Sole Trader vs Limited Company | Build Your Salon

There comes a point in many growing salon businesses where being a sole trader stops feeling like the simple option and starts becoming a liability. Here are three signs that it might be time to start looking at limited All on Build your Salon. Hello. My salon friends, Phil Jackson here, your Queen of salons coming all over the internet with another dose of my Wise Owl wisdom. You have no idea how many times I had to re-record that intro. My god, you'd have thought two sentences would've been simple for your Uncle Phil, wouldn't you? Anyway, how's business? How are things treating you? We are marching towards the end of April and I feel like it's been a pretty positive month for most of my group salon coaching clients. How on earth are you doing? Why not reach out and let me know? You know, I love hearing about your salon businesses. I'm just very nosy. Just a very nosy person. It's why being a business coach is the perfect career for me. So what are we talking about today? We're talking about the differences between a sole trader and a limited company. Well, not so much the differences, but when it's time to perhaps think about having that conversation with your accountant and changing the structure of your business. Now from the get go, I've always had limited companies in my coaching business. I'm a limited company. In my salon business, I was a limited company and that was a little bit different and that's because I had a business partner and a limited company makes running things with other people really easy and figuring out who's gonna get what out of the business is a lot easier, a lot simpler with a limited company. So right from the beginning, I've always had limited companies, but lots of the people that I'm coaching have chosen to stay as sole traders. And if you ask me whether most people should be thinking about limited companies, honestly, once you get to a certain level of turnover, the answer is gonna be yes. I think for a lot of you, a limited company might be the right structure. Now you're gonna need to talk to your accountant about this. I'm not qualified or indemnified to give you legal or financial advice. And frankly, you shouldn't be taking legal or financial advice from a free podcast anyway, that's just daft. But why I am gonna be able to give you today is my honest version of why moving over to a limited company might be a good thing. Because there's a little caveat that a lot of people don't consider until they're sitting across the desk from their solicitor or their accountant, or their bank manager. And I'd rather you heard it from me first. So three signs that it might be time to make the switch, change the structure and move your business forward. Let's go, shall we? So the first sign is when you are paying more tax than you need to. So as a sole trader, every pound of profit that you make is taxed as your personal income, which makes it very easy to understand. Basically everything that comes into the business take away everything that you spend on the business. Whatever's left is your profit and all of that is taxed as if it was your personal income. Now it's very simple to understand, but it does get more painful as your business grows. And here's what it looks like in real numbers. And again, do your own research. Talk to your accountant. So you have a personal allowance of just over 12 and a half thousand and everything above that, you're gonna be paying 20% income tax plus 6% national insurance right up to your profit becoming 50,270. So that's a combined rate of tax of 26%. So just over a quarter of everything after your personal allowance is being swallowed up by tax go above 50,270 I think it is. And the income tax rate goes up to 40%. So the better your business does, the harder the tax system is gonna start hitting you. Now a limited company is taxed differently because the company is like a person, it's a legal entity and the company pays corporation tax on profits, but that rate is only 19% on profits up to 50 K. So already that's a lot lower than the 26%. But the real advantage is how you pay yourself because instead of being the owner of the company or being a sole trader, you are a director. And what the best way to do it, and a lot of accountants will tell you to do it, is to take a small salary usually around the level of the personal allowance and take the rest as dividends. So the salary is counted as a business expense. So the company doesn't pay corporation tax on that bit and dividends are taxed at a lower rate than income tax. And crucially, you don't pay national insurance on them either. So let's say your salon's making 60 K profit as a sole trader, your tax national insurance bill's gonna be about 13 5,000. As a limited company, you'd be paying a lot less on company tax around 12 and a half thousand. So you're about a hundred pounds a month better off across the year, same salon, same profit, different structure. And that gap gets wider the more that you earn. So my rule of thumb is if your profits are consistently 40 K plus, you almost certainly are paying more tax than you need to. If you're a sole trader, it is time to have that chat with your accountant. Indicator number two is when it becomes a problem that your personal assets are on the line. So as a sole trader, there's no separation between you and your business. You are the business, which means if the business gets into serious debt or if a client makes a claim against you and your insurance won't cover it, you are liable. That means that they can come for everything you own, your savings, your car, your house. That's called unlimited liability. And when you're just starting out with low turnover and low risk, that's absolutely fine. But as you grow and those risks grow, that exposure grows with you. So for example, let's say you've taken team members on as a sole trader, you are liable. So if the business starts to fail and you've gotta pay out redundancy and there's no money in the business, guess who's gotta pay it? You have, unless you're gonna declare yourself personally bankrupt. If you're signing leases on premises and you've got unlimited liability and you can't pay the rent, they're coming for your house. If you start taking out finance on, let's say you've got a beautiful expensive laser machine, and you can't make the payments out of the business account and guess what? They're coming for your personal account and those aesthetic treatments that we all love the nice high average bill on, well, there's real clinical risk there and that exposure grows with you. So one claim against you could be personally devastating. I've already told you though, a limited company is like its own person. It puts a legal wall between you and the business. Now that wall is not completely impenetrable. If you've gone out there and been deliberately negligent, then the wall is breached. But the company is a separate entity. So if the company gets into debt or the company faces a lawsuit and gets sued by a client, they can only go after the company's assets, not yours. And that protection is the main reason I've always operated as a limited company. But here's the bit that nobody tells you. In the early years, let's say you're gonna go for a lease or you're gonna go to the bank for a loan or you're gonna go to a finance company or even some suppliers because you haven't got a proven track record, they will very often ask for a personal guarantee. So that means if the business can't pay the debt, you are still personally liable. And that means for that specific liability, that wall between you and the business does not exist. This is completely normal. It doesn't mean that the limited company is not worth having. It absolutely is. But I want you to go in knowing that limited liability is real protection, but it's not always total protection until you've got a track record that speaks for yourself. So in my own business, when we signed the lease on our last salon, we initially had to sign it with a personal guarantee after the lease came up for renewal. 10 years later I went to the landlord and said, look, we've got 10 years of track record. We wanna sign this lease as a limited company this time. And the landlord was okay with that because we hadn't missed any rent in between times. So that protection is from the general accumulated risk of running a business, but there might still be specific instances where you're gonna have to put your name behind a debt and sign. Number three is where the structure of the business is getting in the way of your growth. And this one's a bit less dramatic, but it is real. There are some types of businesses, sometimes even banks that take limited companies more seriously because as a limited company, you've gotta file your accounts at company's house every year and they are public records. Anyone can check those accounts at company's house. You are required to do that as a limited company, but it shows that you have financial discipline when you walk in asking for some funding because you wanna expand or refurbish or open a second location, the conversation feels very different if you're a limited company with track record. Also, it depends on the kind of business, but sometimes having limited after your name carries some weight with clients, particularly at the higher end of the market, it signals that you're established, that you're professional, helps build some trust before anyone's even walked through the door. Also, if you're concerned about someone stealing your business name, you cannot have two limited companies with the same name. So it does offer a little bit of protection. It's not as good as a trademark that you're reinforcing, but it does offer a little bit of protection around your business name as well. Finally, if you ever wanted to sell, which at some point lots of salon owners do, selling a limited company is really easy. Literally all you do is sell your shares in the company; the company lives on. Done. Selling a sole trader business is really hard because you're selling off individual assets, you're selling off individual bits of your business. It's a bit messier, it's a lot less attractive to buyers and typically you get a lot less money. Think about it just as something as basic as record keeping and GDPR, your clients are giving you permission to keep their details. They're giving you the sole trader permission. If you transfer your business to someone else, they haven't given permission to the new owner. Whereas if you're a limited company, they give permission to the limited company to keep their records and then the limited company gets transferred to new ownership, the records go with it. So if you're thinking about selling at some stage, you're probably gonna want to look at a limited company. If you're thinking about a second location, bringing in a business partner or building something, you'll eventually exit from sole trader status may already be holding you back. Also, bear in mind, let's say you've got team members that wanna become part of the business and perhaps open a second location with you. It's as simple as opening a second limited company this time you own it together. So food for thought, when's it time to switch? Well, I've said already, if you're consistently profitable above 40 K, if you're taking big business risks or if you've got any ambition to grow beyond where you are now, the answer is probably it's time to have the chat with the accountant. The switch is not complicated. You can buy a limited company called an Off-the-shelf company. It's done and dusted usually in a couple of days in your accountant who will be used to working with small businesses. They'll be doing this very regularly. Yes, there is more admin than there is as a sole trader, but now that we're making tax digital, actually the difference between the two is gonna be a lot less than you think. So there you have it. My take on whether it's time to move from sole trader over to limited company. If you wanna talk through what the right structure looks like for your specific situation, maybe discuss your future goals. I'd love to be hearing from you. Why not reach out to me, phil@buildyoursalon.com. Also, reach out if you'd like to be interviewed on a future episode of the Build Your Salon podcast. I'd love to be sharing your journey with my amazing Build Your Salon listeners, just a few short days until I'm coming all over the internet again with another dose of my Wise Owl wisdom. And until next time, take care.