A limited company is a more complex choice of trading structure, but can offer some advantages as a business grows. Our guide to Choice of Structure for Yoga Teachers comments more on this.
This page gives some guidance specifically for Yoga Teachers and similar working via companies – there is a lot more detailed guidance for small companies on the website of our parent, Whitefield Tax, under Help and Guidance.
How Does a Company Differ From a Sole Trader or Partnership?
A Sole Traders business has the same legal personality as its owner; likewise a Partnership is an extension of the legal personality of its partners. By contrast a Limited Company is a separate legal entity.
The major implications of being a separate legal entity is limited liability – if a Sole Trader or Partnership business fails then the owner or partners are liable for its debts, however if a Limited Company fails then its Shareholders and Directors are not liable for debts unless they have either given guarantees for them (banks and landlords often insist on guarantees) or there have been offences under Companies/Insolvency Legislation such as fraudulent or wrongful trading (unlikely, except for egregious conduct)
Whereas Sole Traders or Partners own their business or partnership, a Limited Company is owned by its Shareholders and run by its Directors. Directors are appointed by Shareholders and in a small business are normally one and the same, although they are separate roles. Directors are employees of the company, Shareholders are not.
So Is A Company Right for Me?
The separate legal personality may be advantageous in some circumstances, typically, but not exclusively:
- If you are opening a studio or otherwise expanding your business and have a wider range of risks than a yoga teacher renting halls or working from home.
- If your business is growing and has a higher profile than normal, and you feel a company would look more professional. This is less of an issue in an environment like Yoga, but may be relevant if you were, say, moving into offering CPD or Teacher Trainings.
- If your business has grown and the VAT threshold is an issue – a Company will have a separate threshold and with careful planning you could structure some of your business to run through a Company – but take professional advice on this as it isn’t straightforward and needs a lot of care.
- Better tax flexibility – whereas the tax & NI for a Sole Trader or Partner is a simple profits based calculation, for a company there some more sophisticated tools available which can help to reduce or defer tax.
Other factors to consider are that a company is more complex to run, eg:
- Payroll for Directors
- Confirmation Statement to Companies House
- More complex annual accounts
A lot of this can be passed on to an accountant to assist with, but expect either your time investment or your accounting / administration costs to be more if you have a company.
If a company is appropriate for you, then YogaTax can assist with forming and administering your company
How Tax works with a Company
Whereas a Sole Trader or Partnership is taxed as if it is an extension of the individuals income, a company is taxed differently.
- Corporation Tax is due on profits.
- Directors receive a salary which is subject to PAYE and NI like any other employment – this is deducted as an expense in reaching profit on which Corporation Tax is due.
- Shareholders can receive some or all of the profit after Corporation Tax as a dividend, which is taxed as personal income – Dividend Tax (a form of Income Tax) is applied at a lower rate to dividend income than other income, reflecting that Corporation Tax has already been paid.
In a typical owner managed company where the Shareholders and Directors are one and the same, the norm is to take a small salary up to NI level and dividend for the remainder – but there are a number of inter related issues here, and its easy to fall into traps – an accountants advice is best for your personal circumstances.
Whether the total taxes will be less or more under a company depends on a number of variables, but at present below £100,000 profit there is not a significant difference in the overall tax liabilites on a like for like basis between operating as a sole trader and as a limited company.
Tax Examples
You may also want to look at Case Study 5 of our Examples and Case Studies for Yoga Teacher’s Tax which gives a more detailed example of calculating the taxes for a teacher working via a limited company.
