Knowing how to set up your business, who to register with and when can get pretty confusing so today's blog post is for anyone thinking of setting up or in the process of starting their own business in the UK.
Thankfully my trusty accountant (my fiance!) helped me put this post together to cover some of the basic questions you may have. However please do seek your own tailored advice and only take this as a general guide, every business will be different depending on individual circumstances, the industry, etc etc!
How and when you register your business will depend on the type of business entity you choose so first of all let's run through three main options to consider: 1) a self-employed sole trader, 2) a partnership and 3) a limited company.
WHAT 'TYPE' OF BUSINESS is right for me?
A Sole Trader is for businesses that will be owned and controlled by one person. You're classed as self-employed (although you may employ others) e.g. a wedding photographer or hairdresser and you get to keep any profits after you've paid tax on them.
The benefits of setting up as a sole trader are that it's relatively easy to set up and administer, as the owner you have full control and there is no requirement to file information publicly as a company would have to.
However as the owner you are personally responsible for any business debts (unlimited liability) or additional investment that may be needed. You will also be taxed on all profits the business makes regardless of whether they are drawn or retained in the business.
Sole Trader Responsibilities: You will have to file a self assessment tax return every year by 31st January, pay income tax on any profits, pay national insurance and if your turnover will be more than £82,000 (currently) a year you must also register for VAT - which will likely mean quarterly VAT returns being needed. You're also responsible for registering your business as self-employed with HMRC and keeping tidy records of your businesses sales and expenses.
There's more information on how to set up as a sole trader HERE.
A partnership is for a business that will be run by two or more people and they are usually bound by a 'partnership agreement' which details how much capital each person has invested, how profits (and losses) will be shared and how involved each person is in the day-to-day running of the business.
Like sole traders, partnerships are relatively easy to set up and administer, plus each partner is treated as self-employed. You of course also benefit from more people bringing more expertise, investment and therefore sharing the responsibilities.
The disadvantages of setting up as a partnership again include unlimited liability and the potential for disputes regarding responsibilities, profit distribution and decision-making.
Partnership responsibilities: you must register your partnership with HMRC then send a partnership self-assessment tax return every year (by 31st January). Then, as with sole traders, each partner must also complete a personal self assessment tax return every year, pay income tax on their share of the profits and pay national insurance. If the partnership expects to turnover more than £82,000 a year you will also have to register for VAT.
HERE are all the steps you need to take to set up a partnership.
Limited companies are 'incorporated' so they have their own legal identity separate to that of the owners. Any profit the business makes is therefore owned by the company (after it pays corporation tax) and can then be shared amongst it's shareholders. Directors are responsible for running the business, and although they often own shares they don't have to.
A major advantage of this type of business structure is that the business owners (or shareholders) are not personally liable for the firm's debts - the shareholders have limited liability.
However there is much more administration involved such as ongoing filing obligations under company law and director information being made publicly available.
Limited company responsibilities: when you start you must register with Companies House and HMRC, then every financial year the company has to put together statutory accounts, send an annual return to Companies house and HMRC. Again the business must register for VAT if turnover is expected to be over £82,000 in a year. Any directors in the business must also fill in a self-assessment tax turn every year and pay personal tax and national insurance (if they are paid a salary).
It is generally considered to be more tax efficient to trade as a limited company the larger the business becomes, although every situation can be different due to the interaction of personal and company tax responsibilities.
Click HERE for more information on how to set up a limited company.
When you've decided on your business structure the next step is to decide on a business name:
DO I need to REGISTER my BUSINESS NAME?
If you are a sole trader or a partnership you don’t have to register your business name with Companies House (as this is just for companies as the name suggests!), however there are some things to be aware of when naming your business:
1. Limited companies can't have a name that's the same (or too similar) to another registered company's name. You can search the companies house register to see if the name you've chosen is available HERE
2. Sole traders aren't allowed to use the terms limited (Ltd), limited liability partnership (LLP) or public limited company (plc) in your name (or their Welsh equivalents) as this incorrectly describes the status of your business
3. Your business name must not be offensive or contain prescribed “sensitive” words, including those that suggest your business is connected to the government or of national importance (such as British or international) without special permission!
4. Registering a business name does not mean it is protected as a trademark, you have to register trade marks separately so you may want to check the trade mark register before registering your business name to make sure you can also register it as a trade mark if required.
5. You can choose to register your business with the National Business Register (NBR) for around £100 per year to help you conduct name searches and give you more protection against any legal challenges to your name in the future.
SO HOW DO I OFFICIALLY REGISTER MY BUSINESS?
The best thing about being self-employed is that you can decide to start your business today and start earning money) tomorrow. You just need to tell HMRC in a timely manner (commonly considered to be within 3 months).
However trading as a limited company is different and the company needs to be set up first.
Once you've chosen the right business entity and named your business you can register with HMRC HERE.
WHEN WILL I START PAYING TAX?
As a sole trader or partnership you can start your business at any time but your first period of trading runs from the date you start to the end of that tax year (5th April). Your tax will then be due on that period the following 31st January.
A limited company generally has to pay corporation tax on its profit 9 months after its year end.
Finally you may be wondering what else you need to do now that your business is registered and has started trading:
1. You do not need to set up a separate business bank account if you are self-employed (there is no legal requirement to do so) however it is very helpful to keep track of your finances by using a dedicated account. A limited company is a separate legal entity so does need it's own bank account.
2. Keep a record of your business sales and expenses (we'll write a separate blog post on record-keeping soon as there's a lot to it!)
3. Remember to submit the appropriate tax return on time every year as detailed in the responsibilities of the different business structures above!
Please note that this blog post is for guidance purposes only, you should seek qualified, professional advice as every individual circumstance can be different!
I hope this post has been useful to you? If you have any questions we'll try and answer them in the comments below...