If you’re thinking of running your own business, you’re in good company. The most recent statistics show that 660,000 companies were formed in 2016, and this looks to keep rising. So, in the final instalment of our four-part series on running a small business, we take a look at what you need to know if you’re thinking of going solo.
Step 1: Sole trader, limited company or business partnership?
What sort of company do you want to form? This depends on a number of factors, including the work you do, whether you’re setting it up with someone else, and how you want to manage your tax obligations (see below). It’s worth getting advice from an accountant if you’re in any doubt about your decision.
A sole trader is someone who runs their own business as an individual and is self-employed. Although you can keep any profits your business makes - after paying tax on them - you’re also responsible for any losses.
A limited company is a separate legal entity from the person or people who run it. Company finances are kept separate to personal finances, which means profits can stay within the company – or be shared out amongst company directors as dividends – and the company, rather than the individual, is liable for any losses. However, there’s more paperwork and additional responsibilities for company directors.
A business partnership is when two or more people become co-owners of a company. They share the profits and liabilities and make business decisions together. You might also consider a limited liability partnership (LLP), which is similar in structure to a business partnership but formed as a legal entity in itself, therefore responsibility for debts and liabilities lie with the company rather than the individuals.
Step 2: Registering your business
Once you know what type of company you want to run, you need to set it up and register it. You can do this by yourself on the GOV.UK website or with help from an accountant.
As a sole trader, you’ll need to speak to HMRC and register yourself for Self Assessment tax returns. You’ll also have to choose a company name, although you won’t need to register this.
If you’re starting a limited company, you’ll need to choose your company name and register this with Companies House. You’ll also need to supply other information including a company address and the name of at least one director. Also, you can’t choose a name that’s the same or similar to one that’s already in use, so it’s worth searching the register before you set your heart on something.
For business partnerships, you’ll need to choose a company name and register all partners’ details with HMRC. Also, one partner must be nominated to manage record-keeping and tax returns. If you’re setting up an LLP, you’ll also need to provide some additional details too.
Step 3: Get ready to do business
Before you start trading, it’s a good idea to open a business bank account. This keeps your company incomings and outgoings separate to your personal affairs, making things a lot easier when it comes to the end of the tax year. It’s also worth making sure you’re covered by insurance should anything happen.
You might want to look into accountancy software to help log expenses and invoices, and invest in a filing system for any receipts or paperwork. You’ll need these at tax return time, so you must keep a strict record of everything. And before you start spending money on your business account, make sure you know what can and can’t be claimed for the type of work you do. Every year, the list of allowable expenses changes, so speak to your accountant or HMRC to be on the safe side.
Step 4: Know your tax obligations
Your tax obligations differ depending on what type of company you run and are very different to the PAYE system.
Sole traders must submit an annual Self Assessment tax return and also pay their National Insurance contributions. Your deadlines depend on how you choose to file your paperwork. Paper tax returns must be submitted by 31 October following the end of the tax year (6 April - 5 April) and online tax returns have until 31 January the following year – which is also the same date by which you must pay any tax you owe.
Limited companies must file an annual Company Tax Return. Company tax years can run separately to the regular tax year – based on when you form your company – which means deadlines depend on your individual situation. Annually, you’ll need to pay your Corporation Tax bill as well as your personal tax which includes any salary or dividends paid through the company. And you’ll only be liable for National Insurance contributions if you pay yourself salary and bonuses over the HMRC threshold, or if you have any employees. As limited company tax liabilities can be complicated to get your head around when you first start out, it’s worth speaking to your accountant or HMRC.
All parties in a business partnership or LLP are classed as self-employed for tax purposes, therefore each person must file an individual tax return much like a sole trader. They are also liable for National Insurance contributions. However, neither type of partnership is generally subject to corporation tax.
Step 5: Do you need to charge VAT?
If you want to charge VAT, you must be VAT registered. Although this can be a voluntary registration – some people find it beneficial if they have a lot of business outgoings – if your annual turnover exceeds the VAT threshold (£85,000 in the 2017-18 tax year) you must do it.
Being VAT registered means you charge VAT (currently 20%) on goods and services you sell to customers, and can reclaim VAT paid out on goods and services bought for your company. You’ll need to complete quarterly VAT returns in addition to your other tax obligations. How much VAT you owe depends on how much VAT you’ve paid out in goods and services and how much VAT you’ve received in supplier or customer payments. You may end up owing money to HMRC, or – if you’ve paid out more than you’ve received – you could end up getting a VAT refund.
Step 6: IR35 and your employment status
Finally, although everyone should be aware of IR35, this is of particular importance to limited companies.
IR35 is a tax legislation designed to prevent people working as though they are an employee of another company while being paid through their own company in order to benefit from the associated tax breaks. To check your status, take the test on HMRC’s website.
Although setting up your own company can feel very admin-heavy to start with, this is often outweighed by the benefits of having full control over your work life. The most important thing is to ensure you manage your key company responsibilities: finance, tax and legal obligations – and spend time developing new revenue streams in order to grow the business. From working where you like, when you like, to enjoying the freedom of setting your own career path, many people say once they’ve had a taste of being their own boss they don’t want to go back.
Other articles in the series on running a small business: