People start a business because they have a particular skill set whether learned from work experience in a job or a hobby that has potential to expand in to an income generating activity. Deciding how you will structure your business is important for many reasons, but in terms of the financial side of the business it can have a big impact on the administration and tax implications of your business and the time that will take you as the business owner away from your income generating activity.
Last week I spoke with a client that is a sole-trader kitchen fitter. Initially starting out as a sole trader keeps things ‘simple’ he has one tax return to complete and submit by the 31st January. Recording income and your expenses and paying the tax on any profit.
There are of course many rules around what expenses are allowable and allowances that are available that makes having a tax accountant such as MJB Avanti a benefit not just for potential tax savings but the help and advice during the year to support you in your venture. But running a sole trader business has much less legislation, administration and rules governing what is required.
The sole trader client’s business had grown over the last year, he was not Vat registered yet, but profits were over £25K and he was looking to take on staff. This was definitely a good time to chat about the advantages and disadvantages of incorporating into a limited company
Firstly we spoke about the Disadvantages because this is the area that needs to be considered more carefully due to the responsibility that you have being a Director/Shareholder:-
The main disadvantage is the administrative burden placed upon the officers (the directors) of the company for example:
- Maintaining regular bookkeeping records
- Preparing Full Accounts
- Preparing and submitting Abbreviated accounts for Co House
- Preparation and submission of Corporation tax returns for HMRC
- Updating and submitting Confirmation statements for Co House
- Maintaining PSC registers
- Preparing and submitting Personal tax returns
- Completing PAYE returns every week/month/year depending on pay dates
- Completing and submitting annual P11d returns (if required)
- Preparing and submitting Vat Returns (if registered)
- Director Responsibilities – and being at risk of criminal or civil penalty proceedings eg late filing of accounts, breaking insolvency rules
All of which can have different filing dates and deadlines, and the fines can be larger, if you don’t submit on time.
With a sole-trader if you want to take money out of the bank you can, the tax you pay to HMRC at the end of each tax year has nothing to do with the money you take. And getting in the right mindset for how this differs with a limited company can be one of the hardest elements a new Director needs to get their head around, understand and implement. As how you take money out of the company is very structured either; PAYE Director Salaries; Dividends (if profits available) or repayment of Director Loan (if any).
Of course often the reason you go limited is that the Advantages outweigh the disadvantages – so we advised our client that being limited can have (but not exhaustive);
- An incorporated company, whilst not guaranteeing reliability, gives the impression of a soundly based organisation and may appear more credible.
- Because your accounts are submitted to Companies House – these come a public record
- Legal continuity
- A company will enjoy legal continuity as it is a legal entity in its own right, separate from its owners (the shareholders). Eg It can own property,
- Tax savings
- Not guaranteed, but there are often tax savings that can be considered when profits reach a certain level
- The company could establish an approved pension scheme which may provide greater benefits than self-employed schemes
- As a sole trader, there is little distinction between you and the business. Any business debts become your debts and your personal assets – including your house – are not protected. A major reason people choose incorporation. A limited company is its own legal identity, so as a shareholder your liability is limited (hence the name ‘limited by shares’). As a limited company (on the assumption you do nothing illegal as the director/shareholder) you have limited liability protection – which means that any debts of the company – remain the company’s and not yours.
We were able to reassure the client that the benefits of using MJB Avanti means that not only do we handle points 1-10 of the above list of requirements for a limited companies financial documents, but we also remind you about all the important dates and deadlines, provide advice and support during the year to ensure that as a new director/shareholder they understand their responsibilities and take advantage of the benefits of becoming a limited company.
The client has decided this will be the best route for him so we will now help with the next stage of transferring from a sole-trader to limited company including:-
- Valuation on the sole trader business to sell to the limited company
- Creation of the limited company and ensuring the documents (articles of association / share certificates etc) are set up correctly
- Maintain the PSC register
- Act as the Registered Office (to allow privacy for the Director not to have their home address on public record at Co House) and dealing with the Company Secretarial duties during the year
- Registering for PAYE and carrying out the monthly/annual reporting requirements
- Putting him in touch with a recommended IFA to ensure pension requirements are set up correctly
- Creating the Xero bookwork file and moving forward maintaining the bookkeeping for the client to ensure that it is dealt with correctly and thus providing the client with great financial data to help move his business forward
- When the time is right we will also help with registering the VAT
- Preparing the accounts/ tax and providing a meeting to discuss them and ensure the client knows and understands before signing
- Ensuring documents are submitted on time to the relevant authorities
- Being proactive and providing good tax advice during the year and reminding about all the important dates and deadlines
- And just being there to provide support from a dedicated, qualified and friendly team
If you are currently a sole trader and are considering whether or not incorporating is a viable option for you, please speak to a member of the MJB Avanti team on (08000) 388 799