Starting a new business is a very exciting time, but it also can be a little daunting, with much to think about. A good place to start is with your business plan. The plan is essential when you start your business, as it is used to monitor how you are doing, compared with what you had planned.
At Allchurch & Co we have recently been through this process, and are always willing to share our experiences and ideas. We are here to support you, and to ensure that your business set-up is as efficient and pain free as possible. We are proud to be an ICAEW Business Advice Service firm, who provide SMEs and start-ups with a free of charge consultation.
A key thing to consider, which is sometimes over-looked through lack of understanding, is what type of business structure you are going to operate through. In this article, we touch on some of the available structures and just a few of the advantages and disadvantages.
Incorporation Vs Self employment
The decision you have to make, is whether to set up a limited company or become self-employed. If you choose to go self-employed this could be either as a sole trader or a partner in a partnership.
One of the main benefits of working through a limited company, is that your personal and business finances are distinct, so if a claim is made against your company, you will not be personally liable (assuming nothing illegal has taken place). Whereas working as a sole trader, if a financial claim is made against your business, your own personal finances may also be included in any settlement.
Running your business through a limited company does however, result in increased administration time and costs, such as preparing company accounts, and it will mean abiding by company director and shareholder legislation. Whereas setting up and operating as a sole trader is simpler.
The way in which each structure is taxed, is also something to consider. If you are self-employed or a member of a partnership, then your business profits and other personal income is taxed via the annual self-assessment process, which will be subject to income tax and national insurance after taking into account your personal allowance.
Limited companies are liable for corporation tax on their business profits. Corporation tax is calculated, based on your accounting period profit, the corporation tax rate is currently 19% for the 17/18 tax year. As a director and shareholder of a limited company you can become an employee of the company and take a combination of a small salary (which is an allowable expense for corporation tax purposes and subject to PAYE) and dividends which despite not being an allowable expense for corporation tax purposes, are declared and taxed at a lower rate on your annual self-assessment. Unlike the sole trader route, a limited company can retain profits and distribute them as dividends in future tax years if necessary.
In some instances, you may consider operating through a limited company, as it appears more professional or may be a requirement. The structure of your business could also impact funding options available to you. Registering a limited company also protects the name of your business, and ensures no one else uses the same name.
In summary, there is no right or wrong business structure, just the one that suits your individual situation. You may wish to start as a sole trader and later form a limited company. The route you choose is very much up to you. Allchurch & Co are happy to explain all the advantages and disadvantages which haven’t been covered in this article, and support you through your decision making process.
Don’t forget if you need to register with HMRC for self-assessment for the tax year ending 5 April 2017, the deadline is 5 October 2017.