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Tax
Hints & Tips

Lymm Village

Tax Hints and Tips

Lymm Village

Free hints and tips about tax and accountancy from Lymm Tax

Making the leap from sole trade to company

A consultant I was talking commented that she felt the leap from sole trader to company was too great and that there ought to be a halfway house.

I have two responses to her concerns:

  • There is a halfway house – the Limited Liability Partnership (LLP)
  • If you have a good accountant the transition really won’t be that daunting

The LLP

If your main reason for wanting to form a company is to obtain the benefit of limited liability or to make your business appear more substantial, then the LLP may be the compromise you need.

LLPs been around for about 20 years which in legal terms makes them the new kid on the block and still a bit of a mystery. An LLP needs at least two partners, so you need a trusted spouse/partner/family member to join you, although this is just to comply with the formalities and there is no necessity for them to be active in the business or to receive a share of profits. You will benefit from limited liability and the price for this is that you must file statutory accounts at Companies House each year (like a company), but in tax terms an LLP is much more akin to operating as a sole trader. This means that some of the complications of operating a company such as paying yourself and the formalities surrounding salaries, dividends and benefits in kind disappear. Although an LLP is a separate legal entity, as company is, in tax terms it is an extension of you which makes it much easier to operate than a company.

The good accountant

A good accountant takes all your financial worries away (short of actually giving you a big fat cheque!) and keeps life simple for you so that you can get on with running your business. As long as you and the accountant have an initial meeting and it is explained to you what you can and can’t do and you then stick to those rules there is no reason why operating through a company should be unnecessarily complicated. Principally you have to remember that the company and you are different people: the company’s money is not your money and that you can’t withdraw money from the company willy-nilly for your own use. Provided you are genuinely self-employed, a consultancy business is not a complicated business and there is no reason why running a consultancy through a company should be daunting if you have a good relationship with your accountant. Yes it will cost more in terms of accountancy fees than operating as a sole trader but this should be more than made up for by the kudos and reduction in risk. Hopefully there would also be tax savings but that’s the subject of a whole new article or a meeting with that good accountant.