Are you thinking of setting up your own business? Confused about where to start? At Atkinson Accounts we believe the best place to start is the business type.
Is a sole trade of a limited company the answer for you? This doesn’t just apply to start ups! Regardless of what stage of its life cycle your business is at it is important to consider your business type.
Every business – no matter the size – must have a legal structure, with the majority choosing to operate either as a sole trade or a limited company.Here at Atkinson Accounts, we are here to help. We have compiled a handy step by step guide to help you decide which is the best fit for your business.
What will we discuss?
What is a sole trader?
What is a limited company?
Statutory registrations
Statutory deadlines
Tax implications
“The way to get started is to quit talking and start doing” – Walt Disney, Cofounder – Disney
Sole Trade
What is a sole trader?
A sole trader is essentially a self-employed person who is the sole owner of their business. It is the simplest business structure out there, hence the popularity!
Key features
Briefly, the key factors of a sole trader are as follows:
Legality – The government treats a sole trader and the business as the same legal entity
Taxes – A separate business tax return is not required – all profits are reported to HMRC by way of the owner’s personal tax return. Therefore, all sole traders must register for self-assessment and file a personal tax return each year (no later than 31st January)
Control – A sole trader has control over every aspect of the business and all profits (after tax) belong to the owner.
Advantages:
Easy to set up and relatively little paperwork
Greater privacy than incorporated businesses, whose details are readily accessible via Companies House
Disadvantages:
Unlimited liability – they are not viewed as a separate entity by UK law. This means that the owner is personally liable if the business gets into debts.
Raising finance can be difficult, as banks and other investors tend to favour limited companies
Tax rates on sole traders are often harsher than on limited companies. This is important when you reach a certain level of earnings – it may not be as lucrative to stay as a sole trader.
What must I do as a sole trader?
Register for self-assessment (you can do this here)
File a personal tax return annually by 31st January
Limited Company
What is a limited company?
A limited company is a type of business structure, that has its own legal identity, separate from its owners and its managers. This remains the case even if it is just one person, acting as both a shareholder and director.
In contrast, the key factors of a Limited Company are as follows:
Legality – The government treats Limited Companies as a separate legal entity. This means that the businesses finances are separate from your personal.
Taxes – At the company year end, you will have 9 months to submit annual accounts to Companies House. A corporation tax return will also be due to HMRC.
Control – The company’s shareholders will divide the company’s control between them.
Advantages:
As already mentioned limited companies have the benefit of limited liability so the owner’s personal assets are not at risk
Generally speaking Limited Companies tend to be more tax efficient than sole traders. We will explore this later on
Once you have registered a company name no one else can use it in business – giving you your brand identity
A lot of other businesses view limited companies as more established and professional and may prefer to trade with them over sole trades
Disadvantages:
A lot more paperwork is required for limited companies
There is less privacy for limited companies as their year end accounts, and details of directors/shareholders are published online where anyone has access to
What must I do as a Limited Company?
Decide on a company name – you can check here whether the name you have chosen is available
Decide on a registered office
Appoint a minimum of one director
Provide Companies House with the company share and shareholder details
Inform Companies House of the industry your company is working within by ways of a SIC code
Provide details of all People with Significant Control – anyone with 25% and over of shares
Required registrations
Sole trade
The registration process for sole traders are a lot simpler. You must register yourself as self-employed with HMRC (this can be done here) – you must then file an annual personal tax return by 31st January to report your earnings.
Limited Company
There are a lot more registrations that must be done for a limited company. These include:
1. Incorporating the company (this can be done here)
2. Register for Corporation Tax (within 3 months of starting to trade (this can be done here)
Your company will receive a staging date for Auto Enrolment pensions – you will need to register for this regardless of whether you simply plan to opt out.
Please note, whether your business is a sole trade or a limited company it is important you register for the following if you meet the following criteria:
• VAT – If your business turns over more than £85,000 in a rolling 12 month period you should register for VAT
• PAYE – If you pay any employees salaries of over £5,000 you will need to set up a payroll scheme.
So, now that you have an idea of which structure fits your business model best, lets have a quick run through of the different taxes that may apply!
Corporation Tax
Your company will need to register for Corporation Tax within 3 months of doing any of the following:
Beginning trade
Hiring an employee
Did you know that after your company year end you have 12 months to submit your Corporation Tax, but only 9 months to pay the tax!
To register with HMRC you will need your 10-digit Unique Taxpayer Reference. This is often referred to as a UTR and is posted to your address within a few days of you completing the registration. If you fail to register on time you could face a penalty which is the last thing you need when launching your new business.
VAT
If you are going to hit the £85,000 threshold mark, within any rolling 12-month period you are required to register for VAT. This applies to both Sole Traders and Limited Companies.
Once you are registered you will need to charge your customers VAT (depending on what you are selling). The VAT will need to be displayed separately on all invoices.
There are sometimes benefits to registering for VAT even if your turnover does not hit the threshold. To see if this may be suitable for your business, or for a more in depth look at VAT please click here.
If you do need to register for VAT, ensure you investigate the following schemes to ensure you are utilising the options HMRC have available to you:
• Flat rate scheme
• Annual accounting scheme
• Retail and VAT margin schemes
Business planning
When setting up a business you are often reminded time and time again how important a business plan is. Here at Atkinson Accounts, we believe it’s not as important as some would have you believe. You should be focusing on the running of your business and what this will entail in the future. We do not see the benefit of time consuming over planning of events which are often not within our control.
There are a few features we suggest you consider:
What the business will offer
How you will fund the business/repay any loans taken during the set up
Have a rough idea of your expected income and expenditure for the year
If you are planning to lend start-up funds externally a more concrete business plan may be required from lenders. The lender will usually detail what they need specifically before you present them your proposal.
Expenses claim
Corporation tax is calculated as 19% (since 6th April 2017) percentage of company profits. It makes sense therefore, that we are claiming all possible expenses against the company profit.
We have included a few less known expenses which you can claim against company profits:
Use of home – If you have an office at home, or use your house for any business activities HMRC allows a flat rate of £10 per month to be claimed
Telephone – If you use your mobile for business use, you should claim a percentage of your bill against the profit
Mileage – If you have not kept a record of your mileage HMRC will accept a rough approximation. You are entitled to claim 45p per mile for the first 10,000 miles & 25p/mile thereafter.
Prior purchases – If you had bought any materials or fixed assets (that are still in use) before the business started these can still be brought into the business – although this may be at a reduced rate.
For more information on allowable expenses please click here.
Bookkeeping
Bookkeeping is simply the process of keeping a record of all transactions. This includes both monies paid into the business, and out. Bookkeeping is crucial to any business as a record of transactions is required to calculate the correct corporation tax due.
However, if you wish to have a separate record of your transactions we highly recommend the simple Excel option. This is a simple and easy navigable programme. We would not suggest using high cost, complicated software – although we are happy to work with this if this is the route your business choses to take.
If your business has a separate bank account which most of its transactions go through, then often we are able to view the bank statements as a bookkeeping record. Any menial cash receipts can be forwarded on separately.
Accounting
In summary, you will need to pay tax on your earnings, and National Insurance. If you have taken the Limited Company route, then you will also need to pay Corporation Tax and possibly business rates and insurance depending on your businesses decisions.
We would suggest you seriously consider hiring an accountant for this. They can ensure you are tax compliant, reducing the risk of unnecessary fines or penalties. An accountant will also ensure your business is operating in the most tax efficient way possible.
Here at Atkinson Accounts we hope we have helped with any initial queries you may have about your business. For more in depth advice or for your free, no obligation consultation please contact our offices on 01244 31 6449 or email on enquiries@atkinsonaccounts.co.uk.
