26 Sep Starting your business (Part 3)
Now that you have sorted things out, it’s time to deal with the legalities around your business and decide which legal structure will best suit your business. This has to be done prior registering for tax and, of course, start trading. In brief, there are three main types of business: (1) Sole trader, (2) Limited company, and (3) Business partnership. However, you can also form an Incorporated Association if you are not planning to make money from your business (i.e. a voluntary group or sports club). Given that there are several structures for businesses, it’s best to consult an accountant to get some insight.
It is critical you understand the different benefits and risks involved before you choose, as your decision will determine:
- How you will be paying tax.
- The kind of control you will have over the way your business is run.
- The way you report to HMRC (HM Revenue and Customs).
- The way you report to Companies House.
- How much financial risk you are taking on.
Of course, you can change your business structure if things change along the way. Depending on the type of business you are running (if you employ people and if you are VAT-Registered), you will need to follow some steps, which are different per case.
Brief Overview of the Most Common Legal Structures
- Sole Trader
If you work for yourself, you are a sole trader (self-employed) and keep all your business’s profits once you are done with paying tax on them. Thinking that a sole trader works alone is a misconception. You can still employ staff.
The tax responsibilities of a sole trader include:
- A Self Assessment tax return sent annually.
- The payment of Income Tax on your profits.
- The payment of National Insurance.
Also, you will have to register for VAT if your annual takings are expected to be over £82,000.
- Limited Company
A limited company is an organisation responsible for what it does (in its own right). This means that your personal finances are separated from the finances of your business, because any profit made (after paying Corporation Tax) is owned by the company, which can them share profits among its stakeholders.
Since the legal responsibilities of a limited company are quite a few, it is recommended to talk to an accountant and solicitor for legal advice. For example, you may need to set up a company limited by shares or by guarantee, or a public limited company.
First of all, you have to let HMRC know that you are starting business activities. Then you must register with Companies House. As for tax responsibilities, you have to: (1) send an annual return to Companies House, (2) put statutory accounts together every year, and (3) send a Company Tax Return to HMRC annually, and (4) register for VAT, if your takings are expected to surpass £82,000 a year. Now, if you are a director, you have to:
- Pay National Insurance and tax via the PAYE system (that is if you are paid a salary by the company).
- Fill in a Self Assessment tax return annually.
- Business Partnership
In an ordinary business partnership, you share responsibility with your partner(s) and can also share all the profits of the business between them. Each one will then have to pay tax on the share of the profits they have received.
The legal responsibilities involved put you responsible for your share of bills (i.e. things you buy for your organisation), as well as any losses your business may have. If you don’t like the idea of being personally responsible for these loses, you can set up a limited liability partnership or limited partnership. Finally, you have to select a name for your partnership and then register it with HMRC.
All partners are obliged to:
- Send a personal Self Assessment tax return annually.
- Pay National insurance.
- Pay Income Tax on their profits (their individual share of the profits).
- Register for VAT if takings are expected to exceed £82,000 a year.
For more information and assistance in setting up your business, do not hesitate to contact us. Our professional accountants will be more than happy to help.