If you’re starting your business, or reassessing your business structure, you will find detailed information on the .gov website but see below for summary of things to consider.
The most obvious decision to make when starting out is whether to set up a Ltd company or start as self-employed.
What help is available if you become self-employed
Fortunately, when it comes to self-employment, there’s plenty of help and advice out there.
Government-backed advice services around the UK will help you with everything from creating a business plan and researching the market, to finding finance and recruiting staff.
So, depending on where you live, they should be your first port of call.
- England – Great Business
- Wales – Business Wales
- Scotland – Business Gateway
- Northern Ireland – InvestNI
Different kinds of self-employed businesses
If you’re thinking about starting your own business or becoming self-employed, one of the first things you will need to think about is your business structure.
SELF-EMPLOYED BUSINESS TYPES.
This is the simplest business structure. You will run your own business as an individual and keep any after-tax profits.
However, your personal and business assets are not considered separate. This means you’re personally responsible for debts associated with the business. You can reduce this problem through insurance, or by choosing one of the other business structures mentioned below.
But, don’t be put off by the idea of being a business. A sole trader is just that – one person, you, working for yourself. You don’t need to have premises or a business name. You can be just You T/A (trading as) You. Becoming a business is just the official term.
You are not even required to have a business bank account although it does make sense for good money management and your customers will normally prefer to pay a business rather than an individual, even if technically, it makes no difference.
Being a sole trader does notprevent you from employing people or from VAT registration.
To become a sole trader, all you need to do is register as self-employed with HM Revenue & Customs (HMRC).
Find out more about setting up as a sole trader on the Gov.uk website.
A partnership, as the names suggests, is when you go into business with one or more other people and have shared responsibility for the business.
It’s important you draw up a partnership agreement, so everyone involved knows how the profits are split up. Make sure that you agree on all of the details including who is responsible for what. Good partnerships end because of relying on good will and friendship.
Business debts are dealt with under what is known as Joint and Several Liability. This means all members of the partnership are responsible for the debts either in full, or individually, depending on how much they can afford to repay.
All partners will need to submit a Self-Assessment tax return for their own share of the profits, and a nominated partner will have to submit a partnership Self-Assessment for the business.
You can find out more about setting up a partnership on the Gov.uk website.
Private Limited Company. (Ltd)
A private limited company (Ltd), is its own legal entity and is completely separate from the people owning and running it. It will need to be registered (or incorporated) with Companies’ House, must have a suitable name and an address.
The company will have a director (usually the person who started the business) who is legally responsible for running the company, and at least one shareholder (also known as a member).
A Ltd company will have to pay corporation tax on any profits, and the after-tax profits are divided up among the shareholders. This is sometimes the reason, that sole traders choose to be a Ltd company because corporation tax is lower than personal tax but it comes with the cost of more paperwork and potentially more accountancy and filing fees.
The company will need to submit its annual accounts to Companies’ House and a tax return to HMRC. The director will also need to fill in a Self Assessment tax return, but will only pay tax on the money they earned by running the business, not the profits.
Find out more about setting up a private limited company on Gov.uk.
These are the easiest to set-up and understand but there are some other options. If you’re unsure, you can get started as a sole trader and change when you are more sure of the direction of your business.
A limited partnership must have at least one general partner and one limited partner. The general partner is responsible for running the business and the partnerships’ debts. The limited partner is only liable for the amount they originally invested in the business.
Find out more about limited partnerships on the Gov.uk website.
Limited liability partnerships (LLP)
LLPs are a hybrid of a partnership and a limited company. Like a partnership, it can be set up by two or more people, but like a Ltd, it must be incorporated with Companies’ House, have a suitable name and address and is legally separate from the individuals running it.
It must also have at least two shareholders (or members) and each shareholder pays tax on their share of the profits. Partners liability for the business debts are limited to the amount of money they invested.
There are two main reasons for writing a business plan:
- For business reasons so you can set out your objectives, develop ideas and plan for the short and medium term.
- To present to people outside your business, usually to banks or potential investors if you’re looking to raise money.
Regardless of who you’re presenting it to, it’s important to be realistic and honest about your costs and earning potential.
If it will be seen by people outside your business, make sure it looks professional, is well structured and contains all the information people would expect to see.
No matter how long you have been in business, it is useful to write a business plan.
First, and possibly most importantly, you need to draw up a budget. You need to think about all the costs it’s going to take to get your business off the ground and operational. These costs might include:
- renting a business premises or shop front and costs associated with it including electricity and internet access
- buying or hiring vehicle(s) and the cost of fuel and maintenance
- equipment including tools, computers and phones
- setting up and hosting a website
- advertising and marketing materials.
But remember, you might not need all of these. Many profitable businesses have no need for physical premises. You might already have a lot of the equipment you need,and staff might not be necessary until the business is more established.
However, you will also need to think about your personal costs such as rent, mortgage, utility bills, childcare and food.
You will then need to think about how much of your own money you can afford to invest to find out if you will need to look for investment or a business loan.
If you’re thinking of setting up your own business, you will also need to register for self -assessment to pay your own taxes.
You pay tax and National Insurance on your self-employed earnings in arrears. This means any tax you owe on money earned in the 2019/20 tax year is not due until January 2021.
This means you will need to plan how you will pay what could be a substantial bill. The good news is you will have a good idea about how much tax you owe at the end of the previous tax year, which gives you nine months to prepare.
Find out more about registering as self-employed and submitting a Self Assessment tax return.
Find out more about paying tax and NI when self-employed.
If you’re setting up a private limited company (Ltd) or limited liability partnership (LLP) you will also need to pay corporation tax on your profits.
Find out more about registering for and paying corporation tax on Gov.uk
Registering for VAT
From 1 April 2019, if you have a turnover of more than £85,000, you will need to keep digital tax records and submit VAT returns using Making Tax Digital. Find out more on the Gov.UK website.
If your business has a taxable turnover of £85,000 or more, you will need to register for VAT. But, some businesses might benefit from registering even if their turnover is below this.
If you’re VAT registered, you will need to charge VAT on the goods and services you supply. You will also have to complete a lot of additional paperwork.
However, you can claim back VAT you pay for goods or services relating to your business.
Find out more about VAT registration on the Gov.uk website.
You can also find out more about registering for VAT in this interactive guide from HMRC.
If you’re combined annual turnover is less than £150,000 a year, you can use a simplified version of expenses called cash basis.
If you’ve never been self-employed before, something you will need to get to grips with quickly is record keeping.
You will need to keep track of what you are charging clients for your goods and services, as well as any business related expenses.
Acceptable records include receipts, bank statements, invoices and till rolls.
You will not need to send your records when you submit a tax return, but you will need to keep them for five years after the relevant tax return submission deadline. For example, for your 2018/19 tax return, you will need to keep your records until 31 January 2024.
Find out more about keeping records when you’re self-employed on Gov.uk.
Find out more about acceptable expenses when you’re self-employed on Gov.uk.
Traditional accounting vs cash basis
If you have a combined annual turnover of less than £150,000 and are a sole trader or in a partnership, you can use cash basis accounting, rather than traditional accounting.
With traditional accounting you pay tax and claim expenses based on the invoice or billing date.
If you choose to use cash basis accounting, you pay tax and claim expenses based on when the money leaves or enters your account.
Why would this matter? Well, if you’re getting paid for work on a monthly basis, then there’s probably very little difference. But, if you agree to and invoice someone for work several months before you get paid then it can change the year you pay tax on that income.
For example, if you use traditional accounting and invoice someone in March 2019, but don’t get paid until July 2019, you have to declare this income on your 2018/19 tax return and pay the tax on it by January 2020.
If you use cash basis, you would have to declare this income in the tax year you got paid, which is 2019/20. This means you wouldn’t pay tax on this until January 2021.
However, there are some downsides to cash basis accounting. For example, you can’t offset losses against your taxable income, or claim for more than £500 in interest costs, so you might want to get advice about what is best for you and your business.
Find out more about cash basis accounting on Gov.uk.
Do You Need an Accountant?
This is a difficult question and there is no definitive answer. If your business is brand new and you have a simple financial situation, you might want to see if you can manage by yourself, at least in the short term.
Make sure that while you are deciding what to do, that you at least your income and outgoings clearly so that you can pass them on easily if you do use an accountant.
Do you need a business bank account?
If you’re a sole trader or in a partnership, you do not need to have a business bank account. But, you might find it useful to keep your business and personal finances separate, particularly if you’re in a partnership.
If you’re running a limited company you do need to have a business bank account.
Like personal accounts, business bank accounts have a number of different features. You can compare different business bank accounts at:
Using Accounting Software.
If you want some help with your record and bookkeeping, then you might want to look at some of the commercial software suppliers.
What business insurance do I need?
There are lots of different kinds of business insurance on offer.
The best type of insurance for you will vary based on a number of factors, including:
- How many people you employ
- The assets you need to protect
- The type of business you’re running
Scroll down to take a look at what’s available and what you might need.
Running a business from home
If you’re setting up your business from home, the best thing to do is talk to your current insurer and explain your plans. They might ask for an additional premium on your current insurance. If you don’t tell your insurers and you need to make a claim, you might find that your insurance is invalid and that the claim won’t be paid.
Don’t assume that your personal household insurance will cover you. Even though nine out of ten home insurance policies will cover business equipment in your home – it’s best to be sure.
Typically, cover will depend on the use of the home being for clerical purposes only (for example, office work).
But you will not be covered if you have any visitors to do with your business (for example, client visits).
If your business uses vehicles, make sure that your policy includes cover for business use.
This also includes any private policies where an employee is driving their own vehicle in connection with your business.
If you’re unsure, get them to check with their insurer to confirm that business use is included.
Professional indemnity insurance
If you’re a professional who gives certain types of advice or services to your clients, then you should have professional indemnity insurance.
It pays out if you are negligent or make a mistake which causes your client to suffer a financial loss.
The types of business that use this kind of insurance include:
- Business consultants
- Financial advisers and many more
Not sure whether you need professional indemnity cover? Contact your trade association or an insurance broker for advice.
Employers’ liability insurance cover
If you employ people, then you must have insurance cover to pay compensation to employees injured while doing their jobs. This is a legal requirement.
Find out more about Employer’s Liability (Compulsory Insurance) Act 1969 from the Health and Safety Executive.
Buildings and contents insurance
This will protect you from loss if your premises and the contents are affected by fire, flood, theft and other damage.
The right level of cover will depend on whether you own or lease your premises as well as the value of your buildings and their contents.
The kit and machinery you use for your business can be insured for the cost of replacing them or their current value, taking wear and tear into account.
You can also get policies to protect machinery and IT equipment against breakdown.
This could be worth thinking about for all your equipment, or even just the key equipment that you wouldn’t be able to work without.
Tradesmen’s tools can also sometimes be added to another liability insurance product so it is worth asking if this is possible if you have public liability insurance.
Public liability insurance
This pays out in the event of a mistake by any of your business activities which cause injury or damage to a customer or member of the public.
Typical examples will be from a member of the public tripping and being injured because of a spill on a shop floor that isn’t marked with a warning sign.
You’re more likely to need this if people visit your premises, for example, if you run a shop.
For a few businesses like horse riding stables, it is a legal requirement.
Customers might want to see proof of adequate insurance before they’ll do business with you.
Product liability insurance
If goods you’ve made, sold, or repaired either hurt or kill someone or damage someone’s property, then you might have to pay compensation.
You could be held liable for the damage or injury caused by defects in your product design or manufacture even if you haven’t been negligent.
If your business is in a particularly high-risk sector, such as food and drink, the toy or electrical industry, then you should give serious consideration to this.
Product liability cover is often included with public liability insurance.
If you have goods or stock you send around the country, you might want to think about protecting them in case they are lost or damaged while being transported.
It usually covers road or rail and can often extend to inland or coastal waters. International transit by sea or air needs to be insured separately.
This covers you against the risk of your customers not paying you because they go bust or because they don’t pay in time.
You can tailor the cover to suit your needs – to cover the whole of your turnover or just that of key customers.
You can also protect yourself against the risk of not being paid by overseas customers.
However, you’ll still have to carry some of the risk yourself – so the insurance might cover you for 80% and you’ll have to bear the remaining 20%.
Key person insurance (sometimes also called Key man insurance)
This covers the business up to an agreed limit for any financial losses that would result from the sudden death or illness of a crucial member of the company – including the owner or manager.
People who could be covered include the director, a key salesperson, a vital project manager, or someone with specific skills or knowledge which is valuable to the company.
Legal expenses insurance
This covers the costs of defending a legal action such as solicitors’ fees and court costs.
Typically, this cover includes employment disputes, property protection and contract disputes.
Business interruption or business continuity insurance
This will cover you for the costs incurred and loss of profits if you are hit by a disaster like a flood or fire.
If you or your employees need to travel abroad for work, you might want to consider business travel insurance.
If it will just be yourself travelling for business, you might want to check with your personal travel insurance policy to see if it covers business trips.
Evaluate Your Work-life.
Take a few minutes to think about your work-life – what is working, and more importantly, what is not working.
Is procrastination getting in the way of your success?
Download the PDF and start tackling procrastination.
It is never too late to make a business plan. A clear idea of what you want to achieve in your business is essential.
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