Sole Trader Vs Limited Company?

Quintus

Hi, just a bit of advice wanted.

My wife and I are looking into buying an established business. We are both currently sole traders. We are considering the merits of becoming a limited company on buying the business, or otherwise be partners in the business.

Are there any good guides or advice sites that people can recommend? Its a fairly important decision of course and apart from advice from our accountant we'd like to be able investigate this ourselves. Thanks.

Horace

Advice from your accountant would be valuable indeed and will help you make the decision.

As sole traders you are liable for all debts personally but if you were a limited company then you would have to pay yourselves a wage, pay corporation tax, PAYE & NI..and you would have limited liability. A partnership is something different and there is such a thing as being an LLP which is (I think I am right) a limited liability partnership.

Paranoid

As sole traders you are personally responsible for the debts of the business.

As a Ltd company it is the company which is responsible, as if it were a third party.

This is a very big difference and as you rightly appreciate requires much contemplation.

Previous post points out responsibilities to Companies House. All is readily researchable on the web. A reliable accountant's advice is a must.

ukbill69

Thats right your a limited liability on your debts for a ltd company.

property.advert

I started my first company when temping through agencies way back in the early 90s. Costs nothing to set up, nothing to run and nothing to keep the paperwork in order. If you are already sole traders, then you know about book keeping.

Sometimes there are tax advantages for one way or another such as in the early 2000s you could have a company pay out £10,000 free of tax. End result ? lots of companies and no tax paid.

I would think that an established business would already have a Ltd Co. As part of your due diligence you should have their books looked over and their records checked so you'll need an accountant / lawyer for that.

I would not contemplate an offer until you really know what the ins and outs of this particular business are. You need to look at their potential liabilities and whether the company was insured against them at the time they arose. Not the claims, the actions.

Quintus

Thanks for the good advice. The business we're looking at buying is already set up as a ltd company. We've seen the accounts for the last few years and have had a valuation made on the business by our accountancy firm who specialise in the type of work we do and have done such valuations several times before.

We are looking at buying the property, all the assets and goodwill, but not the company they have itself. We won't be taking on their liabilities after they have moved (the current owners will be relocating abroad, to their home country infact). So we were considering then to form our own company instead of continuing as sole-traders or as a partnership. Hope that makes sense.

Thanks again.

magpiecottage

Quintus wrote: »

We won't be taking on their liabilities after they have moved (the current owners will be relocating abroad, to their home country infact). So we were considering then to form our own company instead of continuing as sole-traders or as a partnership.

You do indeed need a new company if you do not want the risk of being saddled with the old. The only downside is being deducted ten points if it is a football club!

The tax advantages of running as a limited company are less than they were but generally you can pay yourself a salary for part of the income and take dividend on the rest. This means you will pay corporation tax (at 21% unless you are extremely successful) rather than 20% basic rate tax but can save considerably on National Insurance.

You can also retain money in the business if you want to defer receiving it until you fall into a lower tax band but remember that leaves it available to creditors.

khublaikhan

Been on a business start-up course recently and the tutor advised strongly against partnerships as they often get messy over a lifetime of a business or when there are personal differences. Sole Trader or limited liability was apparently the way to go!

martindow

khublaikhan wrote: »

Been on a business start-up course recently and the tutor advised strongly against partnerships as they often get messy over a lifetime of a business or when there are personal differences. Sole Trader or limited liability was apparently the way to go!

Partnerships can be OK if you have a good agreement setting out who is responsible for what and what would happen if someone wants to leave. Very dodgy if there is no written agreement and partners fall out a few years down the line. It can easily destroy an otherwise successful business.

Quintus

magpiecottage wrote: »

The only downside is being deducted ten points if it is a football club!

Oh blast!! Hadn't thought of that. Well, in that case, I definately won't be buying Manchester United. That was a close one.

Only joking!

The other thing that seems to be that other businesses seem to prefer doing business with a limited company than a sole trader/partnership. I guess it shouldn't matter really, but its seems that it does. We've got alot of ideas to develop things and plan of where we're heading in 2 years, 5 years, etc. One part of that is developing alot of local contacts which will be important for us and the business.

Thanks for the advice so far.

PlutoinCapricorn

That is a good point about businesses preferring to do business with a Ltd. Company not a Sole Trader.

This could well depend on what you are actually doing: I call it a "business business" when people are buying and selling, rent an office, employ people, invest a lot of money in the business etc.

I am lucky in that I am accepted everywhere as a Sole Trader, partly because I do research and consultancy as opposed to selling and partly because I get all my work by personal recommendation as opposed to having to market myself. It would be very different if I started up a 'real' consultancy business that employed people.