One of the questions we are frequently asked here at MBK is, ‘Should I become a limited company or stay as a sole trader?’.
It’s a complex question to answer succinctly, since it depends very much on your unique set of circumstances and the type of nursery business you run. It’s certainly not a one-size-fits-all answer.
To find the right answer for you, let’s consider the main difference between the two trading styles, in particular, comparisons concerning income, tax and liabilities, so you can decide which one might be best suited for you and your nursery.
What Is A Ltd Company And A Sole Trader?
First things first, let’s define what a Limited Company and a Sole Trader are.
Being a sole trader effectively means you’re self-employed. You’re the exclusive owner of your nursery business. You and your nursery business are one and the same in the eyes of the law. Once you’ve paid your taxes, you’re entitled to keep all of the profits. Great news! But, this also means you’re personally responsible for all losses and debts incurred by your nursery business.
A limited company, on the other hand, is a private company with its own legal identity. If you choose to trade as a limited company, your personal identity will be separate from that of your nursery business. You can also opt to share ownership of your nursery business with one or more others (known as shareholders), as well as appoint directors to help run your nursery.
What’s The Difference Between A Ltd Company And A Sole Trader?
The way you decide to structure your nursery affects how certain business operations are carried out and who is responsible. For example, the process by which you earn your income, plus your legal and financial liabilities.
As a sole trader, you’ll be personally responsible for any financial or legal issues that crop up. Any problems that surface will be held against you personally, not your nursery business.
With a limited company, it’s the business name on the line (unless there’s criminal activity, of course!). Any debts or problems are held against the company name, effectively keeping your personal and work life separate. So your personal finances are not affected should problems arise.
The Pros And Cons Of Being A Sole Trader
Income & Taxes
As a sole trader, it’s your responsibility to register as a self-employed person with HMRC and file your self-assessment on time every tax year. Your income will depend on the profitability of your nursery since your earnings (drawings) are taken from the profits. Great if you have a successful year! But if your profit margins reduce for any reason, you may have to take a pay cut.
Your taxes as a small sole trader can be lower as you’ll pay income tax at standard rates and your National Insurance contributions are once again based on your nursery profits; the less you make, the less you’ll have to pay.
But be mindful of business growth and how this can change things for you as a sole trader. If you start to see profits grow considerably, you could end up paying more taxes as a sole trader compared to being a limited company.
Responsibilities & Liabilities
There’s far less admin to take care of as a sole trader. Aside from your self-assessment each tax year, there isn’t much else business admin to sort. Making this aspect of running your company less stressful.
However, your personal responsibilities and liabilities are far greater. You’re considerably more at risk since you’ll be personally responsible and liable for any issues with finances or the law.
As a sole trader, you are the one that needs to be the Nominated Individual with Ofsted. Whilst you can appoint others to make notifications to them, it is ultimately you who ensures everything is compliant and reported on time.
Whether it’s your fault or not, any business debt attached to your nursery will be in your name and will affect your private finances. If an organisation such as Ofsted, HMRC or even an unhappy parent open a case against your nursery, it will be you, not your business, who is legally liable.
The Pros And Cons Of Being A Ltd Company
Income & Taxes
If you decide to become a limited company, you can choose to pay yourself in two ways, using one or both methods.
You can pay yourself using the PAYE system and/or with dividends, which are paid from the profits of the company to shareholders. Of course, if there are no profits then there is no money to pay a dividend.
When you pay yourself with PAYE, it’s guaranteed as long as there are sufficient funds in your business bank account. So technically you can keep taking an income no matter how your nursery performs. It’s far more secure than being a sole trader, although in both cases making enough money to cover your own costs is needed. With PAYE, though, you will have to pay NI contributions in two ways: your own, and from your company too.
It’s also important to consider all the ups and downs of the political and economic climate, especially with what we have seen lately in the political arena. Limited companies may have to bear a greater corporation tax burden over the coming years. Only time will tell on that one…
Responsibilities & Liabilities
As a limited company owner, you would find yourself with significantly more administration. You’re required to file accounts to Companies House within 9 months of your year-end. On top of that, you’ll need to file what’s known as an Annual Confirmation Statement. Plus complete a personal self-assessment as a Director of your company. It’s a pile of admin that can be stressful and very time-consuming (although a good accountant can do all this for you!).
The upside? You have minimal and limited personal risk as a limited company owner. If your nursery gathers debt or gets into dispute, you’re not personally liable. The debt belongs to your company alone, and you would lose only as much as you invested.
And by appointing a co-director, you can also delegate the role of Nominated Individual to deal with Ofsted. This person doesn’t have to be a shareholder of the company, so you get to share the workload and responsibilities, without having to share the profits.
How Easy Is It To Move From A Sole Trader To A Ltd Company?
Would you like to know how easy it is to make the switch from sole trader to a limited company?
It’s fairly straightforward, as long as you have the right info and prepare as much as possible. It’s inexpensive too, costing as little as £15.
There are two main considerations you’ll have to plan for:
- Ofsted registration. By switching your business trading style, you’ll have to re-register with Ofsted, which means you’ll lose your current Ofsted rating and go back to no rating and wait for up to 30 months for your first inspection.
- Business registration. You’ll also become a completely new business, which means letting every organisation you deal with know about it. From your local Early Years team for funding, HMRC, Tax-Free Childcare, Voucher companies, insurance companies and suppliers, they’ll all need to be informed. What’s more, you’ll have to open a new bank account.
It can be extremely time-consuming and overwhelming. But with support from those who’ve done it before and helped many others do the same, you can make the change hassle-free.
What Is Right For You?
So should you switch your nursery from a sole trader to a limited company? It really depends on how large your business is, how profitable it is, how secure your finances are and whether you feel exposed or vulnerable as a sole trader.
As we’ve explained, there are pros and cons for both. When it comes to making your decision, think about how much risk you’re willing to take and if you’re ready for greater growth. These points can help you reach a clearer conclusion.
Still have questions?
Get in touch with our friendly and knowledgeable team today. With more than 100 years of combined experience between us, we can give you all the info you need to make the best choice for your nursery.