Are you thinking of hiring an accountant for freelancers? Here are 10 reasons why getting one is a worthy investment, even if you’re a freelancer.
Why Hire an Accountant for Freelancers in the UK?
Freelancers account for a significant portion of the UK’s self-employed workforce because of the freedom and flexibility this career path affords. It is also financially rewarding, especially if one works with multiple clients.
However, going freelance doesn’t free you of the tax responsibilities that employees and business owners have; sometimes, your tax obligations can even be more complicated. That and a few more are reasons to work with an accountant for freelancers UK.
1. Get an Accurate Picture of Your Business
Being a freelancer is similar to running your own business—you earn revenues from selling your services and incur expenses from performing the job. But how do you know if you’re making a profit or which clients you should relinquish?
You’ll find the answers to your questions with a simple profit and loss statement. Based on that data, you can see which clients offer the highest margins and earnings. However, you will only glean these details when an experienced accountant does your accounts and produces financial statements.
2. Manage Your Cash Flow
Even if you’re a freelancer or independent contractor, efficient cash management is crucial to your finances. You’ll need a steady flow of cash into your bank accounts to ensure that you have enough funds to meet your payables and operational costs.
When you work with an accountant for freelancers UK, they will optimise your revenue stream by issuing invoices immediately, looking after your outstanding receivables, and improving debt collection from non-paying clients. At the same time, they’ll identify outflows that reduce your money on hand.
3. Improve Cost-Efficiency
Hiring an accountant may seem like an extra expense, particularly when trying to reduce costs. But that’s just a common misconception.
A professional accountant does more than look at your expenses and take out the ones that cost you the most. Instead, they will analyse your operations and identify areas to reduce bloat and waste. They may recommend alternatives to trim your expenses without impacting your performance as a freelancer.
4. Maximise Deductions
Most freelancers are too wrapped up in their work that they forget to prepare for the tax season. When the deadline approaches, they scramble and frantically think about how to make the most of their deductions. And at this point, it’s already too late to reflect adjustments.
When you work with an accountant for freelancers UK like Sterlinx Global, we will determine which expenses can count as potential year-end deductions and advise how to manage them. Freelancers must learn to track and account for depreciation, home office space, and other out-of-pocket expenses.
5. Make Better Decisions
Managing your freelancing career is akin to running a business—at some point, you reach critical junctures that require a decision. And to make a sound decision, you may need an objective perspective of a professional that understands your gig’s ins and outs and your financial goals.
For example, you may think of structuring your business as a limited company instead of a sole trader. By collaborating with your accountant, you gain insight into the pros and cons of taking the best course of action based on your current situation.
6. Avoid a Tax Investigation
Did you know that when you work with an accountant for freelancers UK, you can steer clear of the dreaded tax investigation?
Most self-employed individuals only think of hiring a professional once they’re subject to an audit, believing that accountants can quickly fix the issues after occurring. It’s a common misconception and a costly one at that.
When you have an accountant with you at the start, they will keep your accounts in order, reduce tax-related errors, and ensure your business is fiscally sound.
7. Stay Out of Trouble
Freelancers are subject to some of the rules applicable to business owners. And if you’re working on several projects simultaneously, chances are you’ll overlook some of the government’s compliance requirements.
Numerous government regulations on taxation, compensation and even accounting procedures often change, and it can be challenging to monitor updates and comply with them. Noncompliance is a burden and costly. But with an accountant on board, you can avoid mistakes or take steps to correct them.
8. Plan for the Future
Most freelancers rarely plan for the future—as long as they have clients, it’s enough to keep their gig going. But what if something unfortunate happens and you start losing clients to competitors?
An accountant can give sound advice and assistance in developing a viable strategy for your service business. They will help you figure out your next steps to boost income, improve operational efficiency, budget for investments, and keep track of your finances to stay competitive.
Their objective stance allows them to identify the best ways to support growth, consistently thrive, and ensure the longevity of your freelancing business.
9. Free Up Time
Perhaps one of the most significant benefits of getting an accountant is having more time for yourself. Instead of dealing with the minutiae of taxes, regulatory compliance, and managing accounts, you can focus on producing quality work, looking for more clients, and creating strategic partnerships.
Your accountant will take over crucial but time-consuming tasks so that you can direct your energy into running your freelancing gig in the most efficient way possible. Let us at Sterlinx Global help you achieve success by supporting you and giving you more time to do what you’re good at.
10. Reduce Your Stress
Sometimes, your freelancing business may be subject to an investigation or audit despite your best efforts to comply with regulations. It can be stressful, causing you to lose focus on your work.
If you have an accountant, they will eliminate this anxiety by handling all the required responses and documentation to clear your status. By taking the burden off your shoulders, you’ll have more energy to meet your targets and deadlines.
Frequently Asked Questions
Is it worth it to get an accountant when I’m only a freelancer?
Yes. It becomes even more critical when you have multiple clients, and keeping track of your receivables becomes more difficult. Keep in mind that accountants do more than file your taxes on time and handle paperwork—they can analyse financial data to make your freelancing gig more profitable.
How do I find an accountant for freelancers UK?
Start your search on the Internet, and make sure it’s localised. Choose a firm with experience working with freelancers rather than those offering general services. We at Sterlinx specialise in self-employed individuals, which makes us more attuned to their needs.
Will it be more cost-efficient to hire an accountant?
Put a value on the time and effort it takes to do your taxes come filing season. Suppose it takes 10 hours to complete this task, and your hour is worth £5. By doing it on your own, you lost £50 in earnings. But if you hire one, you’ll spend less.
The Bottom Line
Hiring an accountant for UK freelancers lets you achieve massive success in your freelancing gig, helping you thrive by providing invaluable support, work, and advice. The above 10 reasons prove that working with a professional is not an expense but an investment.
Working as a taxi driver? Getting yourself an accountant may seem excessive, but it is actually beneficial for you. Learn how Accountants for Taxi Drivers can make your life less stressful.
Accountants for Taxi Drivers: Why Should You Hire One?
Whether you are an Uber or taxi driver, you are considered self-employed by HMRC. It may surprise you, but such a career can be one of the most at-risk for tax investigations. One way to prevent a sudden, stressful audit is to work with accountants for taxi drivers.
If you’re still on the fence and think it’s overkill to hire an accountant, below are a few ways they can make your life on the road a little easier.
Sound Financial Advice
Being self-employed is akin to being an entrepreneur—think of your driving gig as running your own business. You must stay on top of your finances to know whether you’re operating profitably or at a loss. Without an accountant, you might be unaware of what’s costing you more than your revenues.
Accountants for taxi drivers understand how one can profit from such a career. They can identify areas for improvement so you can be more cost-efficient and profitable. By analysing your finances, they can see where expenses may be too high but don’t translate to increased income and bottom line for your business.
Besides tracking your service revenues and expenses, an accountant can also help you make better financial decisions. Suppose you want to shift as a self-employed private hire or Uber driver. Since your accountant doesn’t have the same bias as your family or friends, they can give you objective advice.
Know the Expenses a Taxi Driver Can Claim
Uber, private vehicle and taxi drivers must track and keep updated records of their earnings and expenses as they’re critical to accurate tax reporting. While paying the correct taxes is important, claiming allowed expenses is just as critical to avoid overestimating your tax obligations.
Keep in mind that you cannot deduct all expenditures from your tax. The primary requirement to claim the expense is that it should be business-related. So if you’ve driven your vehicle for a personal trip, such as an errand or vacation, the consumed fuel and toll fees are not tax-deductible.
If you work with accountants for taxi drivers from Sterlinx Global, we will help you figure out which of your expenses can be used to claim back taxes. We will also ask you to keep the invoices or receipts of the following eligible costs:
Fuel, which can be petrol, diesel, or electricity for electric vehicles
Toll charges
Road tax cost
Parking fees
Vehicle repairs, maintenance, and MOT tests
Roadside assistance
The cost of cleaning your taxi, including washing and detailing
Registration, license fees, and other legal expenses concerning your vehicle
Professional membership fees and related subscriptions
Insurance premiums
Advertising and marketing costs
If you hire a professional to handle your accounts, you can also claim their fees against your tax. It’s best to consult an accountant to determine other tax-deductible expenditures incurred while driving your taxi for business purposes.
Mileage Expense
Did you know that when you’re a self-employed Uber or taxi driver, you can claim back mileage as an expense? Driving a thousand miles a year will take its toll on your vehicle, but you can recoup the costs by recognising it as an expense.
There are two approaches to claiming mileage expense: simple and complex methods. Under HMRC’s guidance for the simple method, you can claim 45 pence per mile for the first 10,000 miles travelled within the same year and 25 pence per mile beyond the said threshold.
On the other hand, the more complicated approach involves detailing the expenses related to the miles you’ve driven while on shift or during work. While this method is more time-consuming, it allows you to deduct more expenses.
There are upsides to both methods, and they require accurate recordkeeping—claiming a higher mileage reimbursement despite a lack of records is unacceptable. If you want to know which is the better option, speak to accountants for taxi drivers from Sterlinx Global.
Handle Tax Matters
Taxis, private vehicles, and Uber drivers must register as self-employed with HMRC. As such, you have to calculate your tax liabilities and file the corresponding Self-Assessment return every 31 January following the covered tax year.
Remember that income tax isn’t your only obligation to the government as self-employed; you have to pay National Insurance contributions, the amount based on your profits. While it isn’t tax, you must include it in your Self-Assessment. If you have other income streams, such as dividends, you also have to declare them.
When you hire accountants for taxi drivers, they will oversee tax matters on your behalf. You’ll be confidently compliant with accurate, timely returns and payments, allowing you to focus more on driving farther and safer.
But accountants do more than tax filing. As they are updated on legislative changes, they will ensure you remain in compliance to avoid penalties. They can help you maximise deductions to minimise tax obligations and save money.
Getting yourself a good accountant often pays for itself and more, especially in avoiding the dreaded tax investigation. Since they guide and advise you, you can refrain from doing anything that can trigger an audit. And if the unfortunate happens, your accountant will help you resolve the audit or dispute.
Save Time and Energy
As an Uber, private vehicle, or taxi driver, you should pay attention to the road rather than bookkeeping, taxes, and compliance. An accountant can take over these critical yet time-consuming tasks, allowing you to go on more, longer and better-paid trips.
When you work with accountants for taxi drivers, you don’t have to worry about making erroneous filings and missing deadlines; the burden is on them. While you still need to keep records of earnings and expenses for at least five years, you’ll have stress-free tax compliance when you hire a professional.
Frequently Asked Questions
Is it cost-efficient to hire an accountant when I’m only a taxi driver?
If you want to know how hiring one will benefit you, estimate the cost of doing your Self-Assessment. For example, it will take 10 hours to finish this task, and every hour you allot will cost you £5 in earnings. You could’ve earned £50 and more had you left the job to an accountant.
How do I find accountants for taxi drivers?
Begin searching on the Internet, but keep your search localised. Go with a firm with experience working with self-employed persons rather than those offering general services. We at Sterlinx specialise in freelancers and the like, making us more attuned to their needs.
Can accountants provide VAT guidance?
Yes, they can. If your annual turnover exceeds the specified threshold for the year, you should be VAT-registered or face penalties for failing to do so. But even if you’re earning below the limit, you can still voluntarily register for VAT. We can help you with that.
Conclusion
Hiring accountants for taxi drivers may seem like an expense you can’t afford. But if you think about how they can make your life easier by managing your finances and helping you overcome tax burdens, the benefits significantly outweigh the costs.
Planning to enter the US market as an Amazon seller? Find out the basics of sales tax in the USA and proper compliance to maintain your account’s active status.
A Guide on the US Sales Tax for Amazon Sellers
Tapping the US market as an expansion strategy is financially rewarding because of the size of the potential buyer base. But before you can sell on the world’s biggest online marketplace, you must fully understand its operations, and one of the most crucial is sales tax.
Since it pays for Amazon sellers to understand it, below are 10 important things you should know about the sales tax.
1. What Is FBA Sales Tax in the USA?
FBA stands for fulfilment by Amazon, a common route for many Amazon sellers. When you sell on the platform, you must charge sales tax for every item your buyers purchase.
Sales tax is a tax that customers pay when they buy a product or service. It is another type of consumption tax levied during a sale, collected by the seller, and remitted to the taxing authority. You pay for it whenever you buy coffee from a famous chain or renew your monthly subscription.
Sales tax is similar to VAT in the UK and EU—it is passed on to the end-user or consumer. If you plan to sell a product for $10 and the local sales tax rate is 10%, you must list the price at $11 to include the $1 tax. And instead of pocketing the extra dollar paid by the customer, you have to remit it to the government.
However, with Amazon FBA, handling your sales tax is slightly different compared to managing the order processing and shipping yourself. The collected tax goes into your account, and Amazon may or may not forward it to the proper tax authority.
2. The Difference Between Sales Tax and Income Tax
One of the crucial things Amazon sellers should know is that sales tax and income tax are entirely different.
Sales tax is a pass-through tax—you charge it, collect it from consumers, and remit it to the state tax authority. No complicated calculations are necessary; all you need to know is the tax rate to apply to your products. Think of yourself as the medium for collecting and forwarding the tax due.
On the other hand, income tax is paid out of your net earnings as an online merchant. And unlike sales tax, it comes straight out of your pockets. Moreover, it has different rates or tax brackets, wherein your tax due depends on the applicable rate for a specific range or threshold.
3. Do You Have to Pay Sales Tax When Selling on Amazon?
Yes, you do. Amazon sellers must pay sales tax when trading on the platform. That’s because you’re collecting sales tax from your customers on Amazon. Additionally, you must remit this collected tax to the government to keep it in line with the US tax legislation.
Bear in mind that sales tax is unavoidable, and failure to pay translates to significant penalties and fines that can impact your operations.
Besides settling sales tax dues, you must ensure proper compliance as well. Your responsibilities include registering, collecting taxes, and paying the correct amount to the government. Otherwise, you will be penalised for non-compliance, not the marketplace.
4. When Does an Amazon FBA Seller Need to Collect Sales Tax?
Tax collection isn’t something you do without a legitimate reason. When you’re an FBA seller on Amazon, you are in charge of collecting sales tax in the US states that meet at least one of the two criteria: sales tax nexus and product taxability.
5. What Is Sales Tax Nexus?
Amazon sellers need to know what sales tax nexus means. Nexus occurs when your business has some connection to a state. While every state has varying definitions of nexus, it generally means physical presence in that jurisdiction. A good example is having an office or a warehouse.
An economic connection also creates nexus and making a sale is considered one. So if your buyer lives in California, you have nexus in it. You must charge the corresponding rate and collect the sales tax for remittance to the authorities.
6. Inventory Nexus and Amazon FBA Sellers
You may wonder—what is the link between inventory nexus and Amazon sellers under the FBA program?
Under the FBA fulfilment strategy, merchants must ship their products to an Amazon warehouse. To make the most of the fees, sellers store their inventory in a fulfilment centre in the state where they have many buyers. Unfortunately, this also creates sales tax nexus.
Most state tax laws consider inventory storage grounds for nexus since online sellers use the state’s resources, such as roads for delivery, public safety services during emergencies, etc.
So if you’re an FBA seller, don’t be surprised to have sales tax nexus in a particular state—it’s simply because your inventory is stored in an Amazon fulfilment centre, meeting the physical presence criteria of nexus.
7. An Important Exception to the FBA Rule
Many critical rules are in place between Amazon sellers under FBA and the marketplace because of the latter’s relationship with the local tax authorities.
Nearly every state with an Amazon fulfilment centre has implemented some form of Marketplace Facilitator Law. Under this legislation, online marketplaces like Amazon, Walmart, eBay, and Etsy are in charge of collecting sales tax on behalf of their merchants.
It removes the burden of collecting and remitting sales tax from them. However, you still have responsibilities. For instance, you must hold a valid sales tax permit and file periodic returns in states where you have nexus or your marketplace charges and pays sales tax.
If you’re unsure whether you should file returns or what your nexus states are, it’s best to consult a tax specialist from Sterlinx Global.
8. Product Taxability
Not all products can be taxed, so determine if what you are selling is taxable. Tangible goods are generally subject to tax, while services aren’t. Moreover, some product categories like groceries, clothing, and textbooks may not be taxed or charged at a different rate in certain states.
Check with the state’s tax authority to identify which goods are taxed, subject to reduced rates, or exempt. Ensure you have the right information by consulting a sales tax expert from Sterlinx Global.
9. How to Collect Sales Tax on Amazon
While the online retail giant collects sales tax on merchants’ behalf, Amazon sellers must know that this service comes with a price.
Currently, Amazon charges 2.9% of each transaction for collecting sales tax. It’s necessary to include this rate in your pricing to ensure that it won’t reduce your margins.
Alternatively, you can forego collecting sales tax from your Amazon customers. And since tax is unavoidable, pay your dues out of your earnings. When you take this route, be prepared to do your own calculations.
But if you want to keep it simple, it’s best to let Amazon handle tax collection. To do so, you must accomplish the following:
Set up sales tax collection in your Seller Central.
Input the product tax codes for your products.
10. How to Report and File Amazon FBA Sales Tax
Amazon sellers must report sales tax they’ve collected in every state they’ve had buyers. Also, they need to file and submit the corresponding return to the proper taxing authority.
There are two ways to report collected sales tax:
Download the relevant document from Amazon’s Seller Central.
Use sales tax automation software.
Once you determine the total charged sales tax, you have to file and remit them.
Similarly, you can file your Amazon FBA sales tax return using two methods:
Log online to the state’s taxing authority website and submit the relevant return.
File it via a sales tax software such as TaxJar.
TaxJar automatically collects, calculates the amount due, files returns, and remits the taxes to the government on your behalf.
Frequently Asked Questions about Sales Tax
How is sales tax different from VAT?
Sales tax is imposed only once—at the point of sale. On the other hand, VAT is charged and collected at every stage of the supply chain where value is added, from production to sale. But in essence, they are both consumption taxes and raise approximately the same revenue.
Can I handle sales tax computation myself?
Yes, you can, especially when you have a solid understanding of the fundamentals. However, calculating your sales tax collection takes away the time better spent managing your business. Work with a tax specialist or accountant from Sterlinx Global so that you can focus on operations rather than compliance.
Is there a single sales tax rate?
No, there is no standard sales tax rate in the US. Instead, it varies by state and can range from 2.9 to 7.25%. Moreover, some states have zero and reduced rates applied to specific product categories. You must know the correct tax rate to ensure proper collection.
Conclusion
It’s important for Amazon sellers to understand how sales tax works and its impact on their business—after all, next to income and expenditures, taxes can make or break their profits. Because compliance can be complex, it’s best to work with a tax specialist like Sterlinx Global to cover all your bases.
Does VAT compliance as a non-UK Amazon merchant overwhelm you? Let this guide help you understand more about VAT registration for UK limited company and its significance to your e-commerce business.
A Guide on VAT Registration for Amazon Sellers with Non-UK Directors
Being on the world’s biggest online marketplace allows you to reach more customers from different markets. And when you expand to the UK as an Amazon seller, among the most important to understand is VAT registration.
Registering for VAT in the UK as a non-resident director may seem overwhelming, but it doesn’t have to be when working with a professional from Sterlinx Global. Ease the confusion with a few important things to know.
The Importance of VAT
VAT, or value-added tax, is levied at every stage where value is added, starting from production to the point of sale. In the UK, registered entities collect and remit VAT to HM Revenue and Customs (HMRC).
VAT registration is a legal requirement for businesses with total VAT taxable turnover above £85,000 for the last 12 months or who expect to exceed the threshold in the next 30 days. Bear in mind that UK VAT is only applied to your sales in the UK.
Even if your forecasted sales are below £85,000, you can still choose to be VAT-registered voluntarily. One of your obligations would be to pay HMRC any VAT you collect starting from your registration date.
If you’re a foreign Amazon merchant selling in the UK market, know that you must register for VAT regardless of turnover. Otherwise, you will be penalised for non-compliance.
Besides being mandatory, being VAT registered promotes good business relations.When you have commercial clients, they usually ask for a VAT invoice on their purchases so they can claim input tax. But if you’re not VAT registered, some of your customers may take their business elsewhere.
VAT registration can also help improve your brand image. It makes your business look more legitimate and credible than non-registered ones since they appear to run small operations because their turnover did not breach the compulsory limit.
As soon as you are over the threshold, you must register for VAT within 30 days. Failure to do so results in penalties from HMRC, the amount depending on VAT due and the extent of delay in registering.
Why Amazon Pushes for VAT Registration
When you’re a merchant on Amazon, the platform encourages you to be registered for VAT; otherwise, they may only give limited access to your Seller Central account. They often send notifications about it, and once you receive these messages, you may be required to register for VAT. A Sterlinx Global advisor can say whether you must be UK VAT registered.
How does Amazon know that you have to register for VAT? The online marketplace uses artificial intelligence to predict when a seller will most likely go over the turnover threshold based on its sales history.
Suppose your gross sales for six months are already £50,000. Amazon forecasts a steady increase in sales for the next six months After twelve months, you would have exceeded the threshold. In anticipation, the platform advises you to apply for a VAT number for your expected taxable turnover.
There are two reasons behind Amazon’s push for registration. Firstly, they have a legal responsibility to HMRC to ensure that all sellers in the UK market exceeding the threshold should be charging VAT on taxable products.
Secondly, the marketplace wants Amazon sellers to avoid disruptions in their operations after breaching the £85,000 limit on non-taxable sales. If you opt to do voluntary VAT registration before your business reaches the threshold, you have one less worry and can focus more on operations.
Who Is a Foreign Director to a UK Limited Company?
A foreign director is a non-UK resident based overseas who holds a position in a limited company established in the UK. You would be one if you formed and structured your Amazon business as a limited company rather than a sole proprietorship.
Although classified as a foreign director and living outside the UK, you are still responsible for UK VAT and taxation compliance for your company. That includes applying for a VAT number, paying taxes due, and filing the relevant returns on time. Moreover, you must also meet any additional requirements from HMRC and Companies House.
VAT Registration for UK Limited Company: How Difficult Is It to Register for VAT?
VAT registration as a foreign director can be complicated as some of HMRC’s terms may be hard to understand. Although the tax authority has a user-friendly web portal called the Government Gateway, navigating it yourself can prove confusing.
To create an account, you must input the appropriate information about your limited company and yourself. You will need an active email address and two-step-factor authentication for security purposes. While you can follow the instructions on-screen to proceed with the registration, know that a few terms may require further clarification.
Confirm that the information you provide to HMRC is correct at the onset. Fixing incorrectly input details may be challenging or subject to penalties, which is why you must ensure accuracy.
VAT Registration Assistance
If you’re unfamiliar with the VAT registration process, including the correct codes and terms, it’s best to seek assistance from a qualified tax agent or advisor. They can register your e-commerce business on your behalf but may need more information if HMRC makes a request.
First, you must provide your tax identification number from your home country, which HMRC will record in their system. Secondly, you have to submit proof of identification, such as a copy of your ID or passport. You also need to show the UK address of your business, as evidenced by a rental or lease agreement or a mortgage statement.
In addition, HMRC may also require a copy of your birth certificate fully translated into English.
The above information may have changed by the time of publishing. To ensure you get up-to-date regulations, speak to a qualified tax agent or representative based in the UK.
Work with a professional from Sterlinx Global to handle your VAT compliance needs as a non-UK resident director, so you can focus on growing your business instead of worrying over the minute details of VAT registration.
Frequently Asked Questions about VAT Registration
When do I need to register for VAT?
Ideally, you should opt for VAT registration before doing business in the UK, particularly with foreign companies. But if you’re already running a full operation of your Amazon store, consider applying for a VAT number even before meeting the threshold to minimise inconvenient disruptions.
What happens after VAT registration?
Whether you register on your own or through a tax agent, you will receive a 9-digit VAT number with a GB prefix. This number is specific to your business, and you must include it on all issued invoices. Should your registration be successful, you will get information about performing your first VAT return and payment.
Once registered, how much do I charge for VAT?
The standard VAT rate in the UK is 20% for most goods and services. There is a reduced rate of 5% in certain categories and an exemption in some. It’s best to consult a VAT specialist from Sterlinx Global to know the correct rate you should include in your invoices and collect from your customers.
Bottom Line
If you’re an Amazon seller planning to expand or already selling in the UK market, it’s essential to have your VAT registration done as early as possible. There are many benefits to doing so, especially in the long term.
If the task seems daunting, you can seek assistance from an expert—Sterlinx Global has a team of VAT specialists that can help you from start to finish. Apart from their professionals, they also have a tax community forum where you can post questions and a YouTube channel tackling various tax issues.
Are you an Amazon seller planning to set up your business? Find out which business structure makes the most sense for your operations.
How Amazon Sellers Should Set Up Their Business: Sole Proprietorship, LLC, or Ltd Company
Selling on the world’s largest online marketplace is financially rewarding once you find the right niche. But before Amazon sellers find success on the platform, one of the first things they must decide is how to structure their business.
Three of their most common choices are sole proprietorship, limited company, and limited liability company (LLC). Each has its advantages and disadvantages regarding taxation, liability, and growth. Let the guide below help you determine which structure best fits your eCommerce business.
Sole Proprietorship
Also referred to as sole trader, a sole proprietorship is a business owned by one person or individual. Some sole proprietors create a trading name; however, doing so isn’t necessary. Bear in mind that a trading name is not a company but what Amazon sellers use in doing business instead of their personal name.
Most independent contractors, consultants, and tradespersons organise their business as a sole proprietorship due to ease of setting up and a lack of strict government regulations. However, there are also downsides to this structure.
Under a sole proprietorship, there is no separate legal entity created. You, as the owner, are solely responsible for everything related to the business, from operations to liabilities. When your clients file a claim against your products, you are accountable for it. The same applies to taxes—you are directly liable for them.
Limited Company
A limited company is a business formed and owned by one or multiple shareholders. As a legal structure, it ensures that a member shareholder’s liability is only up to their stake in the company, which can be either through investments or commitments. It is registered in the UK’s Companies House.
Companies that make a profit are ‘limited by shares and managed by at least one director, which can be you. As the managing director, you oversee business operations, including hiring people, allocating dividends to other directors or shareholders, and adding more members to the company.
Although setting up a limited company is relatively straightforward, it’s better to work with a professional from Sterlinx Global. With their assistance, you can ensure a smooth process until your registration on Amazon’s Seller Central.
Limited Liability Company
A limited liability company is a business structure with one or multiple owners called members. Similar to a limited company, an LLC protects its owners from being personally liable for the company’s obligations because it is a separate legal entity.
Amazon sellers in the US can register their LLC in any state, unlike in the UK where registration is centralised and done through the Companies House. Since regulations governing LLCs vary for every state, some places, like Delaware, see more company registrations than others due to offered benefits.
An LLC offers the flexibility and protection of a corporation but without the complexities of setting up as one. However, hiring an expert from Sterlinx Global is still recommended to ensure a fast and easy registration process.
What Is the Most Tax Beneficial?
Comparing the three business structures, sole proprietorship offers the least tax advantage. While calculating your tax due is relatively simple, you may be surprised by how much you must pay come filing season. Your earnings as an online merchant are included and taxed as part of your personal income.
Depending on their income tax bracket, Amazon sellers organized as sole traders may have significant tax burdens because of the high rates applicable to their profits, with the highest rate of 45% at earnings over £150,000. Moreover, they don’t qualify for tax benefits available to limited companies and LLCs.
The corporate tax rate for limited companies in the UK, with profits under £250’000, is 19%. As it is a flat rate, your tax due is proportionate to your earnings, making it reasonable. And if you’re a director, your personal tax depends on your residency status. While you still have tax obligations, this setup offers more savings than as a sole trader.
Since an LLC can be established in any US state, one of the best places to do so in Delaware. It doesn’t have sales tax and state income tax, or gross receipts tax for LLCs not doing business in the state.
LLCs may choose how to be taxed, don’t have to pay federal taxes on profits directly, and can pass through their profits and losses to members, which they will report on their personal tax returns. For these reasons, forming an LLC is the most tax-efficient for US and non-US residents.
Liability
Since no separate legal entity is formed under sole proprietorship, the liability extends from the business to the owner. Amazon sellers under this arrangement have no protection against complaints and claims against defective or hazardous products. Clients can go after your personal assets during settlement.
On the other hand, limited companies and LLCs minimise the financial losses when an injured or disgruntled customer makes a claim for faulty products or sues your business for damages. Because of the legal distinction, these structures segregate a company’s liability from its owners.
Scale and International Growth
Sole traders often find it difficult to scale their operations because of their relationship with suppliers. Some suppliers, especially overseas ones, often presume that individual Amazon sellers don’t run extensive operations, translating to less professional setups.
The treatment changes, however, when dealing with a limited company or an LLC. They tend to be more respectful, professional, and open to forging better business relationships. They may even offer discounts for bulk purchasing.
When you scale your Amazon business, your next step is to expand to other countries. As a company, international growth is less complicated. For instance, it’s easier to register for VAT or sales tax in overseas markets as an LLC or limited company than as a sole proprietor. Also, you have financial protections and simpler tax compliance.
Investors
If you have ever thought about getting additional capital through loans or investors, doing it as a sole trader will be challenging. Banks and investors will be wary of releasing funds to you since the proceeds will go into your personal bank account—there’s no guarantee that the money will be used accordingly.
On the other hand, investors and banks trust limited companies and LLCs more than individual sellers. Besides a comprehensive background check, they can also assess a company’s finances and business viability based on its financial statements. Moreover, they’re more at ease knowing they’re dealing with a professional.
Brand Values
Many Amazon sellers build a brand to distinguish their products from others. And when you’re a sole trader, putting your name as the brand can impact your relationship with business partners, such as suppliers, shipping companies, and 3PLs. They’re less trusting of businesses without a strong brand.
Limited companies and LLCs can be more effective in establishing a trustworthy brand. It allows them to arrange for better terms, say a 30% down payment and 70% to be settled upon delivery. Moreover, they are more credible, and by building credibility over time, they can gain market share.
Exit Plan
An exit plan is what Amazon sellers have when they decide to dispose of their business at the right price. It is usually a 2 to 5-year plan wherein they set goals for every milestone met. Once achieved, company owners can sell their businesses at the right price.
Unfortunately, sole proprietorships cannot have exit plans; only LLCs and limited companies can. If you plan to shift business after a couple of years, this plan can guide you in your disposal strategy.
Frequently Asked Questions
Can I shift from sole trader to LLC or limited company?
Yes. Amazon sellers can change their business structure. That’s why some online merchants start as sole proprietorships but eventually change to LLCs or limited companies when they begin to expand operations or expect to be in the business for some time.
How long does it take to set up an LLC or limited company?
Forming an LLC or limited company takes several weeks; it differs where you set up your company. But if you want to speed up the process, work with a firm like Sterlinx Global. We can help you with the registration, which will be faster than doing it yourself.
How can Amazon sellers make their business tax-efficient?
Amazon sellers cannot circumvent VAT and sales tax. But if they want to be more tax-efficient, the best way to achieve this is to organise their business as an LLC or limited company. They pay tax on the company’s profits only after deducting eligible expenses.
Conclusion
Amazon sellers have several options for structuring their business on the platform. Each has its advantages and disadvantages. After weighing them, you’ll realise that an LLC or limited company is better than being a sole trader.
If you’re still unsure, it’s best to consult a professional from Sterlinx Global—our team is more than willing to help you. Feel free to ask any questions about our tax community, listen to informative podcasts, or learn more about tax on our YouTube channel.
