Sole Trader or Limited Company?: A Business
A Business (aka Self Employed – Sole Trader -Proprietor)
Business Name
For the sake of this article – and in most peoples mind – a ‘business’ is any entity that operates but is NOT a ‘limited company’. An explanation of what a business name can or cannot be can be found at Business Names but basically, the individual must be named and easily identified on all business papers.
It is common, in most circumstances, for a business to trade as one name (i.e. JJ’s Cafe) but the owner must use the proper entity (name) when dealing with finances, government communication.
Short Business Name: ‘JJ’s Cafe’
Business Name on Paper: ‘Jane Smith and John Smith trading as JJ’s Cafe’
Short Business Name: ‘JJS Machines Company’ Business Name on Paper: ‘Jane and John Smith trading as JJS Machines Company’ Short Business Name: ‘Smith’s’ Business Name on Paper: ‘Smith Partnership. Partners: Jane Smith & John Smith’
Business Taxation
Business owners are self-employed and are therefore liable to the Self Assessment scheme and National Insurance payments: you can register by calling the Inland Revenue Helpline for the Newly Self-employed on 08459 15 45 15. You MUST register as self-employed within the “first three-months of full trading”.
Self Assessment Tax
Tax is paid on annual income, less allowances (personal tax code) and expenses (specific to running your business). Self Assessment
National Insurance
Self employment does not mean that you lose the benefits of living in a state that provides treatment on the National Health Service (NHS). What it does mean is that you are responsible for maintaining NI payments relative to your earnings: all self-employed people pays class 2 NI which is currently £2.20 per week. Class 4 NI is also payable on annual profits between £5,225 and £34,840 at a rate of 8%. National Insurance Contributions for Company Directors
VAT
A business can be VAT - Value Added Tax regardless of annual turnover, but MUST be registered for vat if:
- at the end of any month, the total value of the taxable supplies you have made in the past 12 months or less is more than £64,000; or
- at any time you expect that the value of your taxable supplies will be more than £64,000 in the next 30 days alone.
However, registering for vat below the above criteria allows you to:
- Claim vat on the supplies you buy (can be vital on start ups)
- Be the difference of whether some customers deal with you
- Give the impression to potential customers that you are bigger than you may be/are (a fair reason)
There is no legislation that forces you into incorporating your business, however, tax and investment benefits play their part when turnover, and more importantly profits, rise to a level where you are paying more than you need to in tax’s, or you are not utilising the benefits of company allowances in the chancellors budget etc. The question is, ‘what is that figure?’, well, lets say that if you have five or less employees (a figure used in much legislation as the threshold at which compliance would not be practical or cost effective – to the business that is) and your annual PROFIT is less than £50,000, it is arguable whether limited liability would benefit you – UNLESS you needed ‘LIMITED LIABILITY’ (see below) the fallacy of personal protection!
Records
Self-employment offers huge advantages in the administration of your business. You can quite literally ‘run your business out of a shoe box’. But, do get a small business accountant and look to pay between £10 – £15 per week which should get you a couple of meetings, your annual accounts prepared and help in reducing your tax bill.
Liability
A sole trader is PERSONALLY responsible for all amounts owed to creditors and the government. This also means that should the sole trader not be able to make suitable arrangements to settle any debts the personal possessions (including the house) will be fair game to the creditors. Homes that are jointly owed can be forced to sale, unless 50% of the market value can be found for creditors. So, husband & wife partnerships can have a nasty end if they are business partners and sole traders.
Article Index
- Related Articles
