Choosing the right type of business for you
When you decide to start your own business it is important to think about the type of business you want to have and where you want it to go.
There are different options for the type of business you can set up, each with their own positive aspects, depending on your situation. Becoming self employed is a great starting point to begin your business, as it is the easiest to set up, but as a business grows, this can soon become less suitable.
Consider your plans for the business and how you hope to grow in the coming years. Do you have someone to go in to partnership with, where you can share the initial investment, responsibilities and workload, or would setting up a limited company be more beneficial?
Self Employed (Sole Trader)
It is easy to register as self employed with HMRC and to run the business. The only reporting required is your annual self assessment tax return. By keeping track of your income and any allowable expenses, you will arrive at your profits. You will be required to pay income tax and class 2 and class 4 national insurance on these profits.
There are many options of accounting software available to help you with this, or a simple bookkeeping spreadsheet may be all you need. The key is to keep all your records up to date and organised, to make it so much easier when it is time to complete your tax return.
You wouldn’t need to have an accountant when you are self employed, but a bookkeeper can be a big asset if you are unsure of looking after the accounting yourself, or would prefer to outsource this so you can focus on your business.
The great thing about being self employed is that all the profits made, after outgoings and taxes, are yours to keep. However, you must be aware that you would be personally liable for any debts the business has.
After starting your business as self employed, you may get to the point where you find the business has grown well and the level of profits you are making mean it is time to consider progressing to become a limited company. An accountant can advise and guide you on finding the right time to do this and the process involved. As your level of profit grows, becoming a limited company can be a more tax efficient option for you.
When two or more people want to join forces and go into business together, a partnership can be a straightforward way to do this. It works in a similar way to being a sole trader, but one partner would be nominated to be responsible for the business administration and completing the annual business tax return. Once this has been done, each partner can complete their own self assessment tax return and pay the income tax and national insurance due, based on their own portion of the business’s profits.
When creating a partnership, a partnership agreement should be drawn up, to clearly state how the costs and profits of the business will be split between the partners and also to document any other important business arrangements between the partners. This can then be used to determine the amount of profit each partner is responsible for declaring on their own personal tax returns.
As with being self employed, the partners are entitled to keep their share of the profits, after outgoings and taxes, but equally would be responsible for any debts.
Working as a partnership can boost the skills, expertise and knowledge you can offer your customers, and give you extra support in running a business. Also, with more people putting in capital to start the business, it can start you in a better position than going it alone. However, you must carefully consider who you are starting your business with. Have you worked together before? Do you think you can work well together and compliment each others skills to make a great team? There are always the risks to consider too. You could find that you are jointly responsible for debts which you may not have been aware of, or you could both have a different vision of where you want the business to go.
With careful consideration, organisation and good communication between all partners, you could be part of a great team, heading for success.
Limited Liability Partnership (LLP)
If a partnership seems like the right choice for you, there is another option to consider. A limited liability partnership would work in much the same way as a standard partnership, but it offers more protection for the partners as they would not be liable for the business debts.
An LLP is registered with Companies House, so annual company accounts and an annual confirmation statement will need to be filed with them each year. The partners will still need to complete their own self assessment tax returns for their share of the profits.
Being the owner of a limited liability company means that you are a separate legal entity to the business. The profits made, and likewise any debts incurred, belong to the business, not the owner. This gives business owners greater protection from possible losses if the business is in trouble, as they would only be losing the money they have invested in to the business.
A limited company owner can make themselves a director and be paid by a salary, through PAYE, and also can receive a share of the business profits by payment of dividends. A combination of these can provide the most tax efficient way of receiving the profits the business is earning.
There is more reporting involved with running a limited company. You will need to submit annual company accounts and an annual confirmation statement with Companies House, as well as a Corporation Tax return to be submitted to HMRC. A director will also need to complete a self assessment tax return when they are receiving dividends.
As the reporting and tax implications can be far more complex when running a limited company, it is advisable to enlist the services of an accountant for your business. However, the general bookkeeping for the company can be carried out by a bookkeeper, who can keep your accounting records up to date and accurate for you, making it a smoother process when it is time to hand this over to the accountants.
Whichever option you decide to go for, you don’t have to do it alone. Accountants and bookkeepers can be a great support in helping you get started, which may be all you need to be help you successfully manage your own bookkeeping. Or you can leave the bookkeeping in their capable hands, giving you all the time you need to focus on growing your business and achieving your goals, whilst having them work alongside you to give you all the information you need to plan ahead, when you need it.