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A potential legal reform might enable sole traders to protect some or all of their assets from creditors without having to incorporate a company,according to a corporate lawyer.
“All new business owners should consider the most appropriate trading vehicle for their business,” says Philip Round, a partner in the Wolverhampton office of George Green LLP. “Many sole traders choose to form a company in order to benefit from limited liability status. Incorporation does, however, bring additional compliance burdens. The Office of Tax Simplification is currently consulting on the possibility of making available to sole traders the status of Sole Enterprise with Protected Assets (SEPA). Individuals who register as a SEPA would be able to safeguard certain assets against claims relating to their business, removing the necessity to incorporate.”
Mr Round explains that such a protection is likely to be confined to the sole trader’s main residence. “The OTS feels that most traders are principally concerned about the risk of losing their home, and that provided this is protected, they are likely to opt for SEPA status so that they can continue to benefit from the simpler self-employed tax system rather than the corporation tax regime applicable to companies.”
Mr Round continues, “the protected status is likely to be subject to certain limitations. Those businesses who contract with the public sector may have to form a company given that public authorities tend to prefer to deal with a contractor with a separate legal status. Furthermore, those creditors who require a mortgage over a trader’s residence to secure the debts of the business are unlikely to be prevented from doing so. Individuals who are bankrupt or disqualified from acting as directors will almost certainly be prevented from registering as a SEPA”.
Mr Round concludes, “the consultation is still in its early stages and one cannot therefore be entirely certain how the proposed changes will take shape. Any measure designed to reduce the burdens on small businesses is nevertheless to be welcome. It may not, however, be the most appropriate vehicle for all sole traders, who should seek legal and tax advice on the most suitable structure for their businesses.”