for company accounts is typically nine months after the year end, which is about the same as for a personal Tax Return. Most companies are able to meet the deadlines, and so avoid any penalties.

 

The tax would be more complicated

 

If anything company tax is simpler to understand. There is often no national insurance liability and, in many cases, no payments on account. Sole traders typically have to make payments on account to HMRC for estimated, future tax liabilities. As such, the system for sole traders can make liabilities harder to predict and bring about cash flow shortages.

 

If I am registered as a company, does that mean I also have to be registered for VAT?

 

No, the VAT registration threshold (currently £79,000) applies to both sole traders and Companies alike.

 

All my business details would be public

 

Your can register your company at your accountant's address. Therefore, your home address would not be on any public record. For businesses with a turnover less than £6.5 million, the accounts which get filed with Companies House are abbreviated and as such do not include a profit and loss.

 

Don't I lose out on state pensions with a company?

 

There is a risk that you could forfeit state pension by changing the business to a company. However, if the company is arranged properly to pay you a salary each month then your social security should stay protected.

 

It's not as easy to close the business down

 

The procedure for closing down a limited company is now straightforward.

 

Is there now a lot of paperwork when I want to pay myself from the company?

 

Not really, you can simply transfer money from the company bank account to your personal bank account at any time. The money you withdraw will be treated as a mixture of salary and dividend. Most of the reporting of dividends takes place once-a-year after the year end. Usually, the only restriction is to keep about a fifth in the company bank for tax.

 

I would like a further discussion

 

At Coman & Co., we can respond to your query by email and, if suitable, arrange for a free, initial meeting.

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