Sole trader or limited company?
Business Baker Bukky — our resident accountant — has some brilliant advice for starting a new business
1. Choose Your Business Structure
Sole Trader: Simple and easy to set up. You'll be personally responsible for all the debts, but it's a great way to get started quickly.
Partnership: Share the responsibilities and joys of running a business with one or more people.
Limited Liability Partnership (LLP): Enjoy the benefits of limited liability, which protects your personal assets.
Limited Company: This is a separate legal entity, meaning your personal finances are protected from business debts.
2. Register Your Business
With Companies House: If you're setting up a limited company, LLP, or a limited partnership, this is your first step.
With HM Revenue & Customs (HMRC):
Sole Traders: Register for Self Assessment to pay your taxes.
Limited Companies: Register for Corporation Tax.
3. Set Up a Business Bank Account
Open a separate bank account for your business. This helps keep your personal and business finances distinct, making accounting and tax filing much simpler.
4. Understand Your Tax Obligations
Income Tax: Applies to sole traders and partnerships.
Corporation Tax: Applies to limited companies.
VAT: Register if your turnover exceeds £85,000.
National Insurance: Pay Class 2 and Class 4 if you’re a sole trader; Class 1 if you have employees.
5. Keep Accurate Records
Bookkeeping: Track all your financial transactions. Using accounting software like QuickBooks, Xero, or Sage can make this easier.
Invoicing: Set up a system to issue and manage invoices. Include important details like dates, amounts, and payment terms.
Receipts and Expenses: Keep all receipts and records of your business expenses for tax deductions.
6. Set Up an Accounting System
Choose Accounting Software: Pick software that suits your business needs, from invoicing to payroll to tax calculations.
Chart of Accounts: Create a chart of accounts to categorize your income and expenses (e.g., sales, rent, utilities).
7. Understand and Plan for Tax Deadlines
Corporation Tax: File your first accounts and pay tax within 9 months and one day after your accounting period ends.
VAT Returns: Submit quarterly if registered.
Self Assessment: Submit by 31st January each year (or 31st October for paper filing).
8. Create a Budget and Cash Flow Forecast
Budgeting: Plan your income and expenses to ensure you cover costs and make a profit.
Cash Flow Forecast: Estimate your cash inflows and outflows to avoid cash shortages.
9. Set Up Payroll (if applicable)
Register as an Employer with HMRC: If you have employees.
Payroll Software: Use software to manage wages, deductions, and pensions.
Understand PAYE: The Pay As You Earn system for employee tax and National Insurance contributions.
10. Consult with Professionals
Accountant: Hiring an accountant or bookkeeper can help you set up your financial systems and ensure compliance with tax regulations.
Legal Advice: Consider consulting a lawyer to draft contracts and understand your legal obligations.
11. Compliance and Reporting
Annual Returns: Submit your Confirmation Statement to Companies House.
Financial Statements: Prepare and file annual accounts with Companies House.
Summary Checklist:
Business Structure: Decide and register.
Bank Account: Open a dedicated business account.
Tax Registration: Register with HMRC.
Bookkeeping System: Set up and maintain records.
Accounting Software: Implement for efficiency.
Tax Deadlines: Note and plan for them.
Budget and Cash Flow: Create and monitor.
Payroll Setup: Register and use software.
Professional Advice: Consult with experts.
Our Accountant Baker, Bukky, can help you with all of the above services, plus company formation, preparing company accounts and tax returns, calculating corporation tax, and providing tax planning services.