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Don’t unnecessarily limit your business


At Mostons we enjoy meeting prospective clients.  This is an opportunity to listen to entrepreneurs and their ideas as well as our opportunity to pass on valuable, supportive advice.  We will always give our time, for this first meeting, for free.  This builds trust and goodwill.  It will dispel myths and set the record straight on out-of-date advice given by the “mate down the pub”.

Our first piece of advice is always to seek qualified help if you are embarking on a new venture.  A Chartered Accountant is able to give solutions and a balanced opinion on what your next steps should be.  This important relationship gives you access to technical knowledge that is usually extremely hard to decipher.

The question we are asked most is whether a new, or established business should be a limited company or a sole trader. The answer however, is never straightforward.  As nothing is ever as easy as “yes” or “no”, the good answer will always be, “it depends”.  You have to examine your own circumstances and do what is right for you and your business.

Due to their simplicity the vast majority of UK businesses are either sole traders or limited companies.  Approximately 2 sole traders exist for each Limited Company.

Without being prescriptive, Mostons have set out the main variable to consider.

Set-up simplicity

Setting up as a sole trader is very easy and free of charge.  Simply register yourself as self-employed on the HMRC website, Gov.UK.  You must do this via the self-employed route on the website otherwise the National Insurance tax calculations will be troublesome until class 2 is abolished from next April (2019).  We have had clients register for self-assessment without notifying HMRC of the business element.

Often high street banks will require sole traders to have separate business accounts, where they can charge. We always recommend keeping separate business bank accounts despite this extra cost.

A Limited company can be formed very cheaply at Companies House.  This may be as low as £15 to £20, although you get very little for this.  You will then be in the system and personal data is then on public record, including your date of birth and home address.  Once the business has traded beyond its first year the company’s financial position will also be on this public and free to access database.  This formation gives you a unique business name no one else can register.

A company must have a separate bank account, in the business or trading name, which can often take time to set up.  If you are going to take income from the business then you will need to set up a payroll to enable you to take money out on a regular basis.  It is advisable to seek guidance on how much you take and the frequency you pay yourself.

Often new businesses will not readily understand the rules for registering for VAT.  Whatever the status of your venture you must register if your sales exceed £85,000 in a rolling year.  This threshold is changed regularly and of course there are always exceptions where certain trades don’t ever need to register.

Accounting simplicity

Sole trader’s accounts can be as simple as a single page.  These are for your eyes only and key items from your profit and loss are extracted and entered onto the self-employment pages of a personal tax return.  That information is between you and the taxman.  You pay taxes (income tax and national insurance) on the profits, NOT the money you have taken out.

Whilst a sole trader must keep proper accounting records, often this can be done on simple to use software or even on bits of paper.  Technology and app advancements have made record keeping so much simpler and the burden has diminished considerably.  However, next year’s Making Tax Digital (MTD) changes may affect this.

We work for many sole traders of varying size and help them understand their tax liabilities and often save them money through advice on expenses.  Mostly we carry out this work to allow the client to get on with earning a living and provide accurate information.

The accounts of a limited company are a whole different kettle of fish.  The accounts must comply with the Companies Act and complex accounting standards that are frequently updated and changed.  Standards that apply to the largest of companies will vary from the smaller, but not by much.

These accounts are prescriptive and must be presented in a digital format to HMRC, beautifully termed iXBRL.  This memorable term basically means that HMRC’s computers can read your accounts and company tax return (CT600) with minimal human involvement. Instantly comparing your company’s results to HMRC’s industry expectations.  Unusually high expenditure in a certain category could immediately raise an enquiry.  Naturally this last point is also true of a sole trader.

Fundamentally though the higher amount of detailed reporting is the main reason why company accounts are much more costly.  Add on the need for a payroll, dividend papers, company secretarial filing and P11d’s then a company might be looking at something like 3 to 4 times accounting costs compared to a sole trader.

It’s my money

The money paid into the sole trader business account is there to be draw out. The business proprietor can take this at any time, as long as you have the funds to do so.  You are responsible for your own taxes on profits not on how much you take out.

Taking money out of a limited company is far more constrained.  It is the company’s money, and until it is processed as payroll (to the director) or declared as a dividend (to shareholders) out of available profit, it remains the company’s money.

If a person lends money to a company for any reason, that person, in any capacity can be repaid their funds without the need for any formal documentation.

If it all goes wrong

A sole trader may run into trading difficulties, and if they do, they are likely to have to clear the business debts personally. This is not necessarily true of a company.  Whilst no one starts a business to fail, it can happen.  Limiting your liability is the main advantage of being a company, however, this would not be the case where a director has personally signed a lease on a property or agreed personal guarantees on the company bank borrowings.

In the field of business negligence, it’s often sensible to protect yourself and your business with insurances.


Very often new and established businesses tell us that certain clients simply will not do business with anyone other than a limited company.  In which case there is simply no alternative other than to register as such unless you want to lose the client.  This may also lead to the business having to register for VAT purely to meet expectations.

It is also an oddity that banks appear to be more willing to lend to Companies, rather than individuals.

What about tax?

There’s not much in it today.  Seriously, at normal earnings levels there really is not that much of a difference and when you consider the accountancy fees, you are often better off as a sole trader.

At Mostons we treat every business on its own circumstances.  We support many companies and assist them with the navigation of issues such as taxes, raising finance, growth and development, employment taxes and ancillary matters like auto-enrolment.  Our advice is take advice.  Talk to an Accountant over tea and a biscuit.

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