At what point to register as self employed or as LTD Company?

benten69

Hi all,

I am currently in full time employment, however I am also setting up a business on the side. Plan to to start of as a sole trader, and if it picks up change over to a LTD company.

However I am not sure at what point I need to register with HMRC as a sole trader. Some places say "immediately" while other say "once you get your first income".

Now to get this venture off the ground I am having to invest circa £2,000 in some equipment (I am keeping full records / receipts). Does "getting your first income" mean first profit? So, after I have earned back the £2000 investment?

Or does it mean after I get my first paying customer? Or is all that irrelevant and I need to register immediately, regardless of when (or if) I make money?

Also, while I am here, what are peoples opinions on becoming a LTD company? Is it best to do it from the word go (right now), or is it fine to do it later (say after 6-12 months) if things pick up?

Dazed_and_confused

https://www.gov.uk/set-up-self-employed

Strictly you don't have to register with HMRC until 5 October of the tax year after the tax year your business started.

So 5 October 2020 in your case. But there is nothing to be gained by waiting until then (and potentially forgetting all about registering). Do it sooner and you will get longer to complete and file your first Self Assessment return.

Pennywise

In practical terms, I'd register as soon as you have made your first sale. That's the "trigger" point at which you know you'll have to register, and there's nothing to be gained by leaving it later. On the contrary, you don't want to register too soon because then you have to deal with HMRC etc even if you never start trading. As said above, very easy to forget to register, so just register as soon as you know you have to.

Re conversion to limited company, it's always going to be a judgment call. Setting up as a s/t and then converting is always going to be more cost and hassle than setting up as ltd from the start due to the conversion process. You'll have to change bank accounts, Paypal account, insurance policies, leases, contracts, etc., as the limited company is a separate legal entity so a contract you sign as a sole trader wouldn't be valid once you convert to a limited company. If, eg, you sign a property lease as a sole trader, you're very unlikely to get that transferred to a limited company - what's in it for the landlord if they've already got you hooked as an individual - same with bank loans, finance, credit, etc - once it's set up in a personal name, you're going to have to climb mountains to get it converted to a limited company.

But, on the contrary, if it ends up loss making, you'll be able to get tax relief on your losses if a sole trader, but not as a limited company. Swings and roundabouts I'm afraid.

benten69

Pennywise wrote: »

In practical terms, I'd register as soon as you have made your first sale. That's the "trigger" point at which you know you'll have to register, and there's nothing to be gained by leaving it later. On the contrary, you don't want to register too soon because then you have to deal with HMRC etc even if you never start trading. As said above, very easy to forget to register, so just register as soon as you know you have to.

Re conversion to limited company, it's always going to be a judgment call. Setting up as a s/t and then converting is always going to be more cost and hassle than setting up as ltd from the start due to the conversion process. You'll have to change bank accounts, Paypal account, insurance policies, leases, contracts, etc., as the limited company is a separate legal entity so a contract you sign as a sole trader wouldn't be valid once you convert to a limited company. If, eg, you sign a property lease as a sole trader, you're very unlikely to get that transferred to a limited company - what's in it for the landlord if they've already got you hooked as an individual - same with bank loans, finance, credit, etc - once it's set up in a personal name, you're going to have to climb mountains to get it converted to a limited company.

But, on the contrary, if it ends up loss making, you'll be able to get tax relief on your losses if a sole trader, but not as a limited company. Swings and roundabouts I'm afraid.

Spot on, that's good info! I will register when I get my first sale made in that case. Answers my question perfectly.

In regards to LTD company transferal, I will be trading from home (at least to start with) and with no loans, etc. So that will make things a little easier in terms of transferring from Sole Trader to LTD.

I am very tempted to register as LTD from the word go, mainly to be classed legally as a separate entity and limit my liability, it will also open new doors when it comes to making trade deals with vendors, as most companies in this line of work are LTD companies, so vendors will be more inclined to work with them rather than a Sole Trader.

Only thing that has been putting me off going straight to LTD company is having to pay for an accountant and associated costs, at least until I ensure this work is viable enough.

I did look at going it myself by doing all the book keeping on https://www.waveapps.com/

However, a friend of mine mentioned it's not so easy to do the accounting for a LTD company and that after they did it for their first year they had to pay an accountant to sort out some mistakes.

Any advice on this?

uknick

Your friend's experience is typical of a number of clients. We currently have one who insists on doing their own book keeping but now pay us for a quarterly check. The reason being, every year they used to pay us extra to prepare their year end accounts due to the poor state of their accounting records and trial balance.

benten69

Yeah, that's what I thought.

Here's a question....now, I don't need to register as self employed until the Oct after I start working for myself (Oct 2020 in this case), does the same apply for starting a LTD company?

What I am wondering, is if I plan on going from Sole Trader to LTD in a very short time, it might be money wasted in converting from one to another.

Could I simply trade between now and next year, see how things get on, and then before Oct 2020 either register as a Sole Trader or LTD company depending on how things are going?

Is that even possible?

Pennywise

benten69 wrote: »

Is that even possible?

No, a limited company can't "trade" before it's formed - it doesn't exist, so how could it?

Customers, suppliers, etc all have a legal right to know "who" they're dealing with, i.e. whether you in a personal capacity, or a limited company that you've set up.

If you sign orders, raise invoices, etc., in your personal name as an individual (sole trader), then it's a matter of fact that it's you, trading as a sole trader, and you can't re-write history to pretend that it was a limited company trading if the paperwork etc wasn't signed by you in your capacity as a director "for and on behalf of" the limited company.

uknick

You need to understand a limited company is a completely separate entity to you as an individual. Which is why, if it goes bust, you as a shareholder don't have any liability with regard to any monies it might owe. The fact it's a separate entity does escape a lot of people who start trading, which is why many think they're self employed despite trading through a company.

So, as Penny says, if it's not set up, it doesn't exist, hence it can't trade.

benten69

Ok, thanks for the advise. Makes perfect sense! In that case I will continue as planned. Start as a sole trader and then transfer over to a LTD company after a year or so, depending on if it's worth it and the work / money coming in make it viable to pay for accountants, etc.

As I am starting out doing this part time around my day job just to see if it's even viable, so might not be worth going LTD and then dissolving later if the work isn't there.