Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@.

Search
  • FIRST POST
    • SarahLu
    • By SarahLu 15th Oct 19, 1:56 PM
    • 67Posts
    • 6Thanks
    SarahLu
    Ltd Company V Sole Trader
    • #1
    • 15th Oct 19, 1:56 PM
    Ltd Company V Sole Trader 15th Oct 19 at 1:56 PM
    Hi,

    My sister currently runs a business doing inventories for rental properties and I do some basic book keeping for her. I am also self employed as a sole trader in another line of work.

    Neither of us really understands the implications of being a Ltd company, it was something my sister was advised to do when she started the business in case it grew. I find that in comparison to mine as a sole trader, her business accounts are really confusing as I don't really understand director's loans, dividends etc and neither does she, so come the end of the tax year it has been known to cause us quite a bit of stress

    My question is, would there be any downside to her switching to be a sole trader? I think this would be much simpler for her and while she might pay a bit more tax, she would save lots in accountants fees. She doesn't employ anyone and has no plans to, so this wouldn't be a problem. Would switching to sole trader be a bad idea?

    Thank you
Page 1
    • 00ec25
    • By 00ec25 15th Oct 19, 2:12 PM
    • 8,689 Posts
    • 8,608 Thanks
    00ec25
    • #2
    • 15th Oct 19, 2:12 PM
    • #2
    • 15th Oct 19, 2:12 PM
    who is doing what?


    you mention both your failure to understand accounts and at the same time the possible existence of an accountant doing her company for her? What training/qualifications have you had as a bookkeeper able to do sole trade accounts?


    the business case for un incorporating comes down to the numbers, which you have not given.


    Presumably whoever advised her to incorporate in the first place failed to do a comparison of the two statuses so she could make an informed decision (or was it driven purely by fees they could charge)?
    • CityLite
    • By CityLite 15th Oct 19, 2:24 PM
    • 55 Posts
    • 32 Thanks
    CityLite
    • #3
    • 15th Oct 19, 2:24 PM
    • #3
    • 15th Oct 19, 2:24 PM
    Hi,

    My sister currently runs a business doing inventories for rental properties and I do some basic book keeping for her. I am also self employed as a sole trader in another line of work.

    Neither of us really understands the implications of being a Ltd company, it was something my sister was advised to do when she started the business in case it grew. I find that in comparison to mine as a sole trader, her business accounts are really confusing as I don't really understand director's loans, dividends etc and neither does she, so come the end of the tax year it has been known to cause us quite a bit of stress

    My question is, would there be any downside to her switching to be a sole trader? I think this would be much simpler for her and while she might pay a bit more tax, she would save lots in accountants fees. She doesn't employ anyone and has no plans to, so this wouldn't be a problem. Would switching to sole trader be a bad idea?

    Thank you
    Originally posted by SarahLu
    The fundamental downside of not working under the protection of a limited company is that you dont benefit from the limited liability such a company offers.

    As for accountant fees, there really shouldn't be too much difference in them between a one man/woman company and a one man/woman sole trader for a simple, straightforward business. The accounts are not that different. Whilst in the past, accountants would often charge more for a limited company where you asked them to file accounts both with CH and HMRC, nowdays you can make a combined submission.

    But her accountant should be advising her what is best for her. If not, she should find a new accountant.
    • SarahLu
    • By SarahLu 15th Oct 19, 2:36 PM
    • 67 Posts
    • 6 Thanks
    SarahLu
    • #4
    • 15th Oct 19, 2:36 PM
    • #4
    • 15th Oct 19, 2:36 PM
    Hello, thanks for your reply.

    who is doing what?
    Originally posted by 00ec25
    My sister does everything to do with the business, I just compile a basic spreadsheet showing her income/outgoings and categorising them which goes to the accountant.


    you mention both your failure to understand accounts and at the same time the possible existence of an accountant doing her company for her?
    Originally posted by 00ec25
    Yes, she has an accountant who does most of the work based on the basic spreadsheet that I provide. But I still feel it is good to have some understanding of what is going on and the accountant isn't really forthcoming at explaining things clearly.

    What training/qualifications have you had as a bookkeeper able to do sole trade accounts?
    Originally posted by 00ec25
    No formal training but I have been successfully doing this for myself for 5+ years and I'm confident I can do the same for this business too, but even if she used someone else I assume the fees would be significantly less than her accountant (1200 last year).

    the business case for un incorporating comes down to the numbers, which you have not given.
    Originally posted by 00ec25
    Happy to provide any information that will help. Last year for example the business took 31,650 and she personally drew just under 20k from that. Do let me know if there's anything else I can provide.


    Presumably whoever advised her to incorporate in the first place failed to do a comparison of the two statuses so she could make an informed decision (or was it driven purely by fees they could charge)?
    Originally posted by 00ec25
    I think they advised it based on the possibility that she might want to grow and potentially employ someone in future, but that isn't going to be the case now. I do think the fees played a part too.
    • Pennywise
    • By Pennywise 15th Oct 19, 2:40 PM
    • 12,153 Posts
    • 24,087 Thanks
    Pennywise
    • #5
    • 15th Oct 19, 2:40 PM
    • #5
    • 15th Oct 19, 2:40 PM
    There are a lot of factors to consider when deciding on the sole trader versus limited company issue. Obviously, there's the numbers, i.e. profit level, but also risk & limited liability, assets/loans, the individual's personal financial circumstances, car/mileage, equipment, etc.

    As for accountancy fees, the gap is narrowing for very simple limited companies as opposed to sole trader as long as book-keeping is good. 20 years ago, when I started my practice, the amount of extra work was substantial, and we'd charge maybe 3 times the price as against a comparable sole trader, but now, if there's no payroll, for a simple limited company where all profits are paid out as dividends, our fees are virtually the same - just a little extra for the extra time such as the extra tax return and companies house confirmation statement.

    If the OP's accountant is charging 2 or 3 times the price they'd charge for a similar sole trader, then something is wrong, either the book-keeping is failing or they're taking the mickey and overcharging.
    • SarahLu
    • By SarahLu 15th Oct 19, 2:43 PM
    • 67 Posts
    • 6 Thanks
    SarahLu
    • #6
    • 15th Oct 19, 2:43 PM
    • #6
    • 15th Oct 19, 2:43 PM
    The fundamental downside of not working under the protection of a limited company is that you dont benefit from the limited liability such a company offers.

    As for accountant fees, there really shouldn't be too much difference in them between a one man/woman company and a one man/woman sole trader for a simple, straightforward business. The accounts are not that different. Whilst in the past, accountants would often charge more for a limited company where you asked them to file accounts both with CH and HMRC, nowdays you can make a combined submission.

    But her accountant should be advising her what is best for her. If not, she should find a new accountant.
    Originally posted by CityLite
    Thank you, sorry if its a silly question but what is meant by limited liability?

    I don't know if this is unusual but I have been completing my own self assessment for 5 years now and never used an accountant. I was thinking of continuing to keep her records the way I currently do and then submitting her self assessment for her (as I do for myself). Am I missing something really important here? I obviously want to do things properly.
    • SarahLu
    • By SarahLu 15th Oct 19, 2:44 PM
    • 67 Posts
    • 6 Thanks
    SarahLu
    • #7
    • 15th Oct 19, 2:44 PM
    • #7
    • 15th Oct 19, 2:44 PM
    There are a lot of factors to consider when deciding on the sole trader versus limited company issue. Obviously, there's the numbers, i.e. profit level, but also risk & limited liability, assets/loans, the individual's personal financial circumstances, car/mileage, equipment, etc.

    As for accountancy fees, the gap is narrowing for very simple limited companies as opposed to sole trader as long as book-keeping is good. 20 years ago, when I started my practice, the amount of extra work was substantial, and we'd charge maybe 3 times the price as against a comparable sole trader, but now, if there's no payroll, for a simple limited company where all profits are paid out as dividends, our fees are virtually the same - just a little extra for the extra time such as the extra tax return and companies house confirmation statement.

    If the OP's accountant is charging 2 or 3 times the price they'd charge for a similar sole trader, then something is wrong, either the book-keeping is failing or they're taking the mickey and overcharging.
    Originally posted by Pennywise
    I'm not sure what they would charge for a sole trader but it would probably be worth her speaking to them and getting a comparison, thanks.
    • CityLite
    • By CityLite 15th Oct 19, 3:09 PM
    • 55 Posts
    • 32 Thanks
    CityLite
    • #8
    • 15th Oct 19, 3:09 PM
    • #8
    • 15th Oct 19, 3:09 PM
    Thank you, sorry if its a silly question but what is meant by limited liability?

    I don't know if this is unusual but I have been completing my own self assessment for 5 years now and never used an accountant. I was thinking of continuing to keep her records the way I currently do and then submitting her self assessment for her (as I do for myself). Am I missing something really important here? I obviously want to do things properly.
    Originally posted by SarahLu
    It means her (financial) liability is limited should someone make a claim.
    Whilst you could potentially lose the shirt, or blouse, off your back, the most she could usually lose is the 1 or so she has invested into the company in the way of purchasing however many shares she has purchased.

    It's not unusual for a single person sole trader to compile their own accounts and file them with HMRC.
    Neither is it unusual for a single person limited company to compile accounts and file them with CH & HMRC.
    Last edited by CityLite; 15-10-2019 at 3:15 PM.
    • SarahLu
    • By SarahLu 15th Oct 19, 3:21 PM
    • 67 Posts
    • 6 Thanks
    SarahLu
    • #9
    • 15th Oct 19, 3:21 PM
    • #9
    • 15th Oct 19, 3:21 PM
    It means her (financial) liability is limited should someone make a claim.
    Whilst you could potentially lose the shirt, or blouse, off your back, the most she could usually lose is the 1 or so she has invested into the company in the way of purchasing however many shares she has purchased.
    Originally posted by CityLite
    I see, thank you. Is that something that could be covered by insurance if she were to become a sole trader? She does currency pay for business insurance but I'm not sure what is covered.
    • fenwick458
    • By fenwick458 21st Oct 19, 10:17 PM
    • 121 Posts
    • 16 Thanks
    fenwick458

    Neither is it unusual for a single person limited company to compile accounts and file them with CH & HMRC.
    Originally posted by CityLite
    I was under the impression you had to get an accountant to do that?
    • Thiona
    • By Thiona 22nd Oct 19, 8:45 AM
    • 10 Posts
    • 4 Thanks
    Thiona
    I was under the impression you had to get an accountant to do that?
    Originally posted by fenwick458
    Not that I am aware of.

    But in the event you are correct, anyone can call themselves an accountant
    Last edited by Thiona; 22-10-2019 at 8:57 AM.
    • SarahLu
    • By SarahLu 22nd Oct 19, 9:46 AM
    • 67 Posts
    • 6 Thanks
    SarahLu
    I see, thank you. Is that something that could be covered by insurance if she were to become a sole trader? She does currency pay for business insurance but I'm not sure what is covered.
    Originally posted by SarahLu
    Does anyone know about this?
    • Savvy_Sue
    • By Savvy_Sue 22nd Oct 19, 1:38 PM
    • 40,148 Posts
    • 37,554 Thanks
    Savvy_Sue
    I see, thank you. Is that something that could be covered by insurance if she were to become a sole trader? She does currency pay for business insurance but I'm not sure what is covered.
    Originally posted by SarahLu
    No one can say precisely what is covered by her business insurance because we can't see her insurance documentation. However, I'd say it is rare for this to cover financial loss.
    Still knitting!
    Completed: TWO adult cardigans, 3 baby jumpers, 3 shawls, 1 sweat band, 3 pairs baby bootees, 2 sets of handwarmers, 1 Wise Man Knitivity figure + 1 sheep, 2 pairs socks, 3 balaclavas, multiple hats and poppies, 3 peony flowers, 4 butterflies ...
    Current projects: pink balaclava (for myself), seaman's hat, about to start another cardigan!
    • Mistral001
    • By Mistral001 22nd Oct 19, 1:53 PM
    • 4,006 Posts
    • 3,063 Thanks
    Mistral001
    You need to ask your sister why she was advised to form a Ltd Company.

    If she was in a high risk sector where companies often went under just by the nature of the sector, then that would be a reason for forming a Ltd company.
    • SarahLu
    • By SarahLu 22nd Oct 19, 3:56 PM
    • 67 Posts
    • 6 Thanks
    SarahLu
    No one can say precisely what is covered by her business insurance because we can't see her insurance documentation. However, I'd say it is rare for this to cover financial loss.
    Originally posted by Savvy_Sue
    Sorry, I don't mean whether her insurance covers it, I just mean is it something that generally could be covered by insurance were she to become a sole trader
    • SarahLu
    • By SarahLu 22nd Oct 19, 3:57 PM
    • 67 Posts
    • 6 Thanks
    SarahLu
    You need to ask your sister why she was advised to form a Ltd Company.

    If she was in a high risk sector where companies often went under just by the nature of the sector, then that would be a reason for forming a Ltd company.
    Originally posted by Mistral001
    It was because there was quite a bit of scope for the business to grow and potentially take on employees in the future but that now isn't going to be the case.
    • Savvy_Sue
    • By Savvy_Sue 22nd Oct 19, 9:57 PM
    • 40,148 Posts
    • 37,554 Thanks
    Savvy_Sue
    Sorry, I don't mean whether her insurance covers it, I just mean is it something that generally could be covered by insurance were she to become a sole trader
    Originally posted by SarahLu
    I would think it unlikely, but a conversation with an insurance broker would soon get a definitive answer.

    the thing about insurance is that it is all about assessing risk. If she employs anyone, then she is required to have employer's liability insurance, because that covers the risk of an employee being injured. Home insurance covers the risk of a visitor to your property being seriously injured, perhaps by tripping over something. Generally, the risk of either of these things happening is quite low.

    As soon as something becomes more risky, the cost of insurance rises. So insurance for a building site is expensive, insurance for a small office much less so.

    Before offering insurance against a sole trader going bust, an insurer would want to assess the risk - and that, I would say, is a niche market.

    So really, she needs to think about WHAT is at risk if her business fails. What's a worst financial case? She owes millions, or a few thousand? Can she mitigate those risks? She's already limited her personal liability by having a LIMITED company - unless she (or other directors) behaves recklessly, or she's offered her house as personal security on a loan, for example.

    I really do think this is the kind of thing her accountant ought to be able to explain to her, and if you (plural) don't understand what's being said, and what's going on in the accounts, then you (plural) need to either change accountants (if the current one isn't very good at explaining), or get something like the Dummies guide to limited companies (yes, it does exist!) and do some bedtime reading.
    Still knitting!
    Completed: TWO adult cardigans, 3 baby jumpers, 3 shawls, 1 sweat band, 3 pairs baby bootees, 2 sets of handwarmers, 1 Wise Man Knitivity figure + 1 sheep, 2 pairs socks, 3 balaclavas, multiple hats and poppies, 3 peony flowers, 4 butterflies ...
    Current projects: pink balaclava (for myself), seaman's hat, about to start another cardigan!
    • tinkerella
    • By tinkerella 23rd Oct 19, 7:09 AM
    • 6 Posts
    • 5 Thanks
    tinkerella
    Sorry, I don't mean whether her insurance covers it, I just mean is it something that generally could be covered by insurance were she to become a sole trader
    Originally posted by SarahLu
    If such insurance cover were to be available, it would surely cost more than 13.00 per year #moneysavingexpert
    • Mistral001
    • By Mistral001 23rd Oct 19, 11:19 AM
    • 4,006 Posts
    • 3,063 Thanks
    Mistral001
    It was because there was quite a bit of scope for the business to grow and potentially take on employees in the future but that now isn't going to be the case.
    Originally posted by SarahLu
    So the risks to personal finances would go up. That is a fairly good reason.

    Just to be pedantic, many sole trader business have quite big businesses and have many employees. The owners of these businesses obviously see the advantages of being a sole trader and accept the risk to their personal finances.
    • SarahLu
    • By SarahLu 23rd Oct 19, 7:35 PM
    • 67 Posts
    • 6 Thanks
    SarahLu
    Thanks all.

    Her business basically consists of her, she is the only employee and the only director. I think its a case of speaking to the insurance company about the potential risks (they are very small). If they can be covered through insurance then I don't really see any other real benefit to her staying as a limited company but it will be interesting to see what they (and her accountant) advise.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

2,321Posts Today

8,076Users online

Martin's Twitter