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What is the difference between being a sole trader and a limited company?

How should you structure your business?

These are big questions you have to grapple with when setting up your own business, so I asked the perfect guests on the podcast to give us some advice. Wendy Ross is the founder of Tonbridge Accountants, and is joined by her business partner and husband  Laughton. 

Together they explain the difference between being a sole trader and a limited company – in easy to understand language! 

We talk about the advantages and disadvantages of each set up, and the sort of work involved and things you will need to consider.

We also discuss what you need to be keeping a record of in your accounts in order to make sure you are being compliant.

It’s a brilliant episode that makes a complex topic much easier to understand.

Tonbridge Accountants offer a free 15 minute phone consultation, which you can book here.

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Then get in touch with Aubergine Legal, a friendly commercial legal consultancy.  Offering practical and clear commercial legal advice without the overwhelming legal jargon.  Taking the worry away and helping you to protect your business and minimise your risks. Aubergine offers a free initial 30 minute consultation if you have any questions or want to find out how they can help.

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Transcript
Speaker:

Welcome to the bring your product idea to Life podcast.

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This is the podcast for you if you're getting started selling products or if you'd

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like to create your own product to sell. I'm Vicki Weinberg, a product

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creation coach and Amazon expert. Every week I share friendly,

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practical advice as well as inspirational stories from small businesses.

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Let's get started.

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Hello. So today on the podcast, I'm speaking to Wendy and Laughton from

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Tonbridge Accountants. They've actually joined me on the podcast before, and I will link

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to that episode in the show notes. But I've invited them on today to talk

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about a topic that I know lots of you have questions about. And that's the

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actual structure of your business. And what I mean by that

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is whether to set up as a sole trader, whether you need to register as

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a limited company, and what each of those things mean,

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what it means in terms of compliance, what you have to do, and which

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you know is the right one to go with. Obviously, there's not a

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straight black and white answer here, but Wendy and Laughton have provided so

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much information that will hopefully help you to make the best informed decisions that

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you can. And if you want to, they offer a

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free 15 minutes call as well. So if you listen to this episode,

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you still have questions, you're still not sure what's right for you. You can book

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in a call with them and get even more advice. So wherever you

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are with your business, I think you will learn a lot from this episode. And

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I would love now to introduce you to Wendy and Laughton.

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So, hi, Wendy and Laughton. Thank you so much for being here. Thank you, Vicky,

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for having us. Oh, you're welcome. So can we start with you?

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Please give an introduction to yourselves and your business.

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I'm Wendy, and I founded the business about

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four years ago. And this is

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Laughton. I'm Laughton. I'm Wendy's

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business partner, husband, and

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we work closely together. I'm a director in the business that we support each

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other with all of our work. Brilliant. Thank

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you. And I should mention as well that you're from Tonbridge Accountants, and you've been

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on the podcast before. So thank you for coming on again.

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And I have lots of questions for you today about setting

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up as a company, some of which have come from my Facebook group members as

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well. So they're not all, I can't take credit for all of these.

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So we're going to start off with at the beginning, I guess,

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which is, can you explain to us what the difference is between

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being a sole trader, which many of us may be, and setting up as a

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limited company, I. Guess the main difference

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is in the name limited company. So it's the limited part

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and it's the limited liability which is the big difference between

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the two and what that really means. As a sole trader,

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there's no legal difference between yourself and the business.

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You are the business. A limited company is a

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completely separate entity. It exists in

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its own right. So it can borrow money, it can sign

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contracts, it's separate to the

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owners of the business and that's what most people think about when they're

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considering setting up a company is would I like there to

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be separation between me as an individual and my

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business? Yeah, that makes a lot of sense. Thank you.

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So I guess, yeah, so you're the company and you are two separate things. So

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financially your house isnt a risk if

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you owe money in your business, is that the right way of thinking of it?

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Youre two separate financial entities. Yeah, I guess in an

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extreme scenario thats exactly right. Your

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liability within the business is limited to

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your investment in that. Whereas as a sole trader

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lets say youre undertaking some risky trade and theres a high

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chance of something going wrong, somebody taking legal action against you. As

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a sole trader, if they take you to court and you're liable,

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they can take your assets, they could take your house, they could take your

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possessions. As a limited company it would be

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the company being taken to court, the company would be sued and would be liable

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and it's the company's assets that would be potentially taken, not

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yours personally. So that's where the separation.

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Yeah, we always try and explain to our clients the simplest ways. You almost start

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creating this ring, fencing yourself

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and your personal assets within the company

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versus you are the business, you

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are everything in there. Thank you. I know that

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was an extreme example that we gave there, but I think hopefully

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it helps people to see the main difference.

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So at what point might you consider setting up as a limited company? If you're

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listening now and you've been operating as a sole trader, when is the time to

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think about forming a company? That's an

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interesting question. A lot of people we speak to just

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assume there's a, there's like a numerical point and it has to be

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based on your, your income or your earnings. You know, up to this

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point sole traders, fine. After that point everyone switches to a

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limited company. Yeah, we get that a lot, isn't it? Like my

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mate said, 50k, so and so said this and that,

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but you, that's a lot more considerations that you

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have to put in, not, not just one round number.

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Yeah. So I think the answer there is really that there

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is not black and white. There isn't just an answer. There isn't a number. At

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this stage, it's supposed to be this. At that stage, it's best to change. It

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really depends on your business, on you as an individual, on your

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circumstances. There are some very, very large

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businesses that operate in, you know, chains of shops that are operating

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in a dozen different towns that are still sole traders because that's how they've

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chosen to carry on. They could have turnover in millions

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and they're still sole traders because it works for them. You can

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have very, very small, limited companies that have decided to incorporate.

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Maybe straight away they've started off as a limited

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company because it works for them. So

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it's not necessarily that one is best or the other is best.

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It really has to be taken into consideration of the circumstances

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of your business. But I think also worth

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noting is the cost of running a limited company

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with the benefits that flexibility provides you.

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We always mention to our clients that you will need to

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allow more in terms of the liquid

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company. There's just more reporting involved in there and

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to maintain the books and records. So it is a

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flexible, and it gives you that kind of benefit, ring fencing and all that,

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but still will come at a cost. And if

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your business, for example, is not generating sufficient profits or

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income to enable you to have the option,

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then that is no longer an option, despite the, you

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know. Yeah, that makes sense. It sounds like the answer is going to be

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different for everyone. And theoretically, there's nothing to stop someone setting

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up as a limited company from day one. And there's also nothing to stop someone

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operating as a sole trader for the foreseeable future. We

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also assess in the discovery call in terms of, like, whether

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they're partners or husband wives, if there's anything as well to, you

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know, consider as, from an overall perspective as well. Yeah.

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What I would add to that is we often talk to people who've

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maybe set up in one of those forms

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without giving it proper consideration and realize later on

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a different type would be better for them.

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We're not saying you can't switch between them. It's absolutely possible to change from one

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to the other and vice versa. But there's complexities around

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that. If you start as a sole trader and you want to, after a

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year, you decide to incorporate Zimmert company. There's a lot of

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complexities around that. It's going to take you a lot of admin,

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a lot of tax work, probably cost you quite a lot of money when

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thinking about it upfront. And just considering some of these points

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ahead of time might just help you get what's right for you from the very

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beginning. So I think it's important to think through what is going to be right.

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Yeah. And also to consider in terms of, I always do the extra bit where

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I drill to the business online the next three years, five years, where is the

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business going? What sort of income are you going to be generating?

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So it just gives you to, in the next three to five

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years, the solution is still going to be the right fit, rather than you're going

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to outgrow that very quickly. Then we'll go for

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the best option. Perfect. Thank you. And I'm really hoping that this episode

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will be a really good starting point for someone who's thinking about

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which option works better for them, because it sounds like it's

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very individual and there won't be one answer for everyone.

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So let's just cover, if that's okay, to give people as much information as

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they can. Are there any advantages or benefits of setting up as a limited

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company that we haven't touched on already? What we haven't

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mentioned in detail is sometimes the reputation or the

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perceived reputation, I think in some industries,

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and again, this depends really on the trade, but we've spoken to

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people where as a sole trader, they weren't necessarily

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winning certain contracts or being taken as seriously as some of

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their competitors, but when they became a limited company, it

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kind of gave them a credibility that they didn't otherwise

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have. It's not always the case, but in some industries that

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seems to be fairly common. So that could be. Yeah, that's

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really interesting. And I think we'll come on in a little while

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in a bit more detail around some of the record keeping

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topics and some of the taxation topics, which might help to, to expand on that

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a little bit. Yeah, I think so. It's such a big area, which is why

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I'm trying to break this down into such small questions, because there's just so much

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to consider. How about any

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disadvantages? When we're talking about setting up as a limited company in

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particular, are there anything we haven't covered

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that people, maybe not even a disadvantage, but just something for people to

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be aware of? I think these days it's quite easy to set

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up a limited company, isn't it? And what that means is

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often people do it without thoroughly researching it or thoroughly

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understanding what they're getting themselves into.

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Not to frighten people, but as a limited company director, you've got

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a whole load of legal obligations you have to comply with.

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There's a whole load of reporting requirements which we'll come on to in a little

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while. Yeah. You'd be liable to quite a lot of things.

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And I speak to a lot of business owners who are

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directors of limited companies, and most of them don't

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know the responsibilities of what they actually need to cover. So

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we, we have that bit of spend that time to

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educate business owners a bit more in terms of what they need to do.

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And it's so easy to register a company. I

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registered mine in a car journey, so, you know,

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but I know a bit more what it takes and what

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our responsibilities are. Yeah, I wouldn't

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necessarily say it's a disadvantage. I mean, if you understand it and

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you've got support with that, it's absolutely manageable. It's all fine, and

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it can become quite routine for you. But I think if you go into it

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not understanding what those responsibilities are and you're not aware of

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them, some things can catch you out because there is a lot to deal with

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and I think it's important to be aware of what you're getting yourself.

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I see there's this two kind of, um. There's two. There's

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two type people. The first one would be, I'll set that company and

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then they come and speak to you and like, what do I need to do?

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Um, you know, to set up this from day one, I need the whole

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accounting tag and everything. What can you tell me? What do I need

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to have before I start my business or issue my first invoice? And you get

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the other extreme one where my year, my year end is coming up.

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I've got two months left to file. What do I do? Um, it's basically

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going back all the way to try and tell them, like, you need to build

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your records up, all the bookkeeping, invoices, banks and everything.

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So it's very, it just shows you

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the level of gap between,

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you know, once a person sign up for a limited company

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director, they can go either way. Either

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they very, very well prepared from day one or two months

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or a month before deadline. It's like, what do I do? Right.

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I can see that. And hopefully this episode will help people to be very prepared

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if they decide they're going to do this. So you mentioned that setting up a

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company is actually relatively easy. So

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how would you go about doing that? A

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few options with that. The simplest

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one you go on to the gov dot UK website,

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you sort of follow the application process. It will take

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you through each step. It normally takes around 24 hours to

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get registered and it will charge you twelve pounds for

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the fee. You have to check

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whether your name is available. If there's anything

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similar that you wish to register as, then it

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might not be available and you might have to change it. It's always

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worth checking and having a couple of options just in case.

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Yeah, I think it's definitely worth that. Sets out all the steps you need

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to consider. So, you know, I think that would be a good first port of

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call for people to look at to understand what things they need to consider. That

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giving one example, one of the questions it's going to ask you is

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what would you like your registered office to be? Some people

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panic and then think, oh, I'll just put my home address in there. They don't

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always realize that once that's been entered, it's then publicly available

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information. It's on the company's house website. People looking up the

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business will be able to see their personal details.

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For some people that's absolutely fine. Other people prefer not to have

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that, so they might think about, okay, well I want

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to have a registered office address provider.

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When you get into that kind of situation, then there's companies

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that can actually, they can form the company for you, they can give you a

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registered office address, they can give you a director service address, they can even

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set you up a bank account, do your VAT registration for you all as a

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package. And often they're really, really big firms, they do thousands of

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these every week and they have the economies of scale for it to

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be really cost effective, really cost effective way of doing it.

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So it's definitely worth looking at those as well.

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Another option, I would say maybe for the more complex

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cases, it's worth talking to an accountant before you've even started the

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business, because if you've got a particular type

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of entity that you want to set up, if you need,

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for example, if you need different classes of shares or you

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need non standard articles of association, things like

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that, you know, you might have particular needs which

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can't be handled by one of those basic routes. So it's worth speaking to someone

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who's.

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Yeah, that makes a lot of sense. And I'm assuming that you're happy to

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have calls of people who haven't registered a company yet, but are

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considering it and talk people through this in more detail.

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Absolutely, yeah. And I think the other bit as

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well is they will ask you about the share

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capital, which people tend to get a bit stuck as

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well when you do the DIy thing, just one. And then, you know, in

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future, if you're going to have a business partner in, and what we've done,

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or help as well, is to change the number of shares or

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change share classes and stuff, it's all, it's all doable.

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But like we always advocate, is to

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be prepared, have a bit of offer. So it's not always a

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solution of what's going to fit you today. What's good is having that slight

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projection of like, you know, three years, for example, good start to see

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what's going to happen next. And then we can kind of make

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it, you know, cover it so that whatever

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package that you're using is going to fit

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your needs. As far as we can project,

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that makes. I hadn't even thought about the shares aspect. So is that in really

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simple terms, is that looking at how much of the business you own? So if

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you're in a partnership, how much stake you each

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have? I know it's probably a really big topic, but I'm just trying to make.

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It so, for example, using

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your two business partners working together,

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sometimes they'll set it up and they'll say, okay, we'll have one share each, one

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pound each. And then later on,

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they don't want the 50 50 split, they want to split it some other

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ratio. If you've only got two shares, you can only have either 100%

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or 50% or zero. So if you want to split

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it another way, you've got to start issuing more shares,

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which is all doable, but it's easier just to get it right to start with.

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If you think actually we might want to bring in other shareholders or we might

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want to have different ownership ratios. If

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you've got all that planned out, you can set it up in such a way

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that it facilitates that later on. You don't have all the additional

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admin down there. Yeah, you can set up as 101

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pound share. I've actually seen we accidentally set up as

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a thousand. And then obviously you have to pay that thousand as

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your capital thing. But sometimes, you know, when you do it

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on the form and things that kind of like accidental extra zero and stuff, they

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all will mean something eventually. I would strongly

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suggest that the first time you're thinking about an answer to these questions shouldn't

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be when you're going through the website, answering it live. You know, you should have

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gone through them beforehand, done a little bit of research, maybe

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spoken to a professional, if you need some more guidance and,

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you know, when you go to register it, know what you're doing and why you're

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doing it so that you get it all right. That makes sense because these

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are really big decisions and it sounds like, yes, everything can be

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changed down the line to get changed. And sometimes

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people get a bit, you know, not thrilled about

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having to pay to fix things or to upgrade and things. And, you know, it

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can, it can all be done right and the first time to the

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best knowledge that you have, not a problem at all.

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Okay, that's helpful. Thank you.

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So let's talk about the accounting side now. So

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when it comes to accounts and I wonder if we need to talk about

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sole trade, unlimited companies separately, I'd love to talk

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about what you need to know and what you need to do to ensure that

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you're always compliant, because I think should we

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talk about for a sole trader, first of all, if that's okay. And then we'll

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move to talk about a limited company company, just so people have an idea of

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what's expected and what's required. So if you're a sole

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trader, what are your

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compliance things are there, what do you have to be sure to

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do?

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So in a way, there's a lot of similarities.

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At the very basic level,

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keeping proper business records, whether you're a sole trader or limited company, is

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the fundamental basis.

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So how about having proper books and records? Having a record

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of all the income, all the expenditure, all the assets, all the

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liabilities, any contracts you've entered into,

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that would be the same for both. So it would absolutely apply to

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a sole trader. Yeah. And that's the most important one. And

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people neglect that. That's your topic, the

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top, like, whatever you call it, the most neglected area and stuff. You'd be

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surprised, but, yeah, people neglect that.

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But that information is going to tell how

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much you've invoiced or how much your turnover is. They all link to the

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amount of tax that you will be paying. So if you haven't kept any tab

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on it, chances are you haven't put any aside of

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the money that you owe to HR mastee for the taxi.

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Right. So however you're operating your company

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or social or business. Yeah, or business. So whether. Yes, however you're probably. Whether

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it's a company or whether it's. As a sole trader, I guess the key thing

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here is keep records of everything related to

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your money. Yeah. The more the

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better. You can't have too much detail. I think this is common

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misunderstanding. When it comes to sole traders, that, oh, it's a sole trader,

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therefore it's very, very simple. And I've only got to do something

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annually. Quite often people will do nothing for a whole

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year, and they'll come to putting their accounts together or putting

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their numbers together, and it'll be scrapping around to

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find all the information, having not done it month by month,

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week by week. It's much easier to do that as

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you go along. It is possible to reconstruct it all later, but you'll have

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a much better view of what's happened if you do it weekly or monthly

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or at minimum, quarterly.

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Laughton's very good at reconstructing his.

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I imagine it's very hard to go back a year, for example,

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and we. Pull up from the bank account,

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but you get that whole sole trader where they use their

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personal, you see a lot of coffee

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takeaways and everything.

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Yeah, that must be hard in that situation, actually. So work out what's a business

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expense and what's a personal expense.

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Yeah, it can be complicated, especially if they're not well

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separated. But I think what a lot of people don't realize as sole

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traders, the advertisements

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that are sort of promoting

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HMRC and some of the software that tries to facilitate

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people meeting HMRC requirements, they kind of, they try to make

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it as simple and as digestible for people as they can.

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What's often overlooked is that as a sole trader, you still need to prepare a

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set of accounts every year. Not as detailed as a limited company set

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of accounts, but you are still expected to prepare a set of accounts

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that allow you to determine the business profit

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for that year. That's then used as a starting

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point for your tax work, which comes later.

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So in a way, they're both the same, that you have to prepare a set

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of accounts for business. They're just prepared to a different

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standard. And I think people overlook that because there is,

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for example, with a sole trader, you have cash accounting, which is a

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relatively new thing for the

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smaller businesses where they don't have to prepare a

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traditional set of accounts, they can just record the

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income and expense of the business on a cash basis. It's

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simplified. It's designed to help small businesses. So

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sets of accounts prepared on that basis would look a lot different.

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Yeah, and we prepare it from an accruals point of

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view. A lot of people, you know, when you

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diy, you don't really think how it's going to

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impact your tax, because when you do like the

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approvals of matching to match your revenue to the period and

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all that. It could be a case of your tax figure could potentially

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change. Depends on how you, how you account for them.

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Yeah. So I think it's important to understand whichever

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business format you go for to understand what your reporting

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requirements are, the fact you are going to have to prepare accounts, the fact that

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the basis you choose can impact what's reported and

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when, and therefore lead to the timing of

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when taxes are paid. That's why when you prepare your

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tax return, trader clients, they can vary

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by quite a bit compared to DIY. Right? Like they might end up with

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20k tax bill versus like, you know, much lesser or

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depending on what you account for, the tax adjustment, what's

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allowable, what's not. Yeah, but if a sole trader's preparing a full

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set of accounts that they're supposed to follow generally accepted

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accounting principles, it's a set of rules that an accountant would understand

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the history of those. If people haven't had experience

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of that, they might not understand how to capture certain transactions, how they should be

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recorded, or they might not record them at all. Now, things

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like when people take loans for business, they don't always

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capture those. So they don't realize that maybe some of the loan interest they've made

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could be a deductible expense for them they've not taken credit for.

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So they may be paid tax on profits that are higher than they should because

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they haven't thought about including these things. Yeah. You tend to

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get those where they

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just pick up like say five most common

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expenses you can deduct for tax and just put it

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when they did the tax return, you know, a bit of like

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maybe asking friends or like groups and things like, oh, what do

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I do? But they don't assess it based on. Is that the most favorable

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method for you and your business? It's just more of like, this is the

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quick, quick tip is that you got to look at it more in depth. I

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think that's where, that's where we, you know, that's where we come in.

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I think just coming back to your original question,

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in terms of, for the sole trader, what's required? They have to

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prepare the accounts or the numbers as the starting point tax, but they don't actually

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have to file those accounts. They file the tax return. Tax

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return is the main item that gets reported.

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So all of the figures in there have to be somehow substantiated, but the

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only thing that's filed is the tax return. That makes sense, but

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I guess you need to have all of those figures that sit behind it, because

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presumably HMRC could come to you and say, we want to see

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all of your financial details. We want to see the figures.

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Exactly. They could come and say, where does that number

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in that box come from? And the ideal answer should be it

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ties into this set of accounts that's been prepared over here in accordance with

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accounting standards, which then in turn ties through to the set

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of underlying books and records that's all nicely reconciled, tied through

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to bank statements, tied through to other records. And it all matches together and it

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all maps through. Yeah. Basically you need to be able to substantiate,

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for example, your mileage claim. It

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should be a little calculations of where you've traveled for business, how many miles

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you've logged on and stuff. But I still see people

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chatting and say, I've just put a wrong number in.

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Yeah. That makes sense. I guess it's

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good just for peace of mind to know that any figures you're putting in, you

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have the data to back up where that figure came from and it's

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compliant. Obviously, that doesn't necessarily

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mean having a really, really complex way to record all of this. It can be

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captured in quite a simple way. If you're not using software, you can capture it

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in a spreadsheet or even a set of books. And the main thing is

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having something written down regularly. So you've

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got that backup. Just put a little notebook in your car.

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So it doesn't really matter what system you're using, but you need some kind of

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a system, I guess, is the takeaway.

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So it sounds like actually, when it comes to compliance, there

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aren't huge differences between being a sole trade unlimited company,

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I think, in that you both have to do

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reporting. So should we talk about limited

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companies in more detail? And what kind of

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annual paperwork or accounting do you have to submit?

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Is it a lot more than if you're a sole trader

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in terms of what's actually submitted? Yes, it is going to be a lot more.

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So I think we've talked about similarities so that, you know, they're both going to

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have a set of books and records. They're both going to have those, a

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record of all the key financial transactions. They're both going to have a set of

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accounts. The key difference between the accounts is the

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limited company accounts. Most of the time they're going to be

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more complex in that they have to follow set

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of company law, so set of company legal

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rules. They have to follow accounting standards, which are published

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and defined, and that often can include not

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just the numbers, but all of the disclosure requirements that go around

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those numbers. So all of the accounting policies,

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details of how certain transactions have been handled,

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certain disclosures that are required transactions

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have related parties, that kind of thing. There's always rules around what has to

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be included in there. They have to be

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presented in a certain format, measured in a certain way,

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so that a key part of a limited company set of accounts will

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be everything that comes after the numbers,

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all the notes and everything else is where all the detail lies

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and they, and they get filed. So with the sole trader, they don't have to

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file their accounts with companies House. You know, a limited company has to

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actually file those accounts with companies house

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every year by a certain date. And if it's not done,

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it's a breach of the rules and there's going to be penalties issued.

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So there. And those penalties that they're increasing as well over

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time, they're really cracking down and making

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sure people do this well, it's going to be more severe

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for non compliance in the future.

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In addition to the accounts that are filed, a

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company also has to file a tax return. So in the same way a sole

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trader would file a tax return, a company files its own tax return,

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which is linked directly to its accounts.

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One other thing a company has to do that sole trader wouldn't,

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would be the annual confirmation statement. That's another company's house

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filing requirement. And it includes things like

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details of directors, the registered office,

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shareholding, people with significant control in the

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business. That all has to be logged with companies House. It has to be

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kept up to date throughout the year. And then on an annual

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basis, the directors have to submit

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the statement to basically confirm that the

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details held by companies House are accurate.

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Sounds like there's a lot more to file as a limited company.

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Can you do this yourself, or do you really need an accountant

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to do all of this for you?

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Sorry for the very blunt question, but I think it's a question that I've been

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asked, so I'm put in it. Do you? It's a really good question.

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I think accounting, the way I look at it, it's the same as anything else.

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I mean, you know, if you're talking about electricals, you know,

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could you rewire your own house? Well, of course you could. Should you?

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Possibly. Not if you don't know what you're doing. And it's the same with accounts.

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You could do all of this yourself if you know

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what you're doing and you're confident in your ability to get it

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right. But then, by all means do it yourself. But if

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you know the rules are really, really complex, if you

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don't, if you've had no training in accounts, you don't understand

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the rules. It's often far better to have a professional

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do it for you purely because

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they'll do it quickly, they'll do it right, they'll

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make sure that you've thought of everything and that things haven't been left

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out. And it just generally makes your life easier.

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You know, if you're running the business, you've probably got 100 things you could do

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every day. Are you going to spend all of your time worrying about

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your bookkeeping, your accounting and getting your company's house filing

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done? When you've got customers to deal with, you've got new projects

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that you're trying to get off the ground, you've got all of that other stuff

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that needs your time. The accounts have to be tagged as

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well so that I DRl tagging

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so you will get caught with our software

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because it needs to link up between companies. House.

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HMRC. That's a good point, Wendy. Like the

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practical side of it as well. It's like, you know, you could put the numbers

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together, but in terms of actually putting that in the format that's needed to be

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filed, filing it at the right place, at the right time, in the right format,

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so that it doesn't get rejected or

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fail to adhere to all the rules and regulations,

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so many things could go wrong. It's better. It is often better just to have

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a professional. Yeah. And I'm also thinking there must be things

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like working with an accountant means you can be very clear

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on what you can claim for what you can't and just

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making sure that you're 100% within the rules of what's

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allowed, because I think, I'm sure you must have come across

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clients who, you know, they're not sure on. Okay, can I claim for this? Can

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I claim for that? And I think the benefit for me for working with

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you guys is that I can ask the question and know

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that the answer I get is correct and I'm not going to get into trouble,

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basically, because I think that is something that people genuinely worry about, is that

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you want to be complying and you want to know

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that 100% certainty that what I'm doing is correct.

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For me, anyway. And I'm sure most others feel

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similar. And also the. I think the

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biggest take from this is you want to be able to

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sleep at night, right? Yeah. So when

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you try that DIY road, you're not going to

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fulfill that. And it's not just one night,

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could be for a very long time. And if the numbers

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on correct, for example, then you would

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be, you might, you might not make the best

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decision for your business,

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how to grow it. And, you know, I think we'll cover later in terms of

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things like how to pay yourself or extract profit

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from business and things. It's a whole,

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it's just that, you know, that key starting point that is just going to

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like, basically for me, I look at it like he's just gone downhill.

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I mean, coming back to the point on things like allowable expenses,

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you're going to have a couple of situations there. You're going to have really

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common ones where there's, you know, decades worth of tax

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law, case law around it. And there's probably a very clear

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answer and maybe someone just doesn't know. They've never come across it. An accountant should

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be able to give you that straight away.

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Yeah, but the way technology is advancing, the way things are

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moving, there's often really new stuff where someone might say, can I

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claim this? And the answer might be, do you know what? That's a brilliant question.

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I have no idea. There's no tax law on it. It's never been to court.

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No one's ever argued it with HMRC. It's completely brand new.

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Here's what we think based on

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what's gone, similar things that have gone on in the past. But let's

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help you get an answer on that. Maybe we can talk to HMRC and get

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some sort of agreement on from them in advance. And

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we also justify amongst each other, like, you know, how would we

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argue it? You've got two Accountants here, so it's quite

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handy. But, like, things are

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getting, like, you get new, new things coming in. And I

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think the recent years, like, the new things that we are

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seeing a lot more is on, like content creators or

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influencers. So the common

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deductible or allowable is

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different. And I think some of even the tax cases are

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not. Yeah, there hasn't been any yet.

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It's so new that in HMRC, if they think, you

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know, these tax legal cases can take years to go through court

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systems, tribunals, appeals and all of that. So to get a straight

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answer on new stuff, you're often getting it several years after you need

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it. But in those cases, talking to someone who kind of knows how the system

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works, it can give you sort of what the general rules

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are and help you to apply that to your

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situation and to justify it, because at the end of the day, if you're

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entering into it in the right spirit, you're doing the right thing. You can justify

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that, then you've probably got a good case. So we help

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people navigate their way through, through those newer things as well. You need to be

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prepared that if you get, we are always, if you get

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that email or the text from HMRC, can you

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justify this? What have you done? This. We can, you need to be able

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to. I think that's, that's always the end game. Like, you know, if we get

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asked, what are we going to tell them? Yeah, as you

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said before, Wendy, it's about being able to sleep at night, isn't it? And having

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that peace of mind that you are doing the right thing

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with the right intentions. And I think on a similar kind

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of subject, we were talking about how about

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the tax benefits for sole trader and

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for a limited company? Are there any.

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Yeah, are there any benefits or is there one type of

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business that would be better? So

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that, that depends on a lot of different things. So maybe that

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maybe what we can do is sort of COVID how each of them is

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taxed and a lot of this is going to come into the

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role of the person running business and

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they're an employee, what their status is. So I

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appreciate this is a big, this is a big question. So

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should we start with thinking about a sole trader and

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how, and how that works first?

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Yeah, maybe before we

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jump into that, I can start with a very basic rule

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of thumb. Right. If you're going to take all of the profits out of the

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business and, you know, you don't want to retain anything, you just want to, you

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just want to take everything you earn. For a lot of small businesses, there's

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not going to be, in reality, when you add it all up, there's not much

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difference between the two. You know,

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business earning 60, 70,000 pounds a year, that difference could

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be, it could be a few hundred pounds. And

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often the additional admin maybe isn't

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worth the tax sake. You sort of have to balance it all

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out is going down this path that we're worth. So, but

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that's if you're taking everything out. I mean, the one,

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the one great thing about limited companies is, but it comes back to what we're

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talking about at the start because it's a separate entity and because it's completely

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its own thing. Any money earned by the limited

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company, it's subject to corporation tax, but it

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stays within the company unless it's

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drawn down by the shareholders.

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So if you're going to leave the money in the business.

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It is massively tax advantageous to have a limited company.

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Which leads me straight on to answering your original question,

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sole trader and how they tax. Sole trader, you're taxed on everything you

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own. It doesn't matter what cash you take out the business,

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you work out your profits for the year, whatever that profit is, you get

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taxed on that profit. You can't decide to keep some of it in the

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business or to not take all of it. It's

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100% your tax on everything.

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So it gives you less flexibility in terms of, you know, if you have a

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really, really good year, you've made great profits, you're just automatically going to be taxed

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on all of that. It's completely different

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within a limited company because

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those earnings would be earned within the company. The company would pay corporation

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tax, which can be lower if it's just been increased recently,

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but it's traditionally it's been 19% the last few years,

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lower than the rate you'd pay on, sort of pay on

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earnings. But yeah, if you're not paying that out as

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dividends, it stays within the company. So if you're a growing business, if you

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investing in the future of business, you're buying plant equipment,

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machinery, websites, other things,

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you know, keeping that in the business, using it to invest,

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it's going to save you a lot of tax having limited

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structure. So maybe we should come on to

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how do you get the money out of a limited company then? If it's separate

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and if the company earns the money, it's paid the

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corporation tax on it, you've then got a pot of retained

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earnings there. How do you access that? Well, as a

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shareholder you can pay yourself a dividend

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and that's basically a distribution of earnings coming out of this after

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tax money to you as a shareholder, that is

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then taxable income on you as an individual. But the tax rates

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on dividends tend to be a lot lower. So the basic rate

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you're talking about. And

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what about a salary? So if you have a limited company,

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are you an employee of that company and do you, should

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you pay yourself a salary and if so, how is that

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tax? Sorry, I know there's a few questions in one. No,

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that's fine. You're not

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automatically an employee. I think if you

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have a limited company and you're the director, the directorship,

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you're considered to be an office holder, so you're not necessarily an

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employee. Again, as the

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office holder, you perform your responsibilities as a director.

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So if you're getting paid for that, then that would be

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treated as if you're getting a salary or wage. If

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you're just a one man band and you're doing everything, doing all the work for

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the company, then you probably are going to be considered an employee as

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well.

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A lot of this comes down to employment law and whether you've got a

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contract. I won't go into all of that now, but

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basically you're not automatically an employee that you very well could

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be. But yeah, any money that you

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take as a wage or as earnings, that's going to go through payroll, that's going

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to be subject to tax and national insurement.

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That's a bit of a complex landscape in that there's certain thresholds for

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taxes, threshold financial insurance. There's different rates that apply at different

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levels. It's almost like a big puzzle

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where you have to work out what's best for you and your circumstances.

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All of those salary payments or wage payments are going to be deductible for

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the company against its corporation tax.

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So if you, if you, if you had a load of profits,

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you pays them all out as salary. You know, maybe the

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company then doesn't have any profit because you've paid it all out.

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So the company wouldn't pay any corporation tax. But then as an

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individual, you have a huge salary, you're going to be paying personal tax.

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That's probably not going to be the most efficient.

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So what people tend to do, limited company

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owner, managers, directors, they tend to pay a smaller salary

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supplemented by dividends because you get the best of both worlds.

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Then you get the tax deductibility of the salary for the

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company, which reduces the corporation tax. But you also,

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then you're getting that income.

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You're using your tax thresholds, your allowances in the best way. You're

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using the dividends in the best way to kind of, to minimize the taxes

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paid overall. That can be configured

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in a way that suits people. Because again, it really comes down to your

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circumstances and, you know, what salary you might need

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in certain situations. And we do a lot for

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our clients in terms of configuring what is the most

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tax efficient way to pay themselves after business.

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And you always have to, you know, take into

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account for what is their personal circumstances.

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Like some, some owners, they

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have a set amount that they have to pay themselves in terms of, to pay

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the bills and all that, so that the dividend part,

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the dividend way might not be, you know,

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might not cover that alone. And there are

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rules around issuing dividends as well. So some, I think

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it really depends on what they actually need. And you have some people

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who say, I know them, you know, what's effective would be

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say paying yourself like a thousand pounds a month. But you have people who say,

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I need, I need 2500 pounds or 3000. It

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all, it really depends because you then get some people who

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might need a bit more in terms of if you have a mortgage or anything.

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So it's all very, that's why you have to be fitted to

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the circumstances. So there's no mortgage. Yeah. And you don't, again, you

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don't want, you know, people come to you and just say, get a mortgage

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tomorrow. What can I do? And it's like you have to put this all

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in plan at least a year before, two years before.

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So this is where working with an accountant really

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helps you to plan. We always try and drill

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down in terms of what I've clients, you know, what their personal goals as

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well, what they're trying to achieve. You have people like, oh, I'm trying to move

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house in the next couple of years and things. And we put that into mind

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and like, okay, are you thinking about that? Rather than just like,

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you know, I'll just give you a solution at this point. It could be,

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it could be a very expensive one if it's not planned properly.

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Yeah, that makes a lot of sense, I think. Pardon?

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I was just going to say just looking at the similarities though in terms

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of if you're employing people, if you're employing other people,

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the way the payroll process would work would be exactly the same. So whether you're

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a sole trader or a limited company, if you employ other people need to

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pay their wages, you have to register for payroll, you have to make your monthly

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submissions. The record keeping around that would

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be the same for both. So coming back to the question we talked

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about earlier, what, you know, the reporting requirements, the differences. If

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you're employing people, your reporting requirements for that would be the same for both

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formats. So it doesn't really make too much difference what kind of setup

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you have. Just as a sole trader,

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there's no separation between you and the business. So you can't pay yourself a salary,

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you can pay other people, you can employ family members, but you can't pay

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yourself. Whereas as a limited company

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director, because the company is separate to you as a person, you can pay

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yourself because you're two different things.

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That makes sense. Thank you. I mean, the main thing I'm getting from this is

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to be forward thinking and think about your life as well as your

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business and what you need now and what you might need in the

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future. DIY.

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Yes. And speaking of being

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forward thinking, I've got one final question to end on,

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which is if you're, when you're looking ahead in the future for your plans,

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if your plan is to eventually sell the business

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is sole trade diversity limited company, which

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would be best in that scenario? If you know that actually that's your

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ultimate goal? That's a really good

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question. There's very few people

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who plan that far ahead. They kind of, you know, when they're

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setting up the structure with no arch. I'm setting this up ultimately to set it.

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You get a few of those.

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I think when it comes to selling it, again, it's one of these.

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It depends, because it depends on,

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there's so many different elements to it.

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It depends on who you're selling to, what they're going to want to buy. I

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mean, ultimately, as a sole trader,

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you're just selling, you're selling the trades and assets of the business,

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whereas if you're a ship, if you're a limited company, you're selling the

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shares that you own as a shareholder.

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There can be different tax treatments depending on how much you

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own, how long you've held certain assets or shares for.

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It gets very, very complicated. But what I would say

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is thinking about that forward planning,

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if you know you're going to be selling, it's a.

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I would say definitely they need professional help and it's something you want to talk

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about not just days or weeks ahead, but

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probably. Yeah, probably years ahead. I'm thinking of, if someone's

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thinking of retiring, I'm thinking of retiring. I'm going to sell my business in a

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couple of years, start thinking about it now. It can be

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packaged up in such a way to be the most tax effective for that

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situation, for those circumstances. And it's not necessarily that

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one's better than the other or one's going to. It'll be

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often you have to factor in the circumstances of the buyer,

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their own personal tax situation, what they might want, what other

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businesses they have. It can get very complicated

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very quickly. Yeah. And there are various circumstances of

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why people want to sell their business,

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and also it comes back to

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the performance of the business or what sort of

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money the business is generating for the next few years.

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But the core of it as well is always going to be in terms

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of when you get Accountants to work into it or to value it

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or try and structure the deal, they're always going to be looking at the books

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and records. So again, a good

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bookkeeping practice would be if you've got

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everything, and some people even have monthly

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management accounts and things like that. So it really

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adds on to that. So if, if a client came to me and say, you

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know this, I've set up this business next five years, this is, I'm going to

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sell it, we would almost put like a bit

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more comprehensive

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package that they would need because you're going to be

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subject to like more scrutiny, for example, or people just

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want to know more transparency or disclosure, then you will,

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you know, your business would. The way you do it will be very different.

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You pay yourself, almost like even things of paying yourself or how you run

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the business, it's all different because you want to make sure that

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someone else looking to buy a business that's going to be a viable business

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and not just a little like, you know, hobby package doing company sort of thing

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where buy it when I have to actually pay people

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and put the fact in all the costs there, it is no

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longer profitable, then what a lot of. People don't always realize

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as well, if you're buying a limited company because the

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company is a completely separate thing, you're taking over it as a new owner.

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You're buying the entire history, reputation of the company and everything

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that's gone before. So if the previous

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owners or previous people running the business have, haven't done

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things right in the past, you want to make sure that's not going to

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come back to bite you as an owner. And suddenly there's customers coming out of

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the woodwork with complaints about things that

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you didn't even realize existed. That's when it comes down to

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having really well structured contracts and having the right legal people

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involved, all of that stuff. But it

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takes a lot of planning. There's a lot of different elements. Like Wendy said,

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I think the key thing maybe isn't the structure. The key thing is maybe

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being able to demonstrate that you've got a really good business that's marketable. You can

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only do that with good numbers. And that doesn't matter your structure.

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If you keep in the good records, you've got the good figures to be able

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to present to potential buyers. That's more important than you.

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That makes sense. That's just another reason. Of course, there are lots of reasons. That's

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just another reason to make sure that your accounting is correct

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and you have records and you can provide all of this. Because presumably if you

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were ever selling your business, one of the first things someone will say is, can

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I see your accounts? And so just another reason to add to

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all the other reasons for having really good accounts.

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Well, thank you so much for all of this.

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You've shared such a lot and I think you have really helped make a lot

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of this clearer. I think what I'm taking from it is that it is still

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very complex and the answer will be different for everybody

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listening. And probably the best thing is to

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seek advice. So I will put a link in the show notes for

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people if they want to book a discovery call with you to talk a bit

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more about their business, their circumstances. And before

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we wrap up, I would just like to know, is there one thing that you

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would really like people to take away from this episode? What would that be?

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For me, it would be, don't rush into anything, have a think

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about it and plan it before you do it.

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Once you've made a mistake, it's a lot harder to fix than just getting it

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right. The first time for me would be the

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classic bookkeeping. Because we see so many

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people jumping into things and not having proper

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records, it always seemed very like almost very

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tiny little advice, or, you know, something like, don't forget the poly or anything,

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or don't forget anything. But this is so neglected

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and, you know, it's very important and it doesn't take

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a lot for people to make

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sure they have it. Sometimes I speak to, you know, if I go to

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networking or anything, I speak to business owners and I get that, like, oh, I'm

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not ready yet, I'll come to you and stuff. But I've said it would be

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worth just having that ten minutes. I could tell you what

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basic things you need, even if you're using spreadsheet or there are a lot of

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very economical solutions, software for sole

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traders, for example. And it's actually not

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that, not that scary to use. And by having

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something like that sorted, you can

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then focus on how to

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generate more sales for your business or how to get better suppliers or anything like

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that. Yeah, you don't have to. I'll wait till I get to that

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point. Like, just, yeah, that's great advice. Thank

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you. And, yeah, personally, I just feel it's really nice just to know that that

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side is taken care of. You can't get on with other things if you know

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that all your accounts is in

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hand. So thank you both so much for your time and for

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everything you shared. No worries. Thank

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you. Thank you so much for listening. Right

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to the end of this episode, do remember that you can get the fullback catalogue

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and lots of free resources on my website, vickywineberg.com. Please

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do remember to rate and review this episode if you've enjoyed it, and

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also share it with a friend who you think might find it useful. Thank you

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again and see you next week.