Sole trader vs limited company

Difference between a sole trader and limited company

Pop quiz hot shot:

“What’s the difference between a sole trader and limited company?”

Well, the sole trader trades as an individual – e.g. Joe Smith. Joe ‘is’ the company and as a client or supplier you are dealing with Joe.

A limited company however trades as a totally separate entity to the business owner, its Directors or employees. In this way clients and suppliers interact with an organisation – even if that’s just you.

So how does it work?

Joe is a sole trader, he invoices his clients for work done and they pay him directly into his personal account. Every year Joe works out his income and expenditure and pays taxes on the profit.

John owns a Limited Company. The Limited Company invoices for the work done and when paid, holds the cash in a business account.

At the end of the year, John's accountant prepares full financial statements and the company pays corporation tax.

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Reduce your risk

Trading as a sole trader, Joe risks all his personal possessions including his house and car. He has no protection and has the potential of losing EVERYTHING he has worked for. John's risk is much less, all he can lose is his Limited Company and the assets it holds.

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Pay less tax & make more money

This is a biggie and the main reason many form a limited company.

A sole trader has no flexibility, Joe must pay taxes on the full profit and has the potential of paying 50% tax and national insurance, therefore potentially losing over half his hard earned income.

A limited company only pays 21% corporation tax (soon to be 20% from April 2011 onwards) on its profits. It also has the flexibility to distribute profits to its shareholders in different tax years, avoiding higher taxes.

Eh? Say that again? Ok, here’s a rough example:

Based on 2008/9 thresholds and with profits of £50,000 here’s the difference:

Sole trader: Joe pays around £13,000 in Tax and National Insurance contributions of approximately £3,000. A total of £16,000.

Limited company: John pays approximately £9,250 in Corporation Tax, minimal NI Contributions of £250 per year. That’s a total of £9,500.

By having greater flexibility in how he pays himself dividends John can avoid higher rate thresholds.

So, John saves £6,500 or 13% of his hard earned income. So, who would you rather be: John or Joe? No, it’s not a trick question!

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Build up an asset that’s worth something

Joe, the sole trader, having decided to retire at an early age, now realises that he has nothing to sell on. All the goodwill was in his name and his sole trader company is worth nothing without him at the wheel.

John, has two options. He can sell his renowned company to the highest bidder or decide to opt for closure and apply for 'entrepreneurs relief' (thereby paying little tax).  Either way John retires a happy and richer man.

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Any downsides?

So this sounds too good to be true, if there are no cons, then why is everyone not trading through a Limited Company?

Limited companies can be seen as hassle, time consuming, costly and daunting for some people. There is a lot more form filling to set your Limited Company up, annual reporting and government paperwork.

However with My Accountant Friend, we set up the company for you (for a small fee of £75+vat) and we complete all the paperwork on your behalf.

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Practical steps – what would I need to do?

Think of a company name that's close to your heart, avoiding your own personal name, we will purchase this company for you and we will do the rest. To set up a limited company now click here.

But what about bookkeeping? All we ask of you is to simply create a sales invoice or two each month, upload your bank statement and the work is done. We actually make bookkeeping quite fun and easy.

We charge just £60 per month plus VAT to cover our services, which include your financial statements, corporation and personal tax returns, VAT and PAYE. We guarantee you will save much more on tax than our fees as a minimum!

So why choose My Accountant Friend over any other accountant?

My Accountant Friend has a unique online bookkeeping facility that makes bookkeeping a breeze but that’s not all!

Our automated system provides the insight on how your accounts are actually created and gives you your real time tax position at any time.

What’s more our videos will give you handy pointers, explain things in a ‘jargon-free’ way and show you how to save thousands in tax.

You are also allocated your own dedicated accountant, who'll be there every step of the way to support you. All for a low, fixed monthly fee!

With our help a limited company is a must for any business entrepreneur. Don’t give all your hard earned cash to HMRC!

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