How to; set up your business idea?

If you have a business idea, you’re probably wondering how to go about setting it up, or what to do next?

Well the first thing you have to decide is; what kind of business will it be?

Sole Trader vs. Limited Company

Sole Trader:

There are more than 5 million businesses in the UK and most of them are small or medium-sized, the small businesses are mostly sole-traders, also known as sole proprietor and sole operator.

This is simply because it is the easier option when setting up, as you do not need to register the business with ‘Companies House’.

Sole-traders have unlimited liability and are therefore personally responsible for all business debts and liabilities.

You do however have to register with ‘HMRC’ for self-assessment.

Suitability & Requirements:

This structure is best suited for people who wish to operate a straightforward business with minimum administration and reporting requirements as well as the lowest financial risk.

For the business to be classified as a ‘small business’ for tax purposes; you need to be earning a steady annual taxable income of less than £31,865 (as of 2014/15 income tax rates).

As a sole trader you are responsible for reporting this income to the HMRC by filling in your tax return every year.

The deadline for returning your self-assessment tax return in the UK is 31 October for paper forms and 31 January for online forms.

Through the self-assessment tax return scheme, income tax is paid in two instalments on 31 January and 31 July.

All business profits are subject to Tax and you are responsible for your National Insurance contributions.

All profit, even if it is reinvested in the business, is classed as personal income and is taxable.

This is an important point to remember when it comes to planning your income tax payments.

Note:

Make sure that you put enough money aside each month to pay your tax bill by the required deadlines.

Cash flow fluctuations in your business can sometimes make it difficult to come up with the required payments when required.

You should also be aware that if you do not pay on time, you will have to pay penalties and interest on what you owe.

Choosing a name:

You can decide if you want to use your own name or choose a different name for your business.

However if you chose to use a different name other than your own, you will need to make sure your business stationery displays both your name and the trading name of the business, for example John Smith trading as Ace Builders.

If you name includes certain words, it might require written approval from the ‘Secretary of State’.

Controlled names are set out in statutory regulations.

For information on this contact Companies House.

Limited Company:

The benefits of a limited company structure come into play when your business activities present a potential financial risk to the owners.

If your business grows and the turnover increases, there might be a need or wish to expand geographically, maybe even enter a new market.

In such instances, a limited company structure is more advantageous, both financially and professionally.

Limited company owners are protected by limited liability because this type of business structure has an individual identity in the eyes of the law.

it is an identity that exists separately from that of the business owners.

As such, any debts or liabilities arising as a result of business activities are the responsibility of the limited company.

The owners are only liable to lose what they have already invested in shares; or guarantees if the company becomes unable to pay its bills.

Unlike sole traders, limited companies are subject to Corporation Tax of 20-21% on all forms of taxable income.

These rates can be far more favourable than that of a Sole-trader, particularly when profits increase and the rates you have to pay are offset by deductibles. (Consult your Tax Accountant)

Summary:

There is a potential for huge tax savings for many small business owners if they operate as a limited company instead of a sole trader – with careful planning, you could legally minimise your personal tax and National Insurance liabilities by paying yourself a mixture of a salary and dividends.

Indeed, the administrative burdens of a limited company are not terribly appealing but the benefits usually outweigh these small inconveniences.

You can hire an ‘Accountant’ to take care of the tedious bookkeeping and accounting responsibilities if you’d rather avoid such tasks.

Have you decided which is right for you yet?

At ‘Finance Magnate’ we can help you make an informed decision as to the implications on your particular type of business.

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