Life for entrepreneurs is often jam packed, with every waking hour dedicated to the product or service you are providing. Administrative tasks such as the accounting and bookkeeping of your newly formed business can often be relegated to back bench or even ignored until the 11th hour of the filing deadline.
The ability to stay on top of your accounting records could not only save you money but also your new livelihood. Working in the growing business department at Alliotts Chartered Accountants I have seen first-hand where bad accounting could lead in both the long and short term. In this edition of the ‘The Start-up Guide To...’, I will be explaining how to successfully start your new business and the importance of choosing a set up which suits you.
There is a common misconception amongst new entrepreneurs that if you create a company, the profits are yours to do with as they like. This is not correct and in fact, depending on the structure of your company, spending company money on personal items can become very costly.
One of the first decisions as a founder you will have to make, is what type of business entity you wish to create. This decision will impact on the way in which your business is seen by the public as well as the taxes you pay and ultimately how you reward yourself.
The two alternative business types that this article will focus on are Sole traders (sole proprietorship) and Limited companies.
Creating a Sole proprietorship is arguably the easier of the two business types. All a founder must do is inform HMRC of their intention to become a self-employed worker. There are no other steps that need to be taken initially in order to complete your business setup. You also have full control and access to all profits made after tax. Filing a personal tax self-assessment once a year, unless your sales are greater than £83,000 (the VAT registration threshold), is your only initial responsibility to HMRC from a tax position.
However there are some drawbacks to operating as a sole trader, for instance the lack of limitation of liability that a company limited by shares offers. As a sole proprietor you are personally responsible for any debts the business incurs. Creditors can pursue you personally in order to recover the money the business owes. Operating as a sole trader may also make it difficult to attract investment and raise money.
For those who will one day look for outside investment to further your business, becoming a limited company could be a better option. As well as making it easier to attract investment there are other benefits to registering your company as limited. Additional benefits include the fact that the company is a separate legal entity to its owner. This means company founders will not normally be held personally responsible for losses the company may incur.
To register as a private company you must register with Companies House. In order to do so one must have;
1) Company Name & Address
The rules of choosing a company name are simple. Firstly do not use another company’s name. Secondly you cannot use names which could be considered offensive or have any connection to government or local authority.
The address to which you register your company must be a physical address within the country you are registered. This address will be the delivery address of all official correspondence.
2) At least one director and shareholder
You must appoint at least one director to your company. The director(s) are legally responsible for the company. They are responsible for making sure your company accounts are prepared correctly and filed on time. You also must appoint at least one shareholder. The shareholders are the owners of the business and have certain rights. A shareholder can also be the director of the business in fact it is common in startups for the director to also be a shareholder.
3) Details of shares
The share(s) a member holds will define their dividends entitlement and their voting rights. Therefore the way in which you decide to grant shares in your company should not be taken lightly.
Companies require that at least one share is allotted from the outset. It is common for businesses to create 100 shares at £1 pound each.
There is one more registration that is required and this is Corporation Tax registration. Which I will go on to explain further in the second edition of the 'Start-up Guide to... Taxes'.
The decision to become a soletrader or to create a limited company is an important decision. As a start-up you will face many challenges, but I hope that with the assistance of this article your new venture will get off on the right foot.
In the next part of ‘The Start-up Guide to’ I will be highlighting your future tax obligations, dependent upon the type of business you have decided to create. I will also be explaining how you can ensure that your taxes do not become too taxing.