- Are you unsure as to
whether to start your business as a sole trader or a limited company. Now, this video covers the
benefits of a limited company, the benefits are they sole trader, deciding which is right
for you from the outset, and we've made a free downloadable tool to help you make an informed decision and finally converting from a sole trader to a limited company. Hi, I'm Tony Dhanjal of the
Accounting and Tax Academy. Make sure you subscribe
for real quality advice from real qualified accountants. (orchestral music) Starting and trading
through a limited company is certainly a sensible
and tax efficient option, but it should not necessarily
be your default option. Operating as a sole trader
does have its benefits, and that we're going to provide you with a balance evaluation of the benefits of both a limited company and sole trader beyond just the tax benefits. Operating new business
through a limited company has many benefits, but as always, it depends on your circumstances, your business objectives
and financial targets. Nonetheless, the top five
benefits in my opinion of a limited company are as follows, tax efficiency, yes, a limited company is generally more tax efficient, as long as tax matters
are planned in advance and the company's compliance
and administration is done on time and correctly. However, in comparison to a sole trader, there is a certain profit
threshold to consider before a limited company
is more tax efficient. And I'll discuss this later in the video. Limited liability, a lot
is made of this benefit, and rightly so. As a shareholder of a limited company, your personal assets are not at risk in the event of insolvency,
or in other words, if your company is going bankrupt, but many lenders and creditors, are the people that your
company owes money to, have clauses in their contracts that potentially can by
pass limited liability and put your personal assets
at risk so do check this. Multiple shareholders and directors. If you are looking to expand
your business in the future, bring in more directors
to manage the company and share the responsibilities,
then a limited company, certainly provides this scope. Credibility, now, in
my years of experience, I have certainly witnessed many medium to large
organizations insist a supplier is a limited company
rather than sole trader. A limited company does provide you with a level of credibility,
but be careful here. You're only credible, if
you have a trading history, which is published on the
Companies House Register. Legal name, once you've registered
your company legal name, then it is protected, nobody else can use or infringe on that legal name. But do know this is quite different from trademark protection
of intellectual property, such as brand names. Now, in my personal opinion, sometimes I feel too much
weight is given to creating and starting off a business
as a limited company. Part of what is driving
is, is that it's so easy to create a limited
company in the UK today and extremely cheap too. It's a bit like getting married, it's easy to get that
marriage certificate, but more painful going
through the divorce, if things don't work out. What do you think? Put your comments in below. And that leads me to my five main benefits of operating as a sole trader. Flexibility, you can start
your business as a sole trader, and then if it takes off incorporate it. Keep your affairs simple and
fees lower in the early days and if things don't work
out, you can wrap things up so much more easily and cost effectively. Greater privacy, with
a sole trader business, your name and details are
not in the public domain, unlike a limited company. Although there are ways of mitigating this as a limited company through using an accountant's registered
office address, for example,. Cheaper to run, the cost
of accounting, compliance and tax returns are lower and affairs are simpler than
those of a limited company. As a sole trader, you have to complete a
self assessment return by the 31st of January, following
the end of the tax year, 5th of April. Now be careful here
because there is a section in the self assessment return,
which requires many accounts, so it's not always straightforward. Cheaper to close down. If your business simply does
not take off or you've come to the end of your
business's journey naturally, then it's quicker and
simpler to close down your sole trader business. Tax neutral, if your
profits are in the region of 20,000 pounds or lower, then
there really isn't too much difference between a sole
trader and limited company with regards to taxation. There is class 2 in class
4 national insurance to pay as a sole trader, but then there is also class 1 primary and secondary national insurance to pay. If you take an optimum director salary through your limited company
at the personal allowance level and do not qualify for the National Insurance
employment allowance. There's no right or wrong answer here. And a lot depends upon what
stage of your business journey you are at, your business
objectives and financial goals. What you need to do is
make an informed decision. I mean, I have witnessed somewhere, in the region of 40% of new entrepreneurs, jump into creating a new limited company and all the associated companies house and HMRC registrations without
much thought or planning, and eventually end up
resolving their businesses due to non-activity or
things just not working out. And then they get surprised at the fees and time it takes to
shut down that company. We've done a video about how
to dissolve a limited company and spoiler alert, it's not
really that straightforward. As I mentioned earlier,
it's become easy and cheap to start a limited company in
the UK and don't get me wrong, that's not a bad thing at all. Many formation companies offer
nice freebies and incentives so you to create a limited
company in three hours or less, but you should always pause and think, is this the right option for me at this stage in my business journey? Just because McDonald's
offer your kids a free gift and cashback with a happy
meal, does not necessarily mean it's the right type of food for them. And by the way, I have
nothing against McDonald's, it's just an analogy for me to use. Now, if you're thinking, but Tony I'll just make
my limited company dormant allow me to enlighten you
to the official definition. Your company is considered
dormant by Companies House, if it is hard, no significant transactions in the financial year that
you'd normally report. Significant transactions do not include filing fees, paid to Companies House, penalties for late filing accounts, money paid for shares when
the company was incorporated. So in other words, if you have made any significant transactions
in a company year, your limited company cannot
file dormant accounts. And they've pretty much told you what is not significant here, so anything else could be
classified as significant. If you're testing your
concept or the market, then perhaps it's sole trader
vehicle is a feasible option. A lot is made of personal
risk and so forth. But if you're dealing
with manageable amounts that you can afford to lose, then it's highly unlikely your house, car or your kids will be repossessed. Take a few minutes and
think it through first, we've created a free limited company versus sole trader
decision tool to help you. You can download it by clicking the link in the description box below. It's a simple form of 10 questions, and depending upon your answer,
you either score a point for sole trader or limited company and which option gives
the highest points total provides you with a steer, in making a more informed decision. And herein lies the
beauty of a sole trader, yes, you can incorporate
it or in other words, convert your existing business
into a limited company. Any assets, contracts, customers, cash you may have in
your sole trader business gets incorporated into a limited company. And more often than not,
you will only do this, if you start gaining traction with getting paying customers and building an actual business. But a word of caution here,
there is a process to this, and I strongly recommend
that you use the services of a reputable and
trustworthy accounting service who has experience in incorporating
sole trader businesses and things like goodwill,
capital gains tax and incorporation relief are involved and above all the timing of incorporation can make a difference. So let's recap if you're unsure as to whether a sole trader or limited
company is right for you, then pause and plan. Take just a few minutes to use our sole trader versus
limited company decision tool. It will facilitate some thought and help you make a
more informed decision. If you're basing your decision
just on tax efficiency, then you have the option to
start off as a sole trader and then incorporate
into a limited company, when your business is earning a profit of around 20,000 pounds per annum. Now, there some variations
to this, so do use this as a guide threshold only. After some thought and planning, you may decide that
starting a limited company from the outset is the
right decision for you and your business for reasons
other than tax planning. So for example, securing a
legal name that you want, or perhaps your clients are insistently only wants to deal with a limited company. And there's nothing
wrong with this at all, so long as you've made a
balanced and informed decision. Finally, no two scenarios are the same, so remember, this is just general advice. I hope this video has
helped you understand some of the benefits of a sole
trader and limited company in a more balanced way and
has taken you one step closer to knowing your numbers. As always let me know in the comments, your thoughts in today's video, or if there are any topics
you'd like us to cover in the future. Finally, be sure to like and subscribe as it really does help us to
get our content out there. This is Tony Dhanjal for the
Accounting and Tax Academy, and as always, thanks for tuning in.
