Do I need a company?


Limited Company versus a Sole Trader which is best for me?


By Malcolm Chambers BA CPFA CHAMBERS ACCOUNTING LIMITED


Local residents running their own trading business often ask me whether they should trade as a private limited company instead of operating as a sole trader. Whilst I personally consider the advantages outweigh the disadvantages, the answer often depends on individual circumstances, and the desire of the individual to own a company and have the title of managing director.


The process of forming a company is simple enough, a few forms to complete, a visit to the Companies Registry with identification documents, and payment of a modest fee (£200 in 2017). However, help will be needed in completing the forms to ensure they are all correct. Once formed, shares may now be issued, and appointments made of the company officers, normally a director and company secretary.


“This means that the shareholder, as a director, and their spouse/partner, receive earned income from the company


which can attract the second earner tax allowance thereby making the first £5,000 of earnings tax free.


”


As a separate legal entity, the company now owns the business assets, and the former sole trader, as director, will manage the business on behalf of the company. The shareholder is entitled to a share the profits of the business.


This structure, briefly outlined above, does have advantages:


1. The shareholder enjoys limited liability, in that the debts of the business are now a liability of the company and the shareholder is only liable to the value of his shares which remain unpaid.


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As a result, the personal assets of the shareholder, such as their house, are no longer under threat from legal action by creditors of the business. This is a very important protection.


2. All company profits are now assessed for tax at a rate of 0%. This does not mean they are tax free, as any profits taken out of the company as distributions to shareholders will be assessed on the shareholder. Distributions can take several forms. This allows far more flexibility to the company accountant to manage the outflow of profits in a more controlled way. If personal circumstances allow, the profits can be retained in the company and released over time, and the future tax liabilities of the shareholder can be planned and managed. At the very least, the tax position of the company shareholder will be no worse than that of the sole trader, though normally their tax position can be improved to a certain degree. Unless, or until, the tax authority decides to change the rules, this ability to manage the outflow of taxable profits to shareholders can be an advantage.


3. Another advantage is that the company is an employer. It will pay its officers, the director and the company secretary. Whereas the spouse/partner of a sole trader cannot be employed in their business, they can be employed by the company, although they should undertake actual work and be paid sums commensurate with the work they undertake. This means that the shareholder, as a director, and their spouse/partner, receive earned income from the company which can attract the second earner tax allowance thereby making the first £5,000 of earnings tax free.


4. Other advantages come from operating as a company. It may open new avenues of work, as


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