How to pay myself as a sole trader?

[Wouter van Marle]

On 25 Apr 08, at 23:18, Tom Badran wrote:

> I'm registered as a sole trader in the uk, and up till now all my 
> income has
> just gone straight into my business account (which is also an account 
> under
> assets in my gnucash accounts).

As I understand you are not a limited company, right?
In that case normally you ARE the company. So profit for the company is 
income for you, for the tax-man that is. All liabilities of the company 
are your personal liabilities as well.

This means "paying yourself" as in paying yourself a salary is 
impossible, you can however draw money from your company account, 
normally booked against an equity account. That can be the same equity 
account you used for your starting capital. You can see that this way 
your drawings from the company account do not change the company's 
profit. This in contrast to salary you may pay an employee - that is an 
expense.

If however you own a limited company, then the company is a different 
entity (a legal person), and you may pay yourself a salary and 
dividends on the shares you hold. Both of course are optional. In that 
case you could become an employee of your own company, with all the tax 
consequences of such.

In Hong Kong (presumably highly similar to UK as the laws here are 
based on UK laws), a sole proprietorship - I run one - is the same as 
you for the tax man. That means for income tax you write down the 
profits of your company as income, in addition to any other sources of 
income you may have. in Hong Kong you are then normally taxed as 
individual, not as business.

And how to book income taxes paid... I still don't know really. I book 
it against equity, as the tax amount is based on your profit, and 
booking the tax as expense changes the profit on which it is based. 
That makes things a bit confusing to me. GnuCash doesn't allow for 
"profit before tax" and "profit after tax" as far as I know. Booking it 
against equity also makes sense to me when considering it is YOU that 
is being taxed, not the company. The company provides your income (the 
profit made from your trade), and that income is taxed. Just like in 
case you would receive a salary as employee.

Wouter.

>
> However i now need to transfer money from here to my personal account
> (essentially paying myself as far as i can tell). Im not sure how best 
> to
> represent this in gnucash however. Should i set myself as the only 
> employee
> and pay myself like that, or should i set up another asset account 
> called
> "personal" or something and just do direct transfers from 
> business->personal
> every time i use money for non business transactions, or something 
> else?
>
> Also, with regards to national insurance (and presumably income tax 
> when i
> get round to doing that) i currently have that just going straight 
> into an
> expense account under Expenses->Taxes->NI. I presume thats the best 
> way of
> doing that as it was closest to the default set of business accoutns 
> gnucash
> sets up, but if this would be considered wrong by an accountant, what 
> would
> be best? I only ask as the tax is on me directly rather than the 
> business,
> so im not 100% how i should represent that.
>
> Thanks for the help
>
> Tom
>
> -- 
> Tom Badran
> http://badrunner.net
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