Keep it simple: Be a sole trader
JR writes: I am a construction consultant and work as a sole trader. I am registered for Vat and work for more than one client. My wife is planning to leave her job later this year to work as a freelance nutrition consultant. She will probably also have to register for Vat. Should we both carry on as sole traders or would it make more sense to form a partnership or limited company? We are in our fifties and plan to retire in the next two or three years.
You could, if you wanted to, combine your businesses into one partnership or a limited company, writes Chris Lane, a partner at Kingston Smith. But you should compare the benefits of doing so with the costs. The simplest option is for you both to work as sole traders. It is an easy format to understand – you would both keep your own books and complete your own Vat returns, annual accounts and tax returns. If you create a business partnership you could save some time on administration, as you would have to complete only one Vat return between you. The partnership would also have to produce accounts at the end of the financial year, which would determine the profit that will appear on your tax returns. Forming a company would involve the biggest change. A company has to produce formal annual accounts, which have to be filed at Companies House. The way you withdraw income from the company would also be completely different. The most tax-efficient solution is usually a mix of a salary and dividend payments. But this will complicate any pension contributions you may wish to make. In terms of cost, the company option is probably the most expensive but it would give you both the added protection of limited liability. If limiting liability is not particularly important to you, I advise you to keep it very simple and trade as two sole traders. The benefits of combining the two businesses are not that great and, as sole traders, you will both have control over your own affairs.