What is the difference between being a sole trader and a limited company?

How should you structure your business?

These are big questions you have to grapple with when setting up your own business, so I asked the perfect guests on the podcast to give us some advice. Wendy Ross is the founder of Tonbridge Accountants, and is joined by her business partner and husband  Laughton. 

Together they explain the difference between being a sole trader and a limited company - in easy to understand language! 

We talk about the advantages and disadvantages of each set up, and the sort of work involved and things you will need to consider.

We also discuss what you need to be keeping a record of in your accounts in order to make sure you are being compliant.

It’s a brilliant episode that makes a complex topic much easier to understand.

Tonbridge Accountants offer a free 15 minute phone consultation, which you can book here.

The Bring Your Product Idea to Life Podcast  - Best Business Podcast Award, Independent Podcast Awards 2023

USEFUL RESOURCES:

Tonbridge Accountants Website

Tonbridge Accountants Facebook

Tonbridge Accountants Instagram

Wendy Ross Linked In

This episode is sponsored by Aubergine Legal

Do you sometimes worry that your business isn’t meeting all its legal compliance requirements and wonder if you are ticking all the legal boxes?  Are you losing sleep worrying about a piece of legislation that you might not be complying with?  Perhaps you need some help with your client contracts or your data protection compliance?  Or maybe you worry that your website doesn’t have the right documents or legal notices in the right place?  Perhaps you have a brand that you want to protect with a trademark?  

Do you want to outsource it all and eliminate your worries?

Then get in touch with Aubergine Legal, a friendly commercial legal consultancy.  Offering practical and clear commercial legal advice without the overwhelming legal jargon.  Taking the worry away and helping you to protect your business and minimise your risks. Aubergine offers a free initial 30 minute consultation if you have any questions or want to find out how they can help.

Aubergine Legal Website

Get In Touch with Aubergine Legal

Aubergine Legal Blog

Aubergine Legal Shop which includes FREE Cookie Guide, FREE Business Start Up Legal Checklist, and paid for resources including a Guide on Selling to the USA

LET’S CONNECT

Join my free Facebook group for product makers and creators

Find me on Instagram

Work with me 

Buy My Book: Bring Your Product Idea To Life

If you enjoy this podcast, and you’d like to leave a tip, you can do so here: https://bring-your-product-idea.captivate.fm/support

Mentioned in this episode:

Amazon Made Easy is now open

My membership, Amazon Made Easy is now open. It’s a membership for people who are selling on Amazon (or planning to) and want regular access to support, somewhere to ask questions and talk things through, and a bit of structure and accountability as they grow. Inside, there are live Q&A calls, optional co-working sessions and a small, supportive community. Find out more: https://vickiweinberg.com/membership

membership

Welcome to the bring your product idea to Life podcast.

This is the podcast for you if you're getting started selling products or if you'd

like to create your own product to sell. I'm Vicki Weinberg, a product

creation coach and Amazon expert. Every week I share friendly,

practical advice as well as inspirational stories from small businesses.

Let's get started.

Hello. So today on the podcast, I'm speaking to Wendy and Laughton from

Tonbridge Accountants. They've actually joined me on the podcast before, and I will link

to that episode in the show notes. But I've invited them on today to talk

about a topic that I know lots of you have questions about. And that's the

actual structure of your business. And what I mean by that

is whether to set up as a sole trader, whether you need to register as

a limited company, and what each of those things mean,

what it means in terms of compliance, what you have to do, and which

you know is the right one to go with. Obviously, there's not a

straight black and white answer here, but Wendy and Laughton have provided so

much information that will hopefully help you to make the best informed decisions that

you can. And if you want to, they offer a

free 15 minutes call as well. So if you listen to this episode,

you still have questions, you're still not sure what's right for you. You can book

in a call with them and get even more advice. So wherever you

are with your business, I think you will learn a lot from this episode. And

I would love now to introduce you to Wendy and Laughton.

So, hi, Wendy and Laughton. Thank you so much for being here. Thank you, Vicky,

for having us. Oh, you're welcome. So can we start with you?

Please give an introduction to yourselves and your business.

I'm Wendy, and I founded the business about

four years ago. And this is

Laughton. I'm Laughton. I'm Wendy's

business partner, husband, and

we work closely together. I'm a director in the business that we support each

other with all of our work. Brilliant. Thank

you. And I should mention as well that you're from Tonbridge Accountants, and you've been

on the podcast before. So thank you for coming on again.

And I have lots of questions for you today about setting

up as a company, some of which have come from my Facebook group members as

well. So they're not all, I can't take credit for all of these.

So we're going to start off with at the beginning, I guess,

which is, can you explain to us what the difference is between

being a sole trader, which many of us may be, and setting up as a

limited company, I. Guess the main difference

is in the name limited company. So it's the limited part

and it's the limited liability which is the big difference between

the two and what that really means. As a sole trader,

there's no legal difference between yourself and the business.

You are the business. A limited company is a

completely separate entity. It exists in

its own right. So it can borrow money, it can sign

contracts, it's separate to the

owners of the business and that's what most people think about when they're

considering setting up a company is would I like there to

be separation between me as an individual and my

business? Yeah, that makes a lot of sense. Thank you.

So I guess, yeah, so you're the company and you are two separate things. So

financially your house isnt a risk if

you owe money in your business, is that the right way of thinking of it?

Youre two separate financial entities. Yeah, I guess in an

extreme scenario thats exactly right. Your

liability within the business is limited to

your investment in that. Whereas as a sole trader

lets say youre undertaking some risky trade and theres a high

chance of something going wrong, somebody taking legal action against you. As

a sole trader, if they take you to court and you're liable,

they can take your assets, they could take your house, they could take your

possessions. As a limited company it would be

the company being taken to court, the company would be sued and would be liable

and it's the company's assets that would be potentially taken, not

yours personally. So that's where the separation.

Yeah, we always try and explain to our clients the simplest ways. You almost start

creating this ring, fencing yourself

and your personal assets within the company

versus you are the business, you

are everything in there. Thank you. I know that

was an extreme example that we gave there, but I think hopefully

it helps people to see the main difference.

So at what point might you consider setting up as a limited company? If you're

listening now and you've been operating as a sole trader, when is the time to

think about forming a company? That's an

interesting question. A lot of people we speak to just

assume there's a, there's like a numerical point and it has to be

based on your, your income or your earnings. You know, up to this

point sole traders, fine. After that point everyone switches to a

limited company. Yeah, we get that a lot, isn't it? Like my

mate said, 50k, so and so said this and that,

but you, that's a lot more considerations that you

have to put in, not, not just one round number.

Yeah. So I think the answer there is really that there

is not black and white. There isn't just an answer. There isn't a number. At

this stage, it's supposed to be this. At that stage, it's best to change. It

really depends on your business, on you as an individual, on your

circumstances. There are some very, very large

businesses that operate in, you know, chains of shops that are operating

in a dozen different towns that are still sole traders because that's how they've

chosen to carry on. They could have turnover in millions

and they're still sole traders because it works for them. You can

have very, very small, limited companies that have decided to incorporate.

Maybe straight away they've started off as a limited

company because it works for them. So

it's not necessarily that one is best or the other is best.

It really has to be taken into consideration of the circumstances

of your business. But I think also worth

noting is the cost of running a limited company

with the benefits that flexibility provides you.

We always mention to our clients that you will need to

allow more in terms of the liquid

company. There's just more reporting involved in there and

to maintain the books and records. So it is a

flexible, and it gives you that kind of benefit, ring fencing and all that,

but still will come at a cost. And if

your business, for example, is not generating sufficient profits or

income to enable you to have the option,

then that is no longer an option, despite the, you

know. Yeah, that makes sense. It sounds like the answer is going to be

different for everyone. And theoretically, there's nothing to stop someone setting

up as a limited company from day one. And there's also nothing to stop someone

operating as a sole trader for the foreseeable future. We

also assess in the discovery call in terms of, like, whether

they're partners or husband wives, if there's anything as well to, you

know, consider as, from an overall perspective as well. Yeah.

What I would add to that is we often talk to people who've

maybe set up in one of those forms

without giving it proper consideration and realize later on

a different type would be better for them.

We're not saying you can't switch between them. It's absolutely possible to change from one

to the other and vice versa. But there's complexities around

that. If you start as a sole trader and you want to, after a

year, you decide to incorporate Zimmert company. There's a lot of

complexities around that. It's going to take you a lot of admin,

a lot of tax work, probably cost you quite a lot of money when

thinking about it upfront. And just considering some of these points

ahead of time might just help you get what's right for you from the very

beginning. So I think it's important to think through what is going to be right.

Yeah. And also to consider in terms of, I always do the extra bit where

I drill to the business online the next three years, five years, where is the

business going? What sort of income are you going to be generating?

So it just gives you to, in the next three to five

years, the solution is still going to be the right fit, rather than you're going

to outgrow that very quickly. Then we'll go for

the best option. Perfect. Thank you. And I'm really hoping that this episode

will be a really good starting point for someone who's thinking about

which option works better for them, because it sounds like it's

very individual and there won't be one answer for everyone.

So let's just cover, if that's okay, to give people as much information as

they can. Are there any advantages or benefits of setting up as a limited

company that we haven't touched on already? What we haven't

mentioned in detail is sometimes the reputation or the

perceived reputation, I think in some industries,

and again, this depends really on the trade, but we've spoken to

people where as a sole trader, they weren't necessarily

winning certain contracts or being taken as seriously as some of

their competitors, but when they became a limited company, it

kind of gave them a credibility that they didn't otherwise

have. It's not always the case, but in some industries that

seems to be fairly common. So that could be. Yeah, that's

really interesting. And I think we'll come on in a little while

in a bit more detail around some of the record keeping

topics and some of the taxation topics, which might help to, to expand on that

a little bit. Yeah, I think so. It's such a big area, which is why

I'm trying to break this down into such small questions, because there's just so much

to consider. How about any

disadvantages? When we're talking about setting up as a limited company in

particular, are there anything we haven't covered

that people, maybe not even a disadvantage, but just something for people to

be aware of? I think these days it's quite easy to set

up a limited company, isn't it? And what that means is

often people do it without thoroughly researching it or thoroughly

understanding what they're getting themselves into.

Not to frighten people, but as a limited company director, you've got

a whole load of legal obligations you have to comply with.

There's a whole load of reporting requirements which we'll come on to in a little

while. Yeah. You'd be liable to quite a lot of things.

And I speak to a lot of business owners who are

directors of limited companies, and most of them don't

know the responsibilities of what they actually need to cover. So

we, we have that bit of spend that time to

educate business owners a bit more in terms of what they need to do.

And it's so easy to register a company. I

registered mine in a car journey, so, you know,

but I know a bit more what it takes and what

our responsibilities are. Yeah, I wouldn't

necessarily say it's a disadvantage. I mean, if you understand it and

you've got support with that, it's absolutely manageable. It's all fine, and

it can become quite routine for you. But I think if you go into it

not understanding what those responsibilities are and you're not aware of

them, some things can catch you out because there is a lot to deal with

and I think it's important to be aware of what you're getting yourself.

I see there's this two kind of, um. There's two. There's

two type people. The first one would be, I'll set that company and

then they come and speak to you and like, what do I need to do?

Um, you know, to set up this from day one, I need the whole

accounting tag and everything. What can you tell me? What do I need

to have before I start my business or issue my first invoice? And you get

the other extreme one where my year, my year end is coming up.

I've got two months left to file. What do I do? Um, it's basically

going back all the way to try and tell them, like, you need to build

your records up, all the bookkeeping, invoices, banks and everything.

So it's very, it just shows you

the level of gap between,

you know, once a person sign up for a limited company

director, they can go either way. Either

they very, very well prepared from day one or two months

or a month before deadline. It's like, what do I do? Right.

I can see that. And hopefully this episode will help people to be very prepared

if they decide they're going to do this. So you mentioned that setting up a

company is actually relatively easy. So

how would you go about doing that? A

few options with that. The simplest

one you go on to the gov dot UK website,

you sort of follow the application process. It will take

you through each step. It normally takes around 24 hours to

get registered and it will charge you twelve pounds for

the fee. You have to check

whether your name is available. If there's anything

similar that you wish to register as, then it

might not be available and you might have to change it. It's always

worth checking and having a couple of options just in case.

Yeah, I think it's definitely worth that. Sets out all the steps you need

to consider. So, you know, I think that would be a good first port of

call for people to look at to understand what things they need to consider. That

giving one example, one of the questions it's going to ask you is

what would you like your registered office to be? Some people

panic and then think, oh, I'll just put my home address in there. They don't

always realize that once that's been entered, it's then publicly available

information. It's on the company's house website. People looking up the

business will be able to see their personal details.

For some people that's absolutely fine. Other people prefer not to have

that, so they might think about, okay, well I want

to have a registered office address provider.

When you get into that kind of situation, then there's companies

that can actually, they can form the company for you, they can give you a

registered office address, they can give you a director service address, they can even

set you up a bank account, do your VAT registration for you all as a

package. And often they're really, really big firms, they do thousands of

these every week and they have the economies of scale for it to

be really cost effective, really cost effective way of doing it.

So it's definitely worth looking at those as well.

Another option, I would say maybe for the more complex

cases, it's worth talking to an accountant before you've even started the

business, because if you've got a particular type

of entity that you want to set up, if you need,

for example, if you need different classes of shares or you

need non standard articles of association, things like

that, you know, you might have particular needs which

can't be handled by one of those basic routes. So it's worth speaking to someone

who's.

Yeah, that makes a lot of sense. And I'm assuming that you're happy to

have calls of people who haven't registered a company yet, but are

considering it and talk people through this in more detail.

Absolutely, yeah. And I think the other bit as

well is they will ask you about the share

capital, which people tend to get a bit stuck as

well when you do the DIy thing, just one. And then, you know, in

future, if you're going to have a business partner in, and what we've done,

or help as well, is to change the number of shares or

change share classes and stuff, it's all, it's all doable.

But like we always advocate, is to

be prepared, have a bit of offer. So it's not always a

solution of what's going to fit you today. What's good is having that slight

projection of like, you know, three years, for example, good start to see

what's going to happen next. And then we can kind of make

it, you know, cover it so that whatever

package that you're using is going to fit

your needs. As far as we can project,

that makes. I hadn't even thought about the shares aspect. So is that in really

simple terms, is that looking at how much of the business you own? So if

you're in a partnership, how much stake you each

have? I know it's probably a really big topic, but I'm just trying to make.

It so, for example, using

your two business partners working together,

sometimes they'll set it up and they'll say, okay, we'll have one share each, one

pound each. And then later on,

they don't want the 50 50 split, they want to split it some other

ratio. If you've only got two shares, you can only have either 100%

or 50% or zero. So if you want to split

it another way, you've got to start issuing more shares,

which is all doable, but it's easier just to get it right to start with.

If you think actually we might want to bring in other shareholders or we might

want to have different ownership ratios. If

you've got all that planned out, you can set it up in such a way

that it facilitates that later on. You don't have all the additional

admin down there. Yeah, you can set up as 101

pound share. I've actually seen we accidentally set up as

a thousand. And then obviously you have to pay that thousand as

your capital thing. But sometimes, you know, when you do it

on the form and things that kind of like accidental extra zero and stuff, they

all will mean something eventually. I would strongly

suggest that the first time you're thinking about an answer to these questions shouldn't

be when you're going through the website, answering it live. You know, you should have

gone through them beforehand, done a little bit of research, maybe

spoken to a professional, if you need some more guidance and,

you know, when you go to register it, know what you're doing and why you're

doing it so that you get it all right. That makes sense because these

are really big decisions and it sounds like, yes, everything can be

changed down the line to get changed. And sometimes

people get a bit, you know, not thrilled about

having to pay to fix things or to upgrade and things. And, you know, it

can, it can all be done right and the first time to the

best knowledge that you have, not a problem at all.

Okay, that's helpful. Thank you.

So let's talk about the accounting side now. So

when it comes to accounts and I wonder if we need to talk about

sole trade, unlimited companies separately, I'd love to talk

about what you need to know and what you need to do to ensure that

you're always compliant, because I think should we

talk about for a sole trader, first of all, if that's okay. And then we'll

move to talk about a limited company company, just so people have an idea of

what's expected and what's required. So if you're a sole

trader, what are your

compliance things are there, what do you have to be sure to

do?

So in a way, there's a lot of similarities.

At the very basic level,

keeping proper business records, whether you're a sole trader or limited company, is

the fundamental basis.

So how about having proper books and records? Having a record

of all the income, all the expenditure, all the assets, all the

liabilities, any contracts you've entered into,

that would be the same for both. So it would absolutely apply to

a sole trader. Yeah. And that's the most important one. And

people neglect that. That's your topic, the

top, like, whatever you call it, the most neglected area and stuff. You'd be

surprised, but, yeah, people neglect that.

But that information is going to tell how

much you've invoiced or how much your turnover is. They all link to the

amount of tax that you will be paying. So if you haven't kept any tab

on it, chances are you haven't put any aside of

the money that you owe to HR mastee for the taxi.

Right. So however you're operating your company

or social or business. Yeah, or business. So whether. Yes, however you're probably. Whether

it's a company or whether it's. As a sole trader, I guess the key thing

here is keep records of everything related to

your money. Yeah. The more the

better. You can't have too much detail. I think this is common

misunderstanding. When it comes to sole traders, that, oh, it's a sole trader,

therefore it's very, very simple. And I've only got to do something

annually. Quite often people will do nothing for a whole

year, and they'll come to putting their accounts together or putting

their numbers together, and it'll be scrapping around to

find all the information, having not done it month by month,

week by week. It's much easier to do that as

you go along. It is possible to reconstruct it all later, but you'll have

a much better view of what's happened if you do it weekly or monthly

or at minimum, quarterly.

Laughton's very good at reconstructing his.

I imagine it's very hard to go back a year, for example,

and we. Pull up from the bank account,

but you get that whole sole trader where they use their

personal, you see a lot of coffee

takeaways and everything.

Yeah, that must be hard in that situation, actually. So work out what's a business

expense and what's a personal expense.

Yeah, it can be complicated, especially if they're not well

separated. But I think what a lot of people don't realize as sole

traders, the advertisements

that are sort of promoting

HMRC and some of the software that tries to facilitate

people meeting HMRC requirements, they kind of, they try to make

it as simple and as digestible for people as they can.

What's often overlooked is that as a sole trader, you still need to prepare a

set of accounts every year. Not as detailed as a limited company set

of accounts, but you are still expected to prepare a set of accounts

that allow you to determine the business profit

for that year. That's then used as a starting

point for your tax work, which comes later.

So in a way, they're both the same, that you have to prepare a set

of accounts for business. They're just prepared to a different

standard. And I think people overlook that because there is,

for example, with a sole trader, you have cash accounting, which is a

relatively new thing for the

smaller businesses where they don't have to prepare a

traditional set of accounts, they can just record the

income and expense of the business on a cash basis. It's

simplified. It's designed to help small businesses. So

sets of accounts prepared on that basis would look a lot different.

Yeah, and we prepare it from an accruals point of

view. A lot of people, you know, when you

diy, you don't really think how it's going to

impact your tax, because when you do like the

approvals of matching to match your revenue to the period and

all that. It could be a case of your tax figure could potentially

change. Depends on how you, how you account for them.

Yeah. So I think it's important to understand whichever

business format you go for to understand what your reporting

requirements are, the fact you are going to have to prepare accounts, the fact that

the basis you choose can impact what's reported and

when, and therefore lead to the timing of

when taxes are paid. That's why when you prepare your

tax return, trader clients, they can vary

by quite a bit compared to DIY. Right? Like they might end up with

20k tax bill versus like, you know, much lesser or

depending on what you account for, the tax adjustment, what's

allowable, what's not. Yeah, but if a sole trader's preparing a full

set of accounts that they're supposed to follow generally accepted

accounting principles, it's a set of rules that an accountant would understand

the history of those. If people haven't had experience

of that, they might not understand how to capture certain transactions, how they should be

recorded, or they might not record them at all. Now, things

like when people take loans for business, they don't always

capture those. So they don't realize that maybe some of the loan interest they've made

could be a deductible expense for them they've not taken credit for.

So they may be paid tax on profits that are higher than they should because

they haven't thought about including these things. Yeah. You tend to

get those where they

just pick up like say five most common

expenses you can deduct for tax and just put it

when they did the tax return, you know, a bit of like

maybe asking friends or like groups and things like, oh, what do

I do? But they don't assess it based on. Is that the most favorable

method for you and your business? It's just more of like, this is the

quick, quick tip is that you got to look at it more in depth. I

think that's where, that's where we, you know, that's where we come in.

I think just coming back to your original question,

in terms of, for the sole trader, what's required? They have to

prepare the accounts or the numbers as the starting point tax, but they don't actually

have to file those accounts. They file the tax return. Tax

return is the main item that gets reported.

So all of the figures in there have to be somehow substantiated, but the

only thing that's filed is the tax return. That makes sense, but

I guess you need to have all of those figures that sit behind it, because

presumably HMRC could come to you and say, we want to see

all of your financial details. We want to see the figures.

Exactly. They could come and say, where does that number

in that box come from? And the ideal answer should be it

ties into this set of accounts that's been prepared over here in accordance with

accounting standards, which then in turn ties through to the set

of underlying books and records that's all nicely reconciled, tied through

to bank statements, tied through to other records. And it all matches together and it

all maps through. Yeah. Basically you need to be able to substantiate,

for example, your mileage claim. It

should be a little calculations of where you've traveled for business, how many miles

you've logged on and stuff. But I still see people

chatting and say, I've just put a wrong number in.

Yeah. That makes sense. I guess it's

good just for peace of mind to know that any figures you're putting in, you

have the data to back up where that figure came from and it's

compliant. Obviously, that doesn't necessarily

mean having a really, really complex way to record all of this. It can be

captured in quite a simple way. If you're not using software, you can capture it

in a spreadsheet or even a set of books. And the main thing is

having something written down regularly. So you've

got that backup. Just put a little notebook in your car.

So it doesn't really matter what system you're using, but you need some kind of

a system, I guess, is the takeaway.

So it sounds like actually, when it comes to compliance, there

aren't huge differences between being a sole trade unlimited company,

I think, in that you both have to do

reporting. So should we talk about limited

companies in more detail? And what kind of

annual paperwork or accounting do you have to submit?

Is it a lot more than if you're a sole trader

in terms of what's actually submitted? Yes, it is going to be a lot more.

So I think we've talked about similarities so that, you know, they're both going to

have a set of books and records. They're both going to have those, a

record of all the key financial transactions. They're both going to have a set of

accounts. The key difference between the accounts is the

limited company accounts. Most of the time they're going to be

more complex in that they have to follow set

of company law, so set of company legal

rules. They have to follow accounting standards, which are published

and defined, and that often can include not

just the numbers, but all of the disclosure requirements that go around

those numbers. So all of the accounting policies,

details of how certain transactions have been handled,

certain disclosures that are required transactions

have related parties, that kind of thing. There's always rules around what has to

be included in there. They have to be

presented in a certain format, measured in a certain way,

so that a key part of a limited company set of accounts will

be everything that comes after the numbers,

all the notes and everything else is where all the detail lies

and they, and they get filed. So with the sole trader, they don't have to

file their accounts with companies House. You know, a limited company has to

actually file those accounts with companies house

every year by a certain date. And if it's not done,

it's a breach of the rules and there's going to be penalties issued.

So there. And those penalties that they're increasing as well over

time, they're really cracking down and making

sure people do this well, it's going to be more severe

for non compliance in the future.

In addition to the accounts that are filed, a

company also has to file a tax return. So in the same way a sole

trader would file a tax return, a company files its own tax return,

which is linked directly to its accounts.

One other thing a company has to do that sole trader wouldn't,

would be the annual confirmation statement. That's another company's house

filing requirement. And it includes things like

details of directors, the registered office,

shareholding, people with significant control in the

business. That all has to be logged with companies House. It has to be

kept up to date throughout the year. And then on an annual

basis, the directors have to submit

the statement to basically confirm that the

details held by companies House are accurate.

Sounds like there's a lot more to file as a limited company.

Can you do this yourself, or do you really need an accountant

to do all of this for you?

Sorry for the very blunt question, but I think it's a question that I've been

asked, so I'm put in it. Do you? It's a really good question.

I think accounting, the way I look at it, it's the same as anything else.

I mean, you know, if you're talking about electricals, you know,

could you rewire your own house? Well, of course you could. Should you?

Possibly. Not if you don't know what you're doing. And it's the same with accounts.

You could do all of this yourself if you know

what you're doing and you're confident in your ability to get it

right. But then, by all means do it yourself. But if

you know the rules are really, really complex, if you

don't, if you've had no training in accounts, you don't understand

the rules. It's often far better to have a professional

do it for you purely because

they'll do it quickly, they'll do it right, they'll

make sure that you've thought of everything and that things haven't been left

out. And it just generally makes your life easier.

You know, if you're running the business, you've probably got 100 things you could do

every day. Are you going to spend all of your time worrying about

your bookkeeping, your accounting and getting your company's house filing

done? When you've got customers to deal with, you've got new projects

that you're trying to get off the ground, you've got all of that other stuff

that needs your time. The accounts have to be tagged as

well so that I DRl tagging

so you will get caught with our software

because it needs to link up between companies. House.

HMRC. That's a good point, Wendy. Like the

practical side of it as well. It's like, you know, you could put the numbers

together, but in terms of actually putting that in the format that's needed to be

filed, filing it at the right place, at the right time, in the right format,

so that it doesn't get rejected or

fail to adhere to all the rules and regulations,

so many things could go wrong. It's better. It is often better just to have

a professional. Yeah. And I'm also thinking there must be things

like working with an accountant means you can be very clear

on what you can claim for what you can't and just

making sure that you're 100% within the rules of what's

allowed, because I think, I'm sure you must have come across

clients who, you know, they're not sure on. Okay, can I claim for this? Can

I claim for that? And I think the benefit for me for working with

you guys is that I can ask the question and know

that the answer I get is correct and I'm not going to get into trouble,

basically, because I think that is something that people genuinely worry about, is that

you want to be complying and you want to know

that 100% certainty that what I'm doing is correct.

For me, anyway. And I'm sure most others feel

similar. And also the. I think the

biggest take from this is you want to be able to

sleep at night, right? Yeah. So when

you try that DIY road, you're not going to

fulfill that. And it's not just one night,

could be for a very long time. And if the numbers

on correct, for example, then you would

be, you might, you might not make the best

decision for your business,

how to grow it. And, you know, I think we'll cover later in terms of

things like how to pay yourself or extract profit

from business and things. It's a whole,

it's just that, you know, that key starting point that is just going to

like, basically for me, I look at it like he's just gone downhill.

I mean, coming back to the point on things like allowable expenses,

you're going to have a couple of situations there. You're going to have really

common ones where there's, you know, decades worth of tax

law, case law around it. And there's probably a very clear

answer and maybe someone just doesn't know. They've never come across it. An accountant should

be able to give you that straight away.

Yeah, but the way technology is advancing, the way things are

moving, there's often really new stuff where someone might say, can I

claim this? And the answer might be, do you know what? That's a brilliant question.

I have no idea. There's no tax law on it. It's never been to court.

No one's ever argued it with HMRC. It's completely brand new.

Here's what we think based on

what's gone, similar things that have gone on in the past. But let's

help you get an answer on that. Maybe we can talk to HMRC and get

some sort of agreement on from them in advance. And

we also justify amongst each other, like, you know, how would we

argue it? You've got two Accountants here, so it's quite

handy. But, like, things are

getting, like, you get new, new things coming in. And I

think the recent years, like, the new things that we are

seeing a lot more is on, like content creators or

influencers. So the common

deductible or allowable is

different. And I think some of even the tax cases are

not. Yeah, there hasn't been any yet.

It's so new that in HMRC, if they think, you

know, these tax legal cases can take years to go through court

systems, tribunals, appeals and all of that. So to get a straight

answer on new stuff, you're often getting it several years after you need

it. But in those cases, talking to someone who kind of knows how the system

works, it can give you sort of what the general rules

are and help you to apply that to your

situation and to justify it, because at the end of the day, if you're

entering into it in the right spirit, you're doing the right thing. You can justify

that, then you've probably got a good case. So we help

people navigate their way through, through those newer things as well. You need to be

prepared that if you get, we are always, if you get

that email or the text from HMRC, can you

justify this? What have you done? This. We can, you need to be able

to. I think that's, that's always the end game. Like, you know, if we get

asked, what are we going to tell them? Yeah, as you

said before, Wendy, it's about being able to sleep at night, isn't it? And having

that peace of mind that you are doing the right thing

with the right intentions. And I think on a similar kind

of subject, we were talking about how about

the tax benefits for sole trader and

for a limited company? Are there any.

Yeah, are there any benefits or is there one type of

business that would be better? So

that, that depends on a lot of different things. So maybe that

maybe what we can do is sort of COVID how each of them is

taxed and a lot of this is going to come into the

role of the person running business and

they're an employee, what their status is. So I

appreciate this is a big, this is a big question. So

should we start with thinking about a sole trader and

how, and how that works first?

Yeah, maybe before we

jump into that, I can start with a very basic rule

of thumb. Right. If you're going to take all of the profits out of the

business and, you know, you don't want to retain anything, you just want to, you

just want to take everything you earn. For a lot of small businesses, there's

not going to be, in reality, when you add it all up, there's not much

difference between the two. You know,

business earning 60, 70,000 pounds a year, that difference could

be, it could be a few hundred pounds. And

often the additional admin maybe isn't

worth the tax sake. You sort of have to balance it all

out is going down this path that we're worth. So, but

that's if you're taking everything out. I mean, the one,

the one great thing about limited companies is, but it comes back to what we're

talking about at the start because it's a separate entity and because it's completely

its own thing. Any money earned by the limited

company, it's subject to corporation tax, but it

stays within the company unless it's

drawn down by the shareholders.

So if you're going to leave the money in the business.

It is massively tax advantageous to have a limited company.

Which leads me straight on to answering your original question,

sole trader and how they tax. Sole trader, you're taxed on everything you

own. It doesn't matter what cash you take out the business,

you work out your profits for the year, whatever that profit is, you get

taxed on that profit. You can't decide to keep some of it in the

business or to not take all of it. It's

100% your tax on everything.

So it gives you less flexibility in terms of, you know, if you have a

really, really good year, you've made great profits, you're just automatically going to be taxed

on all of that. It's completely different

within a limited company because

those earnings would be earned within the company. The company would pay corporation

tax, which can be lower if it's just been increased recently,

but it's traditionally it's been 19% the last few years,

lower than the rate you'd pay on, sort of pay on

earnings. But yeah, if you're not paying that out as

dividends, it stays within the company. So if you're a growing business, if you

investing in the future of business, you're buying plant equipment,

machinery, websites, other things,

you know, keeping that in the business, using it to invest,

it's going to save you a lot of tax having limited

structure. So maybe we should come on to

how do you get the money out of a limited company then? If it's separate

and if the company earns the money, it's paid the

corporation tax on it, you've then got a pot of retained

earnings there. How do you access that? Well, as a

shareholder you can pay yourself a dividend

and that's basically a distribution of earnings coming out of this after

tax money to you as a shareholder, that is

then taxable income on you as an individual. But the tax rates

on dividends tend to be a lot lower. So the basic rate

you're talking about. And

what about a salary? So if you have a limited company,

are you an employee of that company and do you, should

you pay yourself a salary and if so, how is that

tax? Sorry, I know there's a few questions in one. No,

that's fine. You're not

automatically an employee. I think if you

have a limited company and you're the director, the directorship,

you're considered to be an office holder, so you're not necessarily an

employee. Again, as the

office holder, you perform your responsibilities as a director.

So if you're getting paid for that, then that would be

treated as if you're getting a salary or wage. If

you're just a one man band and you're doing everything, doing all the work for

the company, then you probably are going to be considered an employee as

well.

A lot of this comes down to employment law and whether you've got a

contract. I won't go into all of that now, but

basically you're not automatically an employee that you very well could

be. But yeah, any money that you

take as a wage or as earnings, that's going to go through payroll, that's going

to be subject to tax and national insurement.

That's a bit of a complex landscape in that there's certain thresholds for

taxes, threshold financial insurance. There's different rates that apply at different

levels. It's almost like a big puzzle

where you have to work out what's best for you and your circumstances.

All of those salary payments or wage payments are going to be deductible for

the company against its corporation tax.

So if you, if you, if you had a load of profits,

you pays them all out as salary. You know, maybe the

company then doesn't have any profit because you've paid it all out.

So the company wouldn't pay any corporation tax. But then as an

individual, you have a huge salary, you're going to be paying personal tax.

That's probably not going to be the most efficient.

So what people tend to do, limited company

owner, managers, directors, they tend to pay a smaller salary

supplemented by dividends because you get the best of both worlds.

Then you get the tax deductibility of the salary for the

company, which reduces the corporation tax. But you also,

then you're getting that income.

You're using your tax thresholds, your allowances in the best way. You're

using the dividends in the best way to kind of, to minimize the taxes

paid overall. That can be configured

in a way that suits people. Because again, it really comes down to your

circumstances and, you know, what salary you might need

in certain situations. And we do a lot for

our clients in terms of configuring what is the most

tax efficient way to pay themselves after business.

And you always have to, you know, take into

account for what is their personal circumstances.

Like some, some owners, they

have a set amount that they have to pay themselves in terms of, to pay

the bills and all that, so that the dividend part,

the dividend way might not be, you know,

might not cover that alone. And there are

rules around issuing dividends as well. So some, I think

it really depends on what they actually need. And you have some people

who say, I know them, you know, what's effective would be

say paying yourself like a thousand pounds a month. But you have people who say,

I need, I need 2500 pounds or 3000. It

all, it really depends because you then get some people who

might need a bit more in terms of if you have a mortgage or anything.

So it's all very, that's why you have to be fitted to

the circumstances. So there's no mortgage. Yeah. And you don't, again, you

don't want, you know, people come to you and just say, get a mortgage

tomorrow. What can I do? And it's like you have to put this all

in plan at least a year before, two years before.

So this is where working with an accountant really

helps you to plan. We always try and drill

down in terms of what I've clients, you know, what their personal goals as

well, what they're trying to achieve. You have people like, oh, I'm trying to move

house in the next couple of years and things. And we put that into mind

and like, okay, are you thinking about that? Rather than just like,

you know, I'll just give you a solution at this point. It could be,

it could be a very expensive one if it's not planned properly.

Yeah, that makes a lot of sense, I think. Pardon?

I was just going to say just looking at the similarities though in terms

of if you're employing people, if you're employing other people,

the way the payroll process would work would be exactly the same. So whether you're

a sole trader or a limited company, if you employ other people need to

pay their wages, you have to register for payroll, you have to make your monthly

submissions. The record keeping around that would

be the same for both. So coming back to the question we talked

about earlier, what, you know, the reporting requirements, the differences. If

you're employing people, your reporting requirements for that would be the same for both

formats. So it doesn't really make too much difference what kind of setup

you have. Just as a sole trader,

there's no separation between you and the business. So you can't pay yourself a salary,

you can pay other people, you can employ family members, but you can't pay

yourself. Whereas as a limited company

director, because the company is separate to you as a person, you can pay

yourself because you're two different things.

That makes sense. Thank you. I mean, the main thing I'm getting from this is

to be forward thinking and think about your life as well as your

business and what you need now and what you might need in the

future. DIY.

Yes. And speaking of being

forward thinking, I've got one final question to end on,

which is if you're, when you're looking ahead in the future for your plans,

if your plan is to eventually sell the business

is sole trade diversity limited company, which

would be best in that scenario? If you know that actually that's your

ultimate goal? That's a really good

question. There's very few people

who plan that far ahead. They kind of, you know, when they're

setting up the structure with no arch. I'm setting this up ultimately to set it.

You get a few of those.

I think when it comes to selling it, again, it's one of these.

It depends, because it depends on,

there's so many different elements to it.

It depends on who you're selling to, what they're going to want to buy. I

mean, ultimately, as a sole trader,

you're just selling, you're selling the trades and assets of the business,

whereas if you're a ship, if you're a limited company, you're selling the

shares that you own as a shareholder.

There can be different tax treatments depending on how much you

own, how long you've held certain assets or shares for.

It gets very, very complicated. But what I would say

is thinking about that forward planning,

if you know you're going to be selling, it's a.

I would say definitely they need professional help and it's something you want to talk

about not just days or weeks ahead, but

probably. Yeah, probably years ahead. I'm thinking of, if someone's

thinking of retiring, I'm thinking of retiring. I'm going to sell my business in a

couple of years, start thinking about it now. It can be

packaged up in such a way to be the most tax effective for that

situation, for those circumstances. And it's not necessarily that

one's better than the other or one's going to. It'll be

often you have to factor in the circumstances of the buyer,

their own personal tax situation, what they might want, what other

businesses they have. It can get very complicated

very quickly. Yeah. And there are various circumstances of

why people want to sell their business,

and also it comes back to

the performance of the business or what sort of

money the business is generating for the next few years.

But the core of it as well is always going to be in terms

of when you get Accountants to work into it or to value it

or try and structure the deal, they're always going to be looking at the books

and records. So again, a good

bookkeeping practice would be if you've got

everything, and some people even have monthly

management accounts and things like that. So it really

adds on to that. So if, if a client came to me and say, you

know this, I've set up this business next five years, this is, I'm going to

sell it, we would almost put like a bit

more comprehensive

package that they would need because you're going to be

subject to like more scrutiny, for example, or people just

want to know more transparency or disclosure, then you will,

you know, your business would. The way you do it will be very different.

You pay yourself, almost like even things of paying yourself or how you run

the business, it's all different because you want to make sure that

someone else looking to buy a business that's going to be a viable business

and not just a little like, you know, hobby package doing company sort of thing

where buy it when I have to actually pay people

and put the fact in all the costs there, it is no

longer profitable, then what a lot of. People don't always realize

as well, if you're buying a limited company because the

company is a completely separate thing, you're taking over it as a new owner.

You're buying the entire history, reputation of the company and everything

that's gone before. So if the previous

owners or previous people running the business have, haven't done

things right in the past, you want to make sure that's not going to

come back to bite you as an owner. And suddenly there's customers coming out of

the woodwork with complaints about things that

you didn't even realize existed. That's when it comes down to

having really well structured contracts and having the right legal people

involved, all of that stuff. But it

takes a lot of planning. There's a lot of different elements. Like Wendy said,

I think the key thing maybe isn't the structure. The key thing is maybe

being able to demonstrate that you've got a really good business that's marketable. You can

only do that with good numbers. And that doesn't matter your structure.

If you keep in the good records, you've got the good figures to be able

to present to potential buyers. That's more important than you.

That makes sense. That's just another reason. Of course, there are lots of reasons. That's

just another reason to make sure that your accounting is correct

and you have records and you can provide all of this. Because presumably if you

were ever selling your business, one of the first things someone will say is, can

I see your accounts? And so just another reason to add to

all the other reasons for having really good accounts.

Well, thank you so much for all of this.

You've shared such a lot and I think you have really helped make a lot

of this clearer. I think what I'm taking from it is that it is still

very complex and the answer will be different for everybody

listening. And probably the best thing is to

seek advice. So I will put a link in the show notes for

people if they want to book a discovery call with you to talk a bit

more about their business, their circumstances. And before

we wrap up, I would just like to know, is there one thing that you

would really like people to take away from this episode? What would that be?

For me, it would be, don't rush into anything, have a think

about it and plan it before you do it.

Once you've made a mistake, it's a lot harder to fix than just getting it

right. The first time for me would be the

classic bookkeeping. Because we see so many

people jumping into things and not having proper

records, it always seemed very like almost very

tiny little advice, or, you know, something like, don't forget the poly or anything,

or don't forget anything. But this is so neglected

and, you know, it's very important and it doesn't take

a lot for people to make

sure they have it. Sometimes I speak to, you know, if I go to

networking or anything, I speak to business owners and I get that, like, oh, I'm

not ready yet, I'll come to you and stuff. But I've said it would be

worth just having that ten minutes. I could tell you what

basic things you need, even if you're using spreadsheet or there are a lot of

very economical solutions, software for sole

traders, for example. And it's actually not

that, not that scary to use. And by having

something like that sorted, you can

then focus on how to

generate more sales for your business or how to get better suppliers or anything like

that. Yeah, you don't have to. I'll wait till I get to that

point. Like, just, yeah, that's great advice. Thank

you. And, yeah, personally, I just feel it's really nice just to know that that

side is taken care of. You can't get on with other things if you know

that all your accounts is in

hand. So thank you both so much for your time and for

everything you shared. No worries. Thank

you. Thank you so much for listening. Right

to the end of this episode, do remember that you can get the fullback catalogue

and lots of free resources on my website, vickywineberg.com. Please

do remember to rate and review this episode if you've enjoyed it, and

also share it with a friend who you think might find it useful. Thank you

again and see you next week.