There are advantages and disadvantages to how every business trades, so it's about deciding which is best for you. Below is a guide to the business types that people set up:
A sole trader, or sole proprietor is the term used to describe a business that is owned and controlled by one person who makes all the decisions, responsibilites and profilts. A sole trader will often describe themselves as being self employed.
Becoming a sole trader is easy to do, there are just a few forms to fill in and you can effectively start trading straight away. Other advantages are that you may only need a small amount if capital (money to put into the business). It's easy to keep overall control as it's only you and you keep 100% of the post-tax profits.
However as a sole trader if things don't turn out as planned you are personally liable for any debts. This is known as 'unlimited liability'. The business relies upon you and your continued good health and can often involve long hours.
For more information on setting up as a sole trader click here (external link)
A business partnership is where two or more people own the business. In such cases an agreement is drawn which states the responsibilities of the various partners, for example the capital invested of each partner and profits allocation.
One of the main advantages of a partnership is that the responsibilites and the day to day running of the business is shared. Workloads are shared and if one of the partners was to fall ill or wanted a holiday, the other partner(s) can take up the strain.
A partnership, like a sole trader, has 'unlimited liability' meaning that all the partners are personally responsible for business debts.
However there may be differences of opinion and occassionally a partner may not be pulling their weight sufficiently which may lead to frustration and resntment on all sides. For thid reason it is important that partners draw up a suitable partnership agreement in order to avoid disputes over the distribution of profits.
For more information on starting a business partnership click here (external link)
A Limited Company has it's own legal identity with ownership usually divided amongst the shareholders of the business. The main advantage of a limited company over a sole trader or partnership is that the owners have 'limited liability', meaning that owners are not personally liable if things go wrong.
For more information on setting up a Limited Company click here (external link)
Social Enterprises and Community Interest Companies
A Community Interest Company (CIC) is similar to a Limited Company save that the assets are only owned by the company and their are limitations applied to dividend and interest payments to ensure a profit can be made, but the primary focus remains on achieving benefit for the community.
Forming either a limited or community interest company requires more form filling than a sole trader or partnership as there are a number of statuatory obligations to be considered.
For more information on Social Enterprises click here (external link)
Limited Liability Partnership (LLP)
A limited liability partnership combines elements of both a partnership and a limited company where some or all of the partners have limited liability. Setting up a LLP involves complex legal arrangements and requires detailed consultation.
For more information on Limited Liability Partnerships click here (external link)
It is really important to keep your books and records in order. You can do this using your own software or off the shelf accouting packages and accounts books. You may also want to use a bookkeeper or an accountant.
Whether you're taking the first steps in setting up your business or have been established for years, there are several business issues that you need to consider.
To support our business start up clients we have developed some helpful resources that will help your business to grow:
For many people one of the most daunting aspects of starting a new business is working out what taxes you will need to pay and how to deal with HM Revenue and Customs (HMRC).
Below is a guide to the main taxes that you need to consider:
National Insurance Contributions (NIC)
Depending upon how your business is set up there are different categories of NIC. Sole traders and partners in a partnership are liable to pay Class 2 and Class 4. Class 2 NIC is currently £2.80 per week.
Directors of limited companies are liable to pay Class 1 contributions on their salaries and a company is additionally liable to pay Class 1 contributions as well as Class 1A on the benefits that directors receive.
'Pay As You Earn' (PAYE)
The PAYE scheme ensures that tax is deducted from employees wages within each pay period. This will effect you if you employees or if you are a director.
In most circumstances you will need to complete a Self Assessment Tax Return. If you are self employed (including being a member of a partneship), a company director or if you receive income over a specified level for property, overseas, investments or savings.
Value Added Tax (VAT)
The standard rate for VAT is 20%. VAT is charged on most goods and services in the UK and you are required to register for VAT if the value of your taxable turnover exceeds £83,000 in a 12 month period from 01 April 2016. Voluntary registration is possible and in some circumstances advantageous.
For more information on VAT registration thresholds click here (external link)
If you set up a limited company or limited liability partneship you will be taxed on the profits earned in your financial year. The tax rate for small companies is currently 20% and becomes payable nine months and one day after your year end.
For more information on Corporation Tax click here (external link)
Deciding when your business year starts and finishes?
It's important to choose a year end that suits you and your business.
Many people choose either 31 March or 5 April to coincide with the
end of the tax year, however this may not be the best choice for you.
You can change your chosen year end
In order to keep yourself and your business protected there is a wide variety of insurances to consider including employers liability, public liability, business premises and company vehicles to name a few. However having put insurance and physical contingency plans in place for all of their physical business assets, many companies fail to consider their most valuable asset - their people.
Many banks offer a business start up service, so go to the brand that suits your needs. It's very important to establish a close working relationship with your bank manager because their support and advice will be of vital importance to you. We have contacts with all the high street banks and can offer invaluable assistance in finding the right bank for your business.