The debate over Sole-trader or Company status continues.
One of the first questions sole-traders (and partnerships) often ask us is whether or not they should be trading as a company. To help answer this topical question, I thought it would be useful to give you our five-point checklist which we use when evaluating each case.
1. Saving Money
Company profits up to £300k are taxed at 20% and there is no National Insurance to pay on dividends. Comparatively, ignoring any thresholds, a sole trader is taxed at 20% income tax and 9% Class 4 National Insurance. On this basis alone there is a potential ‘saving’ to the tax payer of 9%. Sounds good so far, but remember that a company will need more looking after and your accountant’s fees are likely to be higher. As a general rule, a sole-trader can save in the region of £1.5k, where pre-tax profits exceed £25k, but always ensure that you get expert advice as the process of profit extraction from a company could cause you to pay more tax! It is not always advisable to incorporate solely for tax purposes but it can be appropriate under the right conditions.
###2. Limited Liability
Limited liability can give some commercial ‘protection’ but be careful as directors operating within the definition of ‘wrongful trading’ can still be held personally liable and potentially subject to prosecution and financial penalties.
3. Company or Partnership
The issue of whether to trade as a company or a partnership will often arise when there are two or more people going into business together. Generally speaking, a company has clearer statutory processes, directors and shareholders can make the ‘who-owns-what-who-does-what’ issue slightly easier and potential investors often prefer shares and dividends. On the flip side, company dividends cannot be off-set against other non-company losses so be careful if there are multiple income streams in the personal tax affairs of the stakeholders.
A company may present your business more professionally to other people. Consider the market that you trade in and whether your customers or peers trade as incorporated entities. A freelancer will often trade in this way for these commercial reasons and where there is a contractual need to be a company.
By and large, companies have more effective continuity through share ownership. The deceased can bequeath their shareholding, existing members can have their shares redeemed and family owned businesses may find company status useful when handing over to the next generation.
This checklist is in no way exhaustive and there are many complex operational and tax issues to consider. Always seek the advice of your accountant who will be best placed to guide you through the process.
Becoming a company can save the owners or the investors thousands of pounds in taxation, disputes or in litigation settlements. Incorporation can be an effective way of saving some money and protecting your interests.