So, you are thinking of setting up a new business, you have a great idea, fantastic. That’s wonderful news and well done. But what do you need to consider before forming your business?
One of the things to consider is what business structure it should take. Do you want to be a self-employed sole trader or a Limited company?
Let’s take a brief look at both of these and the pro’s and cons of both.
Sole Trader – Self Employed
The Facts
Registering as Self Employed
If you are a one-person band i.e. there is just you in the business then you are classed as a sole trader. Before you think about trading you need to register as self-employed with HMRC.
Once registered with HMRC you will get a ten-digit Unique Taxpayer Reference number (UTR). Keep this in a safe place as you will need it to register online to submit your self-assessment return. Also, clients might insist on seeing your UTR number before hiring you.
Self-Assessment Returns
The Tax year runs from 6 April and ends on 5th April the following year. Your self-assessment needs to be submitted online by 31st Jan the following year and you need to pay any tax owed then too.
Depending on how much tax you have to pay, you might have to pay half in January and a second payment which is due 31st July. This is usually half of next years tax.
Financial Records
You have to keep a record of your business income and outgoings if your self-employed. You need to keep track of all business expenses and personal income. The more detailed you can be with your business expenses the less income tax you need to pay. You pay income tax on your overall profit not income.
The Advantages
- Simple record keeping
- One tax return a year
- Less expensive to run
- Not subject to Companies House requirements
The Disadvantages
- You pay National Insurance on net profits
- You are liable for any debts
- You are responsible for the business liabilities
- Raising finance might be difficult
Limited Company
A limited company is completely different than a sole trader, as you have to register with Companies House and send yearly reports to companies house. You must have a UK registered office address and the company must comply with Government regulations.
Registering your company
Find a suitable company name. Decide upon an address. You can use your home or office address, but you can pay a small fee to use your accountant or solicitors address. You can also have a virtual office address which is also becoming popular.
Company Structure
You need to have at least one Director in the business
You need to have at least one shareholder, but you can have as many as you like
Decide upon the correct Standard Industry Classification (SIC) code
You also need an agreement from all shareholders and directors on what to have in your Memorandum and articles of association
Also Details of people with significant control (PSC)
Financial Records
It is a legal requirement to keep financial records. You must also submit annual accounts and financial reports to companies house which are displayed in the public domain.
The Advantages
- It is less personal than being self employed
- It lends credibility to the business
- Makes you appear more professional
The Disadvantages
- It is heavily regulated with extensive record keeping
- It can cost more to set up
- Annual accounts are made public on companies house
- You might end up paying more tax
- You have to pay Corporation Tax on any profit
So, in fairness it is totally up to you which company set up is best for you, it’s an individual choice. But, if you would like more information regarding the above, then do not hesitate to get in touch.