Starting Up In Business For The First Time
So you’ve taken the decision to go into business whether on your own or with a partner. There are many risks and rewards associated with running your own enterprise and it is vital that you spend some time on its administration and take professional advice from the outset. This may at first seem like an unnecessary cost and use of time, but failure to address the fundamentals at this stage could be costly in the future.
Being self-employed has many benefits including the flexibility of not being an employee, taking advantage of the financial rewards and the sense of pride. However, it is essential to appreciate that you will not enjoy some of the security features of being employed, eg contract of employment, regular hours at work, pension scheme and regular salary payment (but still with fixed outgoings).
The structure of your business
The most suitable structure for your business will largely depend upon your personal situation and your plans for the future. Whichever you choose will have implications on the tax you pay and how you are viewed by creditors and other parties.The main structures available to you are:
As a sole trader you will have few formalities, but will need to register with HM Revenue and Customs. You will need to maintain books and records so that your profits can be calculated. Your profits will then determine how much tax and national insurance you will need to pay. A self assessment tax return will need to be completed every year.
A sole trader business is the easiest to establish and should you decide that it is “not for you”, the easiest to close down. However, your business will be an extension to your personal being and you will be liable for all of its debts – your personal assets could be put at risk.
Where two or more individuals come together to share experience, talents, clients or contacts and to build a more successful a partnership is formed. The partners will agree how to manage the business and share the profits – a Partnership Agreement is recommended at the outset.
Each partner is taxed on their share of the profits of the business and is “jointly and severally” liable for the debts of the partnership. If one or more partners are unable to satisfy their share of the debt it will fall on the other partners.
A limited company has a separate legal entity, separate from its owners. Ownership of the company is by way of shares. If a shareholder works in the company he/she will also be an employee.
The profits of the company will be subject to corporation tax and any money taken from the company will be classed as a salary to an employee or a dividend to a shareholder. The two income streams can be balanced to minimise the tax and national insurance liabilities. A salary paid will be deducted from profits when calculating corporation tax but a dividend will be taken from net profit.
There is a limit to the liability of the shareholders, ie the nominal value of the shareholding unpaid at that time. Given the limited liability on the shareholders there are some further regulations regarding the running of a limited company, for example registration at Companies House, more detailed accounting and the submission of an Annual Return, not to mention PAYE procedures. Although there is a limit to liability third parties may require personal guarantees.
There will be restrictions on business names so care should be exercised to ensure there is no infringement of The Business Names Act 1985 or any trade-marks.
Limited liability partnership(LLP)
A limited liability partnership is a separate legal entity similar to a limited company with similar legal obligations but is taxed like a partnership.
At all times, your contact within MSF Accountants will only be a phone call or email away.