Sole trader versus ltd company

FatAndy

PlutoinCapricorn wrote: »

I know that you can be a director and pay yourself a salary, which means that you need to deduct income tax and NI, unless you deliberately pay below the personal allowance. Fine if you are happy to keep the money locked inside the company. You can also take money as dividends I believe.

All this sounds too much like hard work to me.

The trick is pay a salary equivalent to your personal allowance and take the rest as a dividend but this doesn't mean that your money is locked inside the company.

In practice what happens is that there will be a 'Director's Loan' account for each director in the company's balance sheet. As a director you can take money out of the business whenever you want and this will be debited to your director's loan. Over the course of the year the balance will continue to rise, unless to repay any money taken out. At the end of the year you will hopefully have a made a profit sufficient to declare a dividend which will clear the balance in your director's loan account. If you haven't made enough profit and your director's loan remains 'overdrawn' this will be classed as a beneficial loan and will be taxed as a benefit in kind.

Basically you can still take money out of the business bank account whenever you need it just as you would if you were a sole trader. The dividend is purely a year end accounting adjustment. You don't need to declare a dividend every time you need some cash.

Thrugelmir

FatAndy wrote: »

The trick is pay a salary equivalent to your personal allowance and take the rest as a dividend but this doesn't mean that your money is locked inside the company.

In practice what happens is that there will be a 'Director's Loan' account for each director in the company's balance sheet. As a director you can take money out of the business whenever you want and this will be debited to your director's loan. Over the course of the year the balance will continue to rise, unless to repay any money taken out. At the end of the year you will hopefully have a made a profit sufficient to declare a dividend which will clear the balance in your director's loan account. If you haven't made enough profit and your director's loan remains 'overdrawn' this will be classed as a beneficial loan and will be taxed as a benefit in kind.

Basically you can still take money out of the business bank account whenever you need it just as you would if you were a sole trader. The dividend is purely a year end accounting adjustment. You don't need to declare a dividend every time you need some cash.

Not advisable to treat a limited Company in the same way that a sole trader operates.

If the directors own all the share capital of the company and either formally or informally decide that sums withdrawn by them from the company are earnings, or on account of earnings, the withdrawals are not loans. NICs (and PAYE) should be applied at the time of the withdrawal.

Whether or not the directors own all the share capital, it might not be straightforward to find that there has been an informal decision to treat withdrawals as on account of earnings. At one end of the scale there is a strong inference that there has been such an agreement when

<LI class=filledcircle>the account is overdrawn, or becomes overdrawn, and
• there is a regular pattern to the withdrawals

Also dividends are paid from reserves after the payment of Corporation tax not from "profit".

FatAndy

I was just trying to demonstrate that it isn't difficult to 'withdraw' money from a Limited Company if you're a director.

If anyone is thinking of operating through a Limited Company my advice would always be to see a qualified accountant before doing so.