Originally posted by blackjoe24
View Post
What is your guarantee that, if something goes wrong and it is your fault, the client won't sue both you and the agency? What is your guarantee that if they sue the agency, the agency won't sue you?
Is the agency in the US or the UK? Do you have a contract with the client, the agency, or both? Do you have any contracts with either governed by US law?
If you KNOW the client won't sue because of what you know about them, fine. Not everyone in America is looking to drag people into court to grab punitive damages. But if you think that having an agency protects you just because the agency has bought some insurance, you don't know much about the tort system in the US.
As for the tax benefits of Ltd, there are probably three significant ones to consider. The first is if you have a non-employed spouse. In that case, you could make your spouse a shareholder of your Ltd, pay most compensation in dividends, and all or most of the income could be below the higher rate band. That would be a significant savings over sole trader status, or over running a limited wholly owned by you and paying yourself the entire amount. If you have a spouse who is employed but paid much less than £45K, you could still do the same thing, perhaps gift a third of the shares to the spouse, and at least move some of that income out of the higher rate band.
The second benefit is the ability to retain some profit in the company. Say you can afford to retain £30K a year in the company. If you are getting £100K a year and you pay everything as dividends, that £30K will be taxed at 32.5% dividend tax -- almost £10K in taxes. But if you can afford to leave it in the company, you build up a significant reserve in the company without having to pay that dividend tax. Then, in a couple years, when you are out of contract and are looking for a new one, you still can take dividends. But if your income is lower, at least some of those dividends will be below higher rate band, and so be taxed at 7.5% rather than 32.5%.
The ability to retain profit is also useful if you just want to take some time off. Suppose you work hard for four years and then want to take a one year sabbatical, travel, play golf, write a book, get some training, whatever. If you've retained profit, you can pay yourself dividends during your extended holiday, and again, a lot of that dividend will be taxed at 7.5% rather than 32.5%.
The third benefit is that your limited company can make pension contributions to your SIPP completely free of any kind of tax, up to £40K a year. As a sole trader, if you make pension contributions, it reduces your income tax, but you still have to pay National Insurance on the income used to make the contributions. Basically a pension contribution costs a sole trader 9% more than it does a limited company (which is a stupid aberration that they really ought to sort out).
If you don't have an unemployed/underemployed spouse, and you want to take all of your money out of your company, and you aren't making any significant pension contributions, and you absolutely know you aren't going to get sued (especially not in a US court), then sole trader may make more sense. Otherwise, probably not.
Leave a comment: