October 30th, 2012 / Insight posted in

Should I trade as a company?

TW writes: I am about to buy the goodwill of a local retailer for £35,000, with an additional payment being made at completion for the stock. Should I keep the business as a sole trader, as it currently is, or set up a company for the purchase?

Setting up a company will enable you to ring-fence the business liabilities and protect your personal assets from commercial risks, writes Jon Sutcliffe, partner at Kingston Smith LLP. Where there is real risk, it is advisable to limit your personal liability through a company or limited liability partnership.

If you do not need to protect your personal assets, then your choice might be more influenced by tax, and the use of a company may have a number of benefits here too. It will reduce your taxable profits, as the goodwill purchased can be set against profits over its estimated useful life. A sole trader cannot do this.

The disadvantages of using a company are that the accounts will be publicly available at Companies House. Companies also involve more administration than sole traders, so check the difference between the fees your accountant will charge in each case.

Finally, the saving you make by setting off the goodwill against tax may have its price. When you come to sell the business, a purchaser may want to buy your goodwill, not the company. This could create a higher tax charge on sale if you use a company, but tax rules may change by then.

The company is often the right choice to save on tax when cashflow is stretched, but you should go through both options with your accountant.