We are pleased to announce that Christmas has officially come early for Limited Companies, with the release of Coconut Limited Company accounts.Thank you to everyone who’s been waiting patiently since signing up, we promise you, it’s been worth the wait. We will be working our way through the waiting list over the next couple of weeks getting as many accounts opened as possible.If you’re not on the list, sign up here and we’ll have you online in no time. Till then, we thought it might be a good chance to take a look at how Limited Company accounts differ from those of a Sole Trader, and some advice on deciding which one is right for you and, ultimately, your business.
It’s important to understand that there are some big differences between operating as a sole trader and a limited company, starting with how you structure your business.
If you’re working as a sole trader, you are the business. When the business gets paid, you get paid. Simple. It’s not quite so straightforward with owning a Limited Company though. In this case, you and your business are separate legal entities. This means you need to invest time in tracking and monitoring all transactions between you and the business.
If you are registered as a sole trader, you may pay income tax and national insurance on the profit you make depending on the level of earnings. The profit is included as part of your overall personal income. With limited companies, the business pays corporation tax on its profits. In addition to this, the owners/Directors of the business may pay income tax on any payroll and dividend payments made to them. This sometimes results in limited companies paying less tax than sole traders, but it’s a more complex approach which takes time, money and expertise to manage.
The part of the process most self-employed people dread, and something we’re working on changing here at Coconut.Sole traders must report their business income to HMRC through a self assessment tax return, due by the 31st January each year for the previous tax year ending 5 April. It’s not quite so straightforward for limited companies. Firstly, shareholders (owners) or Directors of the business may have to submit a self assessment tax return. Secondly, Directors of the company have a legal responsibility to file the Limited Company’s annual accounts with Companies House within 9 months of its year-end and file full accounts and a Corporation Tax Return with HMRC.
HMRC allow sole traders to use a process called “Cash Basis” accounting. This means you report your income and expenses in relation to when you paid them (rather than when the work’s done or invoice received). This is the simplest form of accounting and what we use here at Coconut. This is because a bank account can give you everything you need for this type of accounting, including those all-important payment dates.Limited companies, on the other hand, have to use what’s called “Accruals Accounting” when completing their year end filings. This is a method of accounting that records income and expenses when they are incurred, regardless of when cash is exchanged. So at the year end they may need to apply some accounting adjustments when filing the accounts at HMRC and Companies House. These adjustments would be done outside of Coconut, and will depend on how you get your accounts prepared. This is an area that an accountant would usually help you with.
We conducted research that highlighted a big difference in the way sole traders and limited companies use accountants.On average, sole traders use accountants 25% of the time, with only 5% of them choosing to use an accountant every month.Limited companies, however, told a very different story, with a massive 90% claiming they used an accountant. The remaining 10% simply hadn’t got round to dealing with their accounts as they were only just starting out on their self-employed journey. People that run limited companies may need to use an accountant to help them comply with the more stringent reporting requirements, such as year end accounts and tax filings, running payroll and helping decide on how to extract profit from the business (usually being a mix of a salary and dividends).
To help manage these differences, we’ve made some changes to the categories for limited companies. We’ve removed some of the sole trader specific ones, and added some extras like Director’s wages, Director’s account, Dividends, Staff wages, PAYE/NI payments and Investment.
The current tax tab in the Coconut app is tailored specifically for sole traders - it does a personal tax estimate plus does a sole trader tax return. Neither of these work for a limited company. We’re working on a new design and functionality for the tax tab for limited companies. It will include a summary of your company’s income, expenses and profit. Until this is ready, we’ve made the decision to hide the tax tab and will keep you updated with when a version tailored specifically for limited companies is ready.
Our limited company accounts will launch with support for up to 2 Owners/Directors. There will be some limitations which we’ll have sorted relatively quickly.The person who completes the sign-up process will be the account’s primary user. They will have access to the Coconut account.For the first week or so it will be 1 owner only while we find our feet, but we’ll add 2 fairly swiftly.
Every new account will open with just one company Coconut card. We do, however, recognise the demand for multiple cards on one account, so we are working with our card issuer to enable this functionality in the future. We’ll keep you posted with our progress.
If your business does have more than one owner, you’ll need to decide which of you has access as that person will need to open the account. It is possible to link more than one device to the account through an authentication procedure, but only one phone number can be linked (you get an SMS code for initial login and creating payees).
Whether you’re registered as a sole trader, or the owner of a limited company, you can now access Coconut’s award-winning banking and accounting solution for self-employed people and small businesses.If you’re still unsure about which account is right for you, feel free to get in touch. One of the team will be on hand to answer any questions you might have. See you in the Coconut community!
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Coconut gives you a personal tax estimate for sole traders, and a corporation tax estimate for limited companies. Make sure you set it up right, here's how.