Starting a business…
Planning and setup
What type of company is best for you?
The first important choice you will face when starting a business is the legal status of your enterprise. With options ranging from sole trader to limited company, the structure you select at the start can have legal and financial implications for the future.
Listed below are the main types of business structure and some of their key features.
Someone who is in independently in control of their business is known as a sole trader. If you choose to be a sole trader, you will be self-employed and personally liable for any business debts.
However, the profits you make are yours to keep and you do not have to concern yourself too much with bureaucracy. Some of the essential requirements of being a sole trader are listed below.
- You must register as self-employed with HM Revenue & Customs (HMRC) within the first three months of trading. This should be the first thing you do, as there are penalties, starting from £100, if you fail to register in time.
- You will have to complete a self assessment tax return each year and pay income tax, detailing your income and expenditure, so you will need to keep records of these.
- You must pay Class 2 National Insurance contributions (NICs). These are set at a fixed weekly amount and are paid with your annual income tax.
- You will also need to pay Class 4 National Insurance contributions, based on your profits and paid with your income tax.
- The HMRC website has more information at www.hmrc.gov.uk.
A partnership exists where two or more people go into business together. Each partner is equally responsible for the debts and costs of the business, and can share the profits between them as they choose.
- The essential requirements for a partnership are the same as for a sole trader, but apply to each partner in the partnership.
- Both partners must complete a self assessment tax return (SA100) and the nominated partner must also complete a partnership tax return (SA800), which shows each partner’s share of the profits of losses.
- Each partner is personally responsible for paying the tax and Class 4 National Insurance contributions due on their share of the partnership profits.
Limited Liability Partnership (LLP)
A limited liability partnership is similar to an ordinary partnership but has the benefits of limited liability for the business owners, giving them some protection if the business gets into difficulties. The essential requirements are listed below.
- You may have any number of members in your partnership, with a minimum of two “designated” members, who carry extra responsibility for the business.
- You must register with Companies House and file annual accounts.
- An annual LL AR01 form confirming certain information about the LLP, e.g. registered office address and member details, must be completed and returned to Companies House, with a small fee.
- A Partnership tax return must be filed with HMRC year each detailing the income and expenditure of the business and how the profits have been allocated between the partners.
- Each partner must complete a self assessment tax return each year detailing their share of profits and any other sources of income they may have.
A limited company is a corporate entity registered with Companies House. This gives the most commercial protection out of all of the business structures as liability for debts is limited to the assets held by the company rather than the directors or shareholders being personally liable.
- You must register with Companies House and file annual accounts.
- An annual return (form AR01) must be prepared and returned to Companies House with a small fee.
- At least one director must be appointed, with legal responsibility for running the company and ensuring it trades lawfully and responsibly. This director may be separate to the shareholders (business owners).
- You have the option to appoint a company secretary. The company secretary is responsible for filing statutory documents, such as the AR01 form and accounts with Companies House each year. If there is no secretary, the director is responsible for filing the documents.
- The business owners are shareholders in the company and able to extract dividends from the company out of the net profit after tax.
- Directors can be paid a salary (under PAYE), which will be treated as an expense of the company when its accounts are prepared.
- If the directors are also shareholders of the company, they may take dividends from the company but only from the net profits after tax has been provided for.
- As a separate legal entity, the company is responsible for filing a corporation tax return for each accounting period and to pay corporation tax on the profits.
- If benefits are provided to directors, these must be accounted for as a benefit in kind, on which the individuals pay tax. The company must pay employers’ Class 1A NICs each year.
- Directors must submit a self assessment tax return each year, detailing their income. This may be a combination of salary, dividends (if they are a shareholder), benefits in kind and other sources of personal income.
Choosing a business name
Your business can say a lot about your enterprise and is an important way to convey information about what you do. Getting the name right from the start makes sense as changing a name at a later date will affect every aspect of your business and could prove costly.
- Check your chosen name with the National Business Register, the Patent Office, Companies House and Trade Marks Register to make sure it’s unique within your chosen business sector. If you infringe on another business’s name, they could take legal action to protect themselves.
- Check other meanings of the name you intend to use, particularly if you will be trading overseas. An embarrassing translation could cost you international business.
Bookkeeping and accounts
Your financial records are an essential part of running any business. While the exact type of accounting records you need will depend on your enterprise’s legal structure, keeping an up-to-date record of your financial data will not only help you stay compliant with HMRC but will provide useful insight into how your business is performing, help you to maintain a healthy cash flow and give you an early warning if certain issues need addressing.
You can look after your books yourself or you may want to employ a part-time or full-time bookkeeper. Another option is to outsource the work to an accountancy firm, which may be a cost-effective alternative to dealing with your accounts in-house.
If you do decide to deal with your financial records in-house, there are various bookkeeping/accounting systems you can use, from manual systems and spreadsheets to accounting software installed locally on your own computers.
Alternatively online and cloud accounting is becoming increasingly popular. As well as being secure and cost-effective there are no upfront costs, you just pay a low monthly subscription the system means you can look at your financial records from anywhere with internet access and it will give you real time information on cash flow, as well as fast transfers of information from your bank and automatic invoicing.
Your accountant can also have instant access to your accounts, so that they can keep your records under review or view them at the same time if you have a query or problem.
Whatever the structure of your business, if your taxable turnover will be more than Â£85,000 in any 12 month period (correct as of 1 April 2017) you will have to be VAT-registered.
This means that you must charge VAT on all your goods or services, (providing they are not VAT-exempt) and will have to complete and submit a VAT return, usually each quarter.
Depending on the nature of your business, your customers or clients may prefer you to be VAT-registered, even if your turnover is below the minimum. It may also be beneficial for you personally.
VAT is a complex area and it is sensible to talk to an accountant about the best approach for you and your business.
It is good practice to have a bank account for the business that is separate from the personal accounts of individuals involved.
This makes it easier to keep your business finances in good order and also means that you can avoid having to provide personal bank statements for your accountants or for HMRC if it ever looks into the business’s affairs.
If the business is a limited company, then the bank account MUST be in the name of the limited company.
Different banks offer different business accounts and the bank where you have your personal account may not always be the best choice, so it makes sense to shop around.
In making your decision, issues to consider include charges, if you are likely to want to pay in cash takings over the counter, whether the bank offers easy access to a dedicated business adviser and what other services it might be able to provide as your relationship develops over time, such as insurance, business loans or even a commercial mortgage.
If you are planning to take on employees, there are a number of factors you need to be aware of to ensure you are compliant with your legal responsibilities.
The National Minimum Wage (NMW) and National Living Wage (NLW) are the minimum pay per hour rates almost all workers are entitled to by law.
The NMW is £7.05 per hour for anyone aged between 21 and 25 and the NLW is £7.50 for those aged 25 and over, both as of April 2017.
These rates revised in April each year.
Based on a typical full-time working week of 37.5 hours, the NMW would provide an annual salary of £13,747.50, which is £2,247.50 more than the annual tax-free allowance (£11,500 in 2017-18).
Again with a full-time working week of 37.5 hours, NLW would provide an annual salary of £14,625.00, which is £3,125.00 more than the annual tax-free allowance.
The NIC-free allowance is Â£8,164.00 annually, calculated on a weekly basis of £157.00 a week.
In setting directors’ remuneration, it may not be necessary for them to have a service contract, which may mean their pay does not have to comply with NMW and NLW regulations.
How to pay salaries
You will need to set up a Pay As You Earn system (PAYE) to ensure your employees are paying tax and National Insurance.
Most employers will be legally obliged to report PAYE via Real Time Information from April 2014, which means you must submit payroll information to HMRC, on or before the point at which employees are paid.
If you are unsure about PAYE issues, speak to your accountant or visit the HMRC website, where information is available at http://www.hmrc.gov.uk/payerti/getting-started/paye-basics/rti.htm
Automatic enrolment (or auto-enrolment) is a government initiative to help more people to save for retirement. By 2018, all employers will be legally required to enrol eligible jobholders into a qualifying workplace pension scheme, although workers can opt out. Both employers and jobholders will be required to contribute.
Employers join the auto-enrolment initiative on what is known as their staging date, based on how many employees they had in April 2012, although they can start earlier if they wish. The scheme started with the largest employers in October 2012 and is being rolled out to businesses in decreasing order of size.
You can find out your staging date by visiting the Pension Regulator’s website at www.thepensionsregulator.gov.uk, remember you need to register your pension scheme four months before your staging date.
A qualifying scheme is one that enables auto-enrolment and meets legislative requirements. It can be an existing scheme that has been compliance-checked (and modified if necessary) or a new scheme set up specifically for auto-enrolment.
NEST (National Employment Savings Trust (www.nestpensions.org.uk ) is a scheme that is open to any employer and to self-employed people. It has the advantage that a NEST pension “pot” follows the individual if they change jobs.
Ensure you’re insured
You will need adequate insurance and processes and procedures to protect health and safety in the workplace. There are three types of insurance you will need.
- Employers’ liability insurance: this insurance covers you in the event of an employee making a claim in relation to injuries or illnesses suffered while working for you. Your certificate for this insurance must be accessible or displayed electronically. This type of insurance is not legally required if you are the only employee and own 50 per cent or more of the shares.
- Public liability insurance: this insurance covers you for damages and legal costs resulting from injury, death or damage to property caused to members of the public, such as visitors, by any of your actions.
- Professional indemnity insurance: If you have made a mistake or been negligent in a way that compromises the quality of service to your customers, this insurance protects your business against claims made against you.
- Other insurance: while not mandatory, other types of insurance that could be useful include directors’ insurance, motor insurance, equipment insurance, contents insurance and cover for legal expenses. If you use your own car for the business, your insurer must be made aware of this.
Training your employees
It is your legal obligation to ensure your employees receive the appropriate and adequate training they need to carry out their duties.
For example, appropriate licences or certificates are essential if your employees handle heavy machinery or drive long distances in specialised vehicles.
If one or more of your employees will be handling money, you need to ensure they are adequately trained to comply with the Money Laundering Regulations. There are many training specialists who can provide training.
For more information, visit https://www.gov.uk/guidance/money-laundering-regulations-nominated-officers-and-employee-training
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, neither the authors nor the firm can accept responsibility for loss occasioned by any person acting or refraining from action as a result of the material.