David Ingall offers a practical step by step guide for entrepreneurs setting up their first business.
Starting your own business is stressful, particularly for someone setting up for the first time. There is a bewildering array of information out there, and it’s important to concentrate first on what you actually need, rather than the ‘optional extras’ people are attempting to sell you. There are a number of considerations which entrepreneurs need to be aware of at the initial stage of forming a company – and making the right decisions now will make the early months of running your fledgling business a little easier.
Selecting a legal entity
Once you have had a new business idea, the next stage is deciding what form the business will take – a sole trader, partnership, limited company or limited liability partnership (LLP) – all of which have their own advantages and disadvantages.
Operating as a sole trader is the simplest option as, other than compliance with income tax regulations, there are no further rules on what records must be kept. A partnership is also a relatively simple arrangement but it requires an understanding between the partners about the nature of their agreement (it may be best to do this in writing) and the partnership will need to be dissolved if one of the partners dies or steps down from their role.
A limited company is a separate legal entity from its shareholders or directors, meaning they are not personally liable for all the company’s debts. However, the directors have certain legal obligations to the company, its shareholders and its creditors, while the company’s accounts have to be filed with Companies House in a specified format, where they are then open to public inspection. There are legal requirements to keep accounting records, file separate tax returns and treat the directors as employees.
An LLP is a partnership, but with limited liability for the partners, providing some protection if the business fails. As with a limited company, there is an obligation to file copies of the accounts at Companies House and to have on public record the members of the partnership.
At this point, it is worth reminding entrepreneurs that an accountant or financial adviser can provide further information on the differences and which structure is most appropriate for the business in question.
Tax is a consideration for all types of businesses, and the onus is on the taxpayer to register with the authorities.
The profits of sole traders or partners are taxed as income, therefore a self-assessment tax return will need to be completed each year, which necessitates a proper record of income and expenses being kept.
Limited liability companies or partnerships are liable to corporation tax and an annual return must be sent to HM Revenue and Customs (HMRC).
If the company has sales of over £70,000 for the last 12 months, it must register for VAT, while if it has any employees, it will need to operate a PAYE scheme.
Failure to deal with these issues right at the beginning can ultimately be very expensive in tax penalties of one sort or another. Ensure you complete your accounts early and ask your advisors to tell you what your tax bill is going to be. By not leaving it to the last minute, you are less likely to get a nasty surprise by receiving a bill you had not budgeted for.