Posted by: Paul | March 13, 2010

Business is Predatory – Part 2

I came away from the seminar feeling positive. People set up new businesses all the time and, if I was to start up as a Sole Trader, the process is simple, quick, and cheap. And there’s nothing to stop you converting to a Limited Liability Company at a later stage, when and if the business takes off.

The difference between the two types of legal entity are quite large though. With ST, you pay income tax and NI as usual. With LLC, you pay Corporation Tax on your profits, you pay income tax and NI via PAYE as a director, and the company must pay Employer’s NI. However, there are tax advantages if you’re making enough as an LLC – you can take the bare minimum as a salary as a Director, and then pay yourself a dividend on any profits the company makes instead, which is subject to a different tax scheme – if you’re earning above a certain level you can end up paying less in tax this way.

But perhaps the biggest difference is one of risk. With ST status, you risk your own personal posessions on the success of the business. If it falls into debt, you are personally liable to your creditors – your assets are those of the business. YOU are the business, no distinction is made in law. A little scary! But with LLC (hence the “Limited Liability” bit), unless you have been fraudulent or negligent as a Director, you are not personally liable – you can, as the guy running the seminar put it, simply walk away.

This is obviously more attractive as protection for your home and so on. But it’s more complicated, costly and involves more administration. This is the status I would like to aim for, but in terms of just getting going and being able to set up a business bank account – probably the most important initial step for me, keeping the financial affairs of the business separate from personal affairs – if I score a contract early on I will set up as an ST and convert over when I have found my feet a bit more.

So I think I got what I wanted out of the workshop, which was an answer to this question. That and the realisation that I need to do as much research as possible!

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