Liabilities if operate as sole trader

Yes, creditors could pursue you for everything you own. Don't forget that even if you are solvent, if you do not have suitable insurance for liabilty (accident, burning down someones factory etc) you would be pursued for such claims.

Very little difference in costs of operating as sole-trader or a limited company these days (used to be more expensive to run LTD co with extra accountancy costs etc) so the only advice is DON'T operate as a sole-proprietor - start a limited company.

As a limited company debts would be written off on closure (assuming you hadn't run it fraudently/criminally).

Just a thought, in 1999 1 in 3 sole trader businesses collapsed before the first year of operation. I don't think the figures have got much better. Take head of the advice above.

With small companies, particularly new-starts, creditors often ask for the director(s) to guarantee the company's debts, so the protection of "Limited Liability" is largely lost.

True, but in a service-based company such as the OP runs, most of the income will be derived from the owner's labour, and the costs only that of running a vehicle and wages so borrowing should be minimal - so probably avoiding the need to give much if any guarantee.

On the other hand his risk of being sued for bad-workmanship/loss of production by a customer or bad debt leading to failure to pay VAT or Taxes could leave him financially crippled, whereas with LTD status he could more or less walk away.

LTD status also offers many ways to be creative with personal income from the business, avoiding personal tax, the CSA that sort of thing, purchasing property in yet another LTD company name and renting it back etc, whereas a sole-proprietor has all his eggs in one basket.

But most of these failures will be people who discovered that they could not profitably make a go of their business. The method of operation won't make any difference to the likelihood of success and it will make little difference to the 'salary' of the principle in the case of failure, if you have business debtors when you decide to stop you can't just pay yourself your salary and walk away, you have to pay those debts first.

tim.

Not from the tax man in most cases ...

I can't see any advantage in renting a property from your own Ltd Company.

In message , Jonathan Bryce writes

I think he meant his new LtdCo renting the property from another new LtdCo.

If he incurs a crippling bad debt from a customer whilst PAYE for the period is outstanding, he can fold the company and walk away from the tax bill - it wasn't his fault the company folded, and they can't pursue him for it - it is a company debt not personal. Ditto unpaid VAT etc.

If you buy a property with company A and rent it to company B

1) If company B folds, company A cannot be pursued for the property - so he (as Company A) still owns a large asset. 2) In certain cases, landlord of property has first call (after taxman and vatman but ahead of other creditors) on assets in the property to meet unpaid rent - so if company B did fold, Company A would own the machinery and materials and could form Company C and start trading again. 3) There are other benefits such as massaging profit and loss for Company B - if he is making too much profit Company A can raise the rent - and vice-versa give him rent free periods if he needs to show a bigger profit when he wants to borrow money from a Bank. Of course this just pushes the profit into the future, it all comes out in the wash over several years, but can be veru useful for smoothing good year/bad year cycles.

In all cases assume he has done nothing illegal whilst trading ie fiddling tax/vat , trading whilst insolvent etc - in those cases Taxman/Vatman would be after him and rip his companies to pieces. If the trading company had done nothing wrong apart from fail for economic reasons, the examples above would hold whereas as a sole-trader they would take everything including his home, and with only one limited company he would lose all the assets in the company.

In the OP case I would suggest two companies, with Company A owning everything of value down to tools/office equipment and Company B that actually does the work for customers owning nothing - renting everything of Company A. (Or renting it off the OP as a sole-proprietor even) As a service company Company A will not need to borrow money to fund stock purchases etc so the net worth of the company does not need to be seen to be growing to support increasing funding from banks - its assets can be purely the outstanding invoice value. Then if he hits trouble, his tools of trade are all ring-fenced from potential creditors and he can form a new company the next day.

Excellent points, thanks.

Everything that you own, plus your dog. Get a Ltd company sorted.

The best buisness investment you can make is a limited company and a good accountant. Start networking - talk to other buisnesses in other fields (so you are not competing) and ask for their advice on accountants.

The point about being a sole trader is that you are the business. So if the business goes bust, you go bust. Everything you own belongs to your creditors, not to you. To further improve this generous policy, the government also ensures that you are not entitled to a state pension and they take every chance possible to mess up your life by inventing rules that apply to you and not to your competitors.

Fun, isn't it?

Steve Firth averred

:-/ Which rules did you have in mind? And are we really not entitled to even the basic state pension? I didn't know that.

Ridiculous assumption.

I have found initially that most suppliers require cheque with order or very short credit period ie 7 days. Once you have started trading for a short while you can then typically get 30+ days credit. I have never been in a position where I have had to personally guarantee an account.

How so? I have been running service-based companies (and supply companies) for 12 years. How many do you run? The OP is starting from scratch from home - what other costs has he got- he only needs transport and a bootful of spares and tools. I started like that with £850 redundancy living in a bedsit.

My service company's average call-out is £260 of which £60 is parts (which we pay £20 for). The rest is made up of £40/hr and travel and mileage charges. We turn over £350k pa. We stock just enough parts for one week's calls, and order carefully

-just in time. We have never had to offer ANY guarantee on our borrowing /credit, if a supplier wants to be 'funny' over supply we use someone else. If a customer wants a high-value item that we do not stock, do not want to expose ourselves to risk on etc - we insist the customer buys the item directly from supplier for us to fit (having first negotiated a commission from the supplier for the part). Let the supplier take the risk! We have 3 leased vehicles and leased premises all without personal or business guarantees. We have a £20k overdraft facility with no guarantee.

Service business is money for old rope.

Compare that to my machinery sales company - everything needs financing - everytime I want to buy/sell a machine I need £30k of ready cash - which may not turn into profit until the customer pays up to 8 weeks later (if they don't go bust in the meantime which isn't uncommon!). So for this business I need a £70k o/d facility and this is guaranteed by me (on my house). Sales company is much more dangerous way to make money, but more fun!

Sorry, hasty fingers I missed out "earning related". I have paid SERPS for years and it was a complete waste of money because now I cannot get SERPS when I retire. I regard the state basic pension as a bad joke.

The rules that concern me are the IR35 rules related to the provision of services. These permit the Inland Revenue to arbitarily decide that someone self employed is not self employed and to put them into the worst possible position by forcing the self employed person to pay employer's NI. Larger consultancies don't have to worry about this rule whacking them in the same way. The publicity about IR35 has made it seem as if it is targetted at IT contractors. But every self employed person has to worry about the implications of these rules and the governments own examples make it clear that (say) a vet who attends a zoo on a regular basis is not self-employed but employed by the zoo.

The rule takes away but does not give. The self employed person who falls foul od IR35 does not have the right to claim back employer's NI from the person deemed to be their employer. Nor do they have the right to SERPS, the right to employee benefits, unemployment benefit, holiday pay, sick pay etc. They just have the duty to pay through the nose.

Further legislation to favour Goliath over David includes the new part "P" of building regulations that means that many self-employed electricians will no longer be able to work for themselves because they will have to buy thousands of pounds worth of testing kit to stay in business, or give the work to a rival who has the kit.

Get ready for the cost of electrical work to rocket.

If it is PAYE for his own salary, they can in some cases go after him personally.

I can't see how you can benefit here. The lower bands for CT purposes will be split between the two companies, so the profits would have to be pretty much exactly equal to end up in the same position as if they were in the same company.

Also, Company B may well be considered a close investment company, which means 30% tax on everything, with no lower rate bands. Company A still loses half its lower rate band though.

The bank manager is not going to be fooled by massaging intercompany charges, they will want to look at both sets of accounts.

The taxman won't be fooled either. The company with the lower profit as a result of the massaging will have to pay the same tax bill as if the massaging hadn't taken place. The other company will still probably have to pay the additional tax as a result of massaging.

Bank managers and landlords will look for cross guarantees between the two companies as well as a personal guarantee, so it won't help here either.

They do have the right to SERPS. You are treated as an employee of your service company and you get the right to all these things from your own company. SERPS is the only one that might potentially be useful though.

Care to identify which company a sole trader is an employee of?

If it could be claimed, yes.