Types of businesses and setting up in business

If you are considering setting up in business in the UK there are four types of business you could use to operating your own business, which are:

– Sole trader
– Partnership
– Limited company
– Limited liability partnership

So to expand on these business types – we start with a sole trader.

In many cases when people first start out the set up as a sole trader (except if there is more than one person involved in the business set up – whereby they might set up a partnership). A sole trader business is the simplest form of organisation and the easiest to establish from the outset, but make sure you register your new business with HMRC within three months to avoid a £100 fine. You can also call the HM Revenue and Customs (HMRC) helpline on 0845 915 4515 and you can even arrange to attend a free work shop.

The next thing you will need to do is to arrange a meeting with your local bank to set up a bank account for your new business. It is best to shop around and look for the best deals available, as you will find that most banks will offer free banking for one-two years for new businesses.

One thing to be aware of with a sole trader business is that you and the businesses are one and the same for “liability” purposes. In other words if all goes wrong, your personal assets are at risk, so if the business were to fail and was left owing money to it’s suppliers you would have to pay them out of your own personal assets, if you have any. If you do not have any assets you are a risk of being made bankrupt.

You as a sole trader can choose any accounting year end you wish, but for simplicity 31 March is often the most convenient. At the end of each accounting year you will need to prepare a set of accounts, which will need to be incorporated into a Tax Return. You will then be taxed on those profits, as an individual, even where those profits are not drawn from the business. In other words you are not taxed on what you draw from the business, but on the profits it makes each year.

You will pay income tax on those profits as well as Class 4 National Insurance and this will be payable in two instalments on 31st January and 31st July each year. As a self-employed individual you will also have to pay Class 2 National Insurance on a monthly basis. For the rates you will have to pay for both Income Tax and for National Insurance I suggest you go to the HMRC website and type in “income tax rates” and you should be able to find the latest rates you will pay.

Register for VAT – where applicable

If your business goes over a certain sales threshold you will need to register for VAT and for more details on this click this link – HMRC VAT registration. However, you might want to consider that there are other reasons for wanting to register for VAT even if your turnover has not reached the registration threshold. These reasons include, for example:

– If you are a business that supplies “Zero rated goods”, for example an exporter, then you might as well register as you will be able to claim the VAT on your supplies.

– If you are setting up a business that requires heavy capital investment at the out-set then you will want to be able to claim the VAT on the cost of this investment.

– For a marketing reason whereby if you don’t register for VAT, those businesses you deal with will know that your company is small so you can disguise this fact by registering so that you charge VAT on your supplies. Also, if you customers are mainly businesses then they will be able to claim the VAT back anyway so that this will have no affect on your customers. However, you might wish to consider this one a bit more if your customers are individuals, as it will make you 15% more expensive straight away.

STARTING A SOLE TRADER BUSINESS CHECK LIST

1. Inform HMRC that you are starting a business within three months of your start date. You will need to inform them of your name, address and NI number.
2. Establish business bank account and remember to search for the best “Free Business Banking” offer for new businesses.
3. Register for VAT if you wish too and in order to do so HMRC will require details of your bank account and some other evidence that you intend to trade.
4. Find an accountant to prepare your accounts and your end of year Tax Return.
5. Register for PAYE if you intend to have employees within the business – your accountant can help you on this point.

Second business type is a partnership

The essence of a partnership is similar to that of a sole trader except that it involves two or more individuals set up to trade in partnership with each other.

As with a sole trader business you must register the new business with HMRC within three months of setting it up to avoid the same penalties as that with an individual. As a partnership each partner is “Jointly and severally liable” for all the partnership liabilities. This means that if one of your partners runs up huge debts you will equally liable for them as he is. So make sure that you totally trust the person or persons you are entering into business with!

The profit or loss of the partnership is calculated in the same way as it is for a sole trader but the profits in this case are split between the partners on an agreed percentage basis, each partner is then taxed accordingly on their share of profits.

The difference for a partnership is that you will need to prepare a partnership tax return in addition to an individual Tax Return for each of the partners. Please note that the partners are individually responsible for their own tax and National Insurance payments, which are also paid in two instalments on 31 January and 31 July each year.

Register for VAT – where applicable

If your business goes over a certain sales threshold you will need to register for VAT and for more details on this click this link – HMRC VAT registration. However, you might want to consider that there are other reasons for wanting to register for VAT even if your turnover has not reached the registration threshold. These reasons include, for example:

– If you are a business that supplies “Zero rated goods”, for example an exporter, then you might as well register as you will be able to claim the VAT on your supplies.

– If you are setting up a business that requires heavy capital investment at the out-set then you will want to be able to claim the VAT on the cost of this investment.

– For a marketing reason whereby if you don’t register for VAT, those businesses you deal with will know that your company is small so you can disguise this fact by registering so that you charge VAT on your supplies. Also, if you customers are mainly businesses then they will be able to claim the VAT back anyway so that this will have no affect on your customers. However, you might wish to consider this one a bit more if your customers are individuals, as it will make you 15% more expensive straight away.

STARTING A PARTNERSHIP BUSINESS CHECK LIST

1. Inform HMRC that you are starting a business within three months of your start date. You will need to inform them of your name, address and NI number for each of the partners in the business.
2. Establish business bank account for the partnership and remember to search for the best “Free Business Banking” offer for new businesses.
3. Register for VAT if you wish too and in order to do so HMRC will require details of your bank account and some other evidence that you intend to trade.
4. Find an accountant to prepare your accounts and your end of year Partnership Tax Return and individual Tax Returns.
5. Register for PAYE if you intend to have employees within the business – your accountant can help you on this point.

Third business type – a limited company

A limited company is more complicated to form than a sole trader or a partnership business and you will need to do this through Companies House. However, you will be better off using a company formation agent to do this for you, as they have all the standard documents needed to register your new company. You will need to choose a name and it must be one that has not already been registered at Companies House before.

However, if you want to see the Company Formation Procedure click this link.

A limited company is a separate legal entity to the individual(s) that own it and this is done through owning shares. A company must also have “Officers”, which includes directors and a company secretary.

With reference to liabilities, provided the company is not trading illegally or fraudulently the shareholders will not become liable for the liabilities incurred within the company, which means that shareholders personal assets are not at risk if the company is liquidated (or in layman’s terms “goes bust”). This protection is called limited liability and is why in some cases people use a limited company as the type of business to trade through.

In addition to forming a company and registering this with Companies House you will also have to register the company with the HMRC using form 41G. At the end of each accounting year you will need to prepare a set of “Statutory Accounts”, which means that the accounts have to comply with certain formalities. You are better of using an accountant to do this for you so that you get the format correct. These accounts must be submitted to Companies House within 10-months of the year end to avoid a £100 penalty (or within 22-months of the incorporation date) and these accounts are on public record for all to view. See changes to the rules on accounts filing deadlines and late filing penalties for account periods beginning on or after 6 April 2008.

The same accounts must also be sent to HMRC and must be accompanied by Form CT600, which is a Company Tax Return, within 12-months of the business year end to avoid a £100 penalty. Tax on a limited company is due and payable within 9-months of the year end.

There are only four ways to take money out of a limited company and each way has its own tax implications. Please note that, as a company director, you will have to complete an annual Tax Return.

Register for VAT – where applicable

If your business goes over a certain sales threshold you will need to register for VAT and for more details on this click this link – HMRC VAT registration. However, you might want to consider that there are other reasons for wanting to register for VAT even if your turnover has not reached the registration threshold. These reasons include, for example:

– If you are a business that supplies “Zero rated goods”, for example an exporter, then you might as well register as you will be able to claim the VAT on your supplies.

– If you are setting up a business that requires heavy capital investment at the out-set then you will want to be able to claim the VAT on the cost of this investment.

– For a marketing reason whereby if you don’t register for VAT, those businesses you deal with will know that your company is small so you can disguise this fact by registering so that you charge VAT on your supplies. Also, if you customers are mainly businesses then they will be able to claim the VAT back anyway so that this will have no affect on your customers. However, you might wish to consider this one a bit more if your customers are individuals, as it will make you 15% more expensive straight away.

STARTING A LIMITED COMPANY BUSINESS CHECK LIST

1. Engage a formation agent to form a limited company for you and register this with Companies House.
2. Inform HMRC that you are starting a business with Form 41G providing them with details about the company, its trade, the trading address and details of the directors of the business together with the start of trading date and your chosen year end.
3. Establish business bank account for the limited company and remember to search for the best “Free Business Banking” offer for new businesses.
3. Register for VAT if you wish too and in order to do so HMRC will require details of your bank account and some other evidence that you intend to trade.
4. Find an accountant to prepare your company accounts and your individual director Tax Returns.
5. Register for PAYE if you intend to have employees within the business – your accountant can help you on this point.

Fourth trading type is Limited Liability Partnership (LLP)

A limited liability partnership his has some of the characteristics of a partnership and of a limited company. The partners are protected in the same way as the advantage of limited company by having limited liability, so that in the event the LLP were to cease owning money the partners would be protected, however, this is also subject to similar rules about fraudulent or illegal trading.

The accounts of a LLP must also be prepared in a certain format and have to be sent to Companies House to be available to the public for all to see. However, a LLP is taxed like any other partnership in that the partners are taxed individually on their share of the partnership profits. The filing deadlines for company accounts an LLP are the same as that for a limited company, but see the changes to the rules on accounts filing deadlines and late filing penalties for account periods beginning on or after 6 April 2008.

Register for VAT – where applicable

If your business goes over a certain sales threshold you will need to register for VAT and for more details on this click this link – HMRC VAT registration. However, you might want to consider that there are other reasons for wanting to register for VAT even if your turnover has not reached the registration threshold. These reasons include, for example:

– If you are a business that supplies “Zero rated goods”, for example an exporter, then you might as well register as you will be able to claim the VAT on your supplies.

– If you are setting up a business that requires heavy capital investment at the out-set then you will want to be able to claim the VAT on the cost of this investment.

– For a marketing reason whereby if you don’t register for VAT, those businesses you deal with will know that your company is small so you can disguise this fact by registering so that you charge VAT on your supplies. Also, if you customers are mainly businesses then they will be able to claim the VAT back anyway so that this will have no affect on your customers. However, you might wish to consider this one a bit more if your customers are individuals, as it will make you 15% more expensive straight away.

STARTING A LIMITED LIABILITY PARTNERSHIP CHECK LIST

1. Complete form LLP2 and send this to Companies House – you can get this form from the Companies House website.
2. Inform HMRC that you are starting a business and provide them with details about the partnership and partners within the business.
3. Establish business bank account for the limited liability partnership and remember to search for the best “Free Business Banking” offer for new businesses.
3. Register for VAT if you wish too and in order to do so HMRC will require details of your bank account and some other evidence that you intend to trade.
4. Find an accountant to prepare your company accounts and your individual director Tax Returns.
5. Register for PAYE if you intend to have employees within the business – your accountant can help you on this point.