10 THINGS TO CONSIDER WHEN STARTING TO WORK FOR YOURSELF OR THINKING OF SETTING UP A COMPANY.
For entrepreneurs, turning a passion into a business is the ultimate dream. However all too frequently people are so focused on their area of expertise they neglect the necessary setup stages, leaving the administration and the setting up their company as an after-thought.
WHAT STEPS SHOULD YOU BE THINKING ABOUT?
When you start working for yourself it can difficult to know which way to go first, you’re more keen on developing your skill or your product. It is however worth taking some time to sit down and get organised to ensure you are operating correctly from the start. There are a few things you need to think about, before you start to trade:
- Bank Account – simple – open a separate bank account to keep all work related expenses and income separate from personal income and expenses.
- Records – ensure you keep all receipts, statements, invoices etc. Basically keep any paperwork you can for all monies going out and all monies coming in. It is recommended that you keep records for 6 years – it can be electronic copies.
- Business Plan – what are you selling? What outlays will you have? Where will you find your customers? What price will you charge for your goods or service? Do you need financing (loan) to get yourself started? If you do a bank will require a detailed business plan.
- Budget for Taxes – as soon as you start making income it is likely that you will owe Income Tax and National Insurance (to HMRC) (and possibly Corporation Tax) so ensure you set some of your income aside to pay this. Estimate how much to put aside either monthly or from each payment you receive.
- Insurance – make sure you consider adequate liability insurance as well as usual property / content / intellectual property insurance.
- Licences / Permits – are you going to be working with music, or food or trading on the street? If so permits or licenses may well be required, along with many other sectors.
- Choose a company name – there are rules you need to follow regarding your company name such as not taking one which is too similar to an existing company name. Check out the Companies House Register.
- Employing other people – if you plan to hire other employees you need to register for employer’s payroll with HMRC. You must ensure you deduct correct taxes, pay at least the current minimum wages and declare the values to HMRC on a monthly basis.
- Accountant – a good accountant can assist you in the setting up of your new venture. They know their way around the HMRC system and Companies House. They keep up to date with latest legislation changes and provide reassurance that your venture is being correctly administered. If in doubt, ask your accountant for advice.
- Business Structure – you must choose a structure for your business, i.e. how you will operate. You can change your business structure at a later date, as your business develops. The most common format options are:
- Limited company;
- Partnership & LLP.
- This structure you choose will define your legal responsibilities, such as:
- Registrations you must fill in to get started;
- The taxes you’ll have to report and pay;
- How you can personally take the profit your business makes;
- Your personal responsibilities if your business makes a loss.
SELF-EMPLOYED V LIMITED COMPANY – WHICH TO CHOOSE?
How to decide which structure to opt for? Below are some definitions of each option and some extra information you may want to consider in each case.
- If you form a Limited Company, its finances are separate from your personal finances, but there are more reporting and management responsibilities.
- Your liabilities are limited to what you put into your company.
- You will be considered as an owner and employee of your company.
- You need to register your business with Companies House and make an annual report.
- You need to register with HMRC for Corporation Tax, Self-Assessment and make annual reports.
- All allowable business expenses are deducted before calculating Corporation Tax.
- As an individual you will pay Income Tax and National Insurance Contributions on the personal ‘salary’ amount only. There may be employers NI to pay also.
- 3 ways to draw money from the business 1) Salary 2) Dividend 3) Directors Loan. You can optimise this to make it the most tax efficient scenario for your circumstances.
- An Accountant is not necessarily required as you don’t need to be audited until you have a turnover of £6.5m. However there are advantages to having an Accountant, particularly as your business grows in complexity, in order to keep up to date with current legislation.
- Agencies can require a Limited Company setup if you do agency contracting work.
- A Limited Company provides a professional outlook when dealing with other companies.
More information on how to set up a Limited Company will be available in a future post.
SELF EMPLOYED / SOLE TRADER
- It’s simpler to set up as a sole trader.
- However you’re personally responsible for your business’s debts and your liability/risk is not limited.
- You have some accounting responsibilities. You need to register with HMRC for Self-Assessment and make and annual return and tax payments.
- You can deduct some of your business running costs to work out your taxable profit as long as they’re allowable expenses.
- The remaining amount after deducting expenses and paying Income Tax, NI and other taxes is then yours.
- Simplified expenses can be used. They are a way of calculating some of your business expenses using flat rates instead of working out your actual business costs. See upcoming posts for more information relating to self-employed expenses.
- You pay Income Tax and National Insurance Contributions at the same rates as if you were employed by another company.
More information on how to set up as a sole-trader will be available in a future post.
If you opt to be a sole trader, are known as self-employed. You will have the following characteristics:
- You run your business for yourself and take responsibility for its success or failure;
- Have several customers at the same time;
- Can decide how, where and when you do your work;
- Can hire other people at your own expense to help you or to do the work for you;
- Provide the main items of equipment to do your work;
- Charge an agreed fixed price for your work;
- Sell goods or services to make a profit (including through websites or apps);
- Sell online, at car boot sales or through classified adverts on a regular basis;
- Earn commission from selling goods for other people.
You’re probably not [classed as] trading if you sell some unwanted items occasionally or you don’t plan to make a profit. You can’t use any losses you make as part of a hobby to reduce your tax bill.
While many of the above characteristics also apply if you own a limited company you’re not classed as self-employed by HMRC. Instead you’re both an owner and employee of your company.
You can be both employed and self-employed at the same time, for example if you work for an employer during the day and run your own business in the evenings.
Pinnacle are here to help! If you would like assistance in setting up a Company or if you are not sure which structure will be best for you, we will take the time to understand your business before helping you to identify the best setup for your current circumstances.
We can also help collate, calculate and report your annual returns of information to HMRC and Companies House. It’s worth noting that fines and penalties are imposed for late returns, late payments and any mis-information provided.
Remember you need to set up your structure before you start trading. Everyone who ‘trades’ needs to submit a report to HMRC even if you have no overall taxes to pay.
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