In the last few months I’ve been faced with the question “Should I incorporate my business or retain sole trader status?” by start up businesses as well as well established sole traders.
I thought it might be a good idea to tell you what the differences are, to help you decide which option is the best for your purposes.
1. Limitation of Liability
There is no distinction between business money and personal money for anyone self employed as all business debts are the personal responsibility of the sole trader. The limited company is a separate corporate body and legal entity, and so liability for payment of debts is the company’s responsibility. The owners, shareholders are not personally liable. However there are special circumstances when this veil between the company and the directors can be lifted by the courts, detailing these chances aren’t within the scope of this article.
2. Taxes
From 1 January 2008 with the Zero-10 regime in Guernsey, trading companies are charged 0% tax on profits, while investment holding companies still pay the higher rate of 20% tax on profits. A trading company (e.g. carpenters, shops etc.) will only crystallize a tax charge when retained profits are distributed to the owners/shareholders. As a sole trader, your business profits will be assessed through your personal tax returns, and you will be charged 20% on all income. More information on the Zero-10 regime can be found at www.gov.gg.
3. Limited Company accounts and Sole Trader basic accounts
Sole trader basic accounts can be quite simple as a formal accounting system is not required and can be reduced to simple lists of income and expenditure supported by documentary evidence of sales and purchase invoices, effectively single entry bookkeeping. Producing a balance sheet is optional in a lot of cases. Due to the simplicity then accountancy costs will remain low.
Company accounts have to use double entry bookkeeping to produce the year end accounts including a balance sheet with statutory notes and statements. Accounting knowledge is required and an accountants fee may well be in the region of £1,000. Keeping accounting records is regulated by the Company (Guernsey) Law, 2008. More information and the wording of the Law can be found at www.guernseyregistry.com.
4. Administration, management and business standing
A company has to be incorporated by a licensed professional and the cost of this is usually in the region of £400 to £1,500.
A limited company is also required to file an Annual Validation with the Guernsey Registry, incurring another annual charge of £250.
A company director is responsible for adhering to company administration according to statutory regulations in regard to both the limited company accounts, statutory books and management as stated in the articles of association. The duties of a director are more formal than a sole trader.
A sole trader basically pleases themselves with regard to the administration and management of the business.
However forming a private limited company is an indication that a business is both serious, has a long term objective and is correctly managed. This psychological perception can increase the business standing of a business. In addition funding requirements are more likely to be met as the lender to a sole trader has to consider the financial influences personally affecting the sole trader. A private limited company advantages concern the published financial statements, protection of the financial position from personal influences and the option of increasing security by virtue of asking directors to provide additional personal guarantees.
A private limited company advantages over self employment also extends to long term finance. Companies tend to retain more funds within the business to meet future financial commitments which aids year on year growth, a more sustainable business and medium term profits growth over a sole trader.
There are however other factors to be considered in deciding which path to choose for the business, and these factors often depend on the individual business nature itself, therefore cannot be simplified to be included in this article.
If you are considering to make this decision and need more help and information, please call A+ Accounting now to book a free initial appointment.