You’re here because you’ve decided to go out on your own. You’ve got a viable idea for a business or you’re simply done with being an employee and keen to be the master of your own destiny.
So where to start? You’ll have a lot of decisions to make in the early days of your business, and you’ll be tempted to jump to all the fun things like creating a logo, designing a website and, of course, bringing home the bacon.
But there are some foundational things to square away first, so you can get to the fun stuff confident you’re all set up properly. The first and most important choice is how to structure your business.
Understand what each business structure offers
A business can be structured in different ways, and the upsides and downsides of each option depend on your circumstances and how you need the business to operate for you. What works for one person may not work for another.
We’re going to delve into some of the most common options to help you decide what you need.
Setting up as a sole trader
- As a sole trader there’s no separation between business and business owner
- You own all profits and assets, and are liable for any debts
- You will have to file an annual self assessment tax return digitally
- This is a good option if you’re starting out or want to keep things fairly small and simple
Many of our clients began their journey as a sole trader and it’s a common choice for those becoming self employed for the first time. It’s one of the simplest ways to trade, and easy to get set up. Once you’ve chosen a valid business name and registered for self assessment tax with HMRC, you’re pretty much good to go.
Being a sole trader means there is no separation between you and the business.
As a sole trader everything belongs to you and you take on all the responsibility – the profits are yours, the assets are yours. That also means the liabilities are yours. Any debts you incur will be your own, rather than belonging to the business. If debts rack up or something goes wrong, this lack of separation between you and the business means you could lose your personal assets as a result.
Really, the major pro and con is the same, depending on how you look at it – total control! Total control means you get to keep all the profits you make after taxes, but it also means taking the financial risk of being personally liable.
As a sole trader, you still need to keep financial records.
Though it’s a breeze to get set up, sole traders still have accounting to do. You’ll need to keep a record of your sales and expenses in order to file your self assessment tax returns. It’s important to keep yourself accountable to good record keeping, to avoid a mass search party for receipts and invoices when it comes to tax time.
Some top tips if you decide to register as a sole trader:
- Open a separate business bank account – it will be much easier to manage the incomings and outgoings of the business, and keep your own personal money separate. By having a second account, you have a dedicated place to save for taxes, so you don’t have to dip into your own pocket. A digitally advanced bank is preferable!
- Make use of tech and tools – These days you can guarantee there’s an app to help you do most of the manual things that steal your time. We recommend Xero and Dext for Sole Traders particularly, and we have a suite of tools we recommend for managing accounting, payments, business expenses, and so on. You don’t have to use them all, but it’s worth exploring the tech that’ll be most helpful for you.
- Do get the help of an accountant for your taxes – you will need to keep a record of your financial transactions throughout the year. And though paying self assessment tax may seem easier than paying taxes as a limited company or partnership, it can still feel like a confusing and panicky burden. An accountant will help you keep track and pay the right amount of tax, so you’re confident you haven’t underpaid or overpaid.
- Consider that it may not always work for your business – as a sole trader, you can change your business structure later down the road.
Setting up a Limited Company
- A limited company is a separate entity from the business owner
- It comes with more accounting responsibilities and is a little more complex to set up than the sole trader structure
- Choosing to register as a limited company gives you more growth opportunities.
This would be a good option to choose if you:
- Expect to grow and build a team
- Want to protect yourself from risk
- Want to claim R&D – here’s a helpful blog if you’re wondering whether you qualify for an R&D claim
- Have higher income – there’s a greater scope for tax planning
- Want some anonymity and stature
- Are looking for investment
Unlike the sole trader structure, a limited company is a legally separate entity from you as the business owner. The business finances are completely separated from your personal finances. This means as the owner and director, your personal assets are protected. If your business goes into debt, it’s the company that owes, not the individual.
Being separate from the business means you will become an employee of your business. You can pay yourself a salary, which can be organised according to your needs and circumstances. You’ll also have the opportunity to pay yourself dividends (a share of the profits) from the business. In a limited company, the company is taxed straight away but you can chose when you take ‘your’ income to manage tax.
With a limited company comes more responsibility.
Not as memorable a quote as the one from Spiderman, but important to consider. There’s a little more set up work to be done, and you’ll be listed on Companies House – meaning some details about the company and its director are required to be available to the public online.
There are also increased filing requirements for Limited Companies. You’ll be required to file the following to HMRC and Companies House:
- Annual accounts
- Confirmation statement
- Corporation tax return
- VAT returns – If you’re earning over the VAT threshold (though you can register voluntarily before the threshold, which can be advantageous for some).
- Employer (PAYE) returns – if you take on employees
There’s no particular point at which you’re required to become a limited company, but choosing a limited company can give you more opportunity for growth and investment.
Some top tips if you do decide to register as a limited company:
- Really THE top tip, enlist the help of an accountant – you’re going to want some support with the requirements mentioned above, to make sure you’re doing things as tax efficiently as possible. But an accountant can be more than just a box ticker for taxes. We stay by your side as you scale your business, helping you manage the finances so your business is working for you and your goals. See how we work here.
- Get (and fall in love with) Xero – To get the most from your limited company without becoming stressed and overwhelmed, you want the combination of an easy-to-use accounting software and a great accountant. We explain why here. But basically, don’t be doing a load of manual accounting on your own. That’s a recipe for business owner burnout!
How to get set up when you’ve chosen your structure
It’s fairly easy to get yourself set up as a sole trader – you can simply follow the instructions to register for self assessment on this HMRC setup page.
If you’re thinking of setting up a limited company, it’s a slightly more complex process and it’s best to get some help. We have experience setting up companies for our clients, and can help you make sure you’re ticking all the right boxes. Drop us a message to get some support.
We love to see a creative vision become a viable thriving business. Once you’ve chosen your structure, read this blog: How do I make sure my business is set up correctly and I don’t run into problems later. We help you prioritise the most important things to focus on from the get go.
Whatever structure you choose, we salute you! Becoming a business owner is a brave and wonderful thing, and you’re in for a wild and exciting (and sometimes scary) journey. Small businesses are vital for local communities and the lifeblood of our national economy. Welcome to the club, friend.