There is a lot to consider when starting up a new business, from where to base your operations to how you structure the company. One of the most important decisions you make will be how to legally structure your business. Most businesses are categorised as sole traders, limited companies or partnerships. The type of structure will impact what you need to do to get started, including what paperwork you must complete. The structure will also influence how taxes are managed and paid, the personal responsibilities of owners, and how owners can take profits from the business.
Sole traders are self-employed business owners. This means that you work for yourself and run the business as an individual. As a sole trader, you can keep all business profits once tax is paid. Sole traders may employ staff but you are responsible for the business, including any losses it makes. To set up your business as a sole trader, you need to register with HM Revenue and Customs (HMRC) using your name or a business name. Each year, you need to send a Self-Assessment tax return and pay income tax on any profits. You also need to pay National Insurance. Sole traders also need to register for VAT if the business takes in more than £83,000 annually.
Setting up as a Sole Trader
Private Limited Companies
A private limited company has its shares traded publicly on a stock market. Directors or shareholders of the company are responsible for all debts, although the company's finances are separate from personal finances. Profits are owned by the company and subject to Corporation Tax, but they can be shared. Each private limited company has members, which are individuals or organisations that own shares in the company. To set up a private limited company, you must register with Companies House. You also need to inform HMRC when the company starts operating and register for Corporation Tax within three months of starting operations.
Register with Companies House
Running a Limited Company
You and your business partner or partners share personal responsibility for the company in a business partnership. Partners share profits and each partner must pay tax on their share of the profits. Partners are also responsible for their share of any losses as well as bills related to purchases for the business. A partner might be an individual or an organisation, such as a limited company. To set up a business partnership, you need to choose a name and register with HMRC. Each year, partners must complete a personal Self-Assessment tax return and a nominated partner needs to send a partnership Self-Assessment tax return. You also need to pay National Insurance and Income Tax on profits. The partnership must also register for VAT if there are takings of more than £83,000 annually.
Other types of partnerships include a limited partnership and a limited liability partnership (LLP). Under each structure, partners share in the business' profits and pay tax on their share. With a limited partnership, partners are responsible for debts. General partners are responsible for managing the business and can be personally liable for debts that business is unable to pay. Limited partners are liable to the amount they initially invested in the company. With a LLP, partners are not personally liable for debts the business cannot pay, although their liability is limited to the amount they invested in the business.
Running a Business Partnership
Registering your Company
When setting up a business, you need to register with Companies House. Private limited companies, limited liability partnerships, limited partnerships, business partnerships, and sole traders need to choose a name for their business. A sole trader or ordinary business partnership does not need to register with Companies House. For most types of businesses, owners need to live in the UK. Private limited companies need to have a registered office in the UK, although the company's directors do not need to live in the UK. You also need to register HMRC to pay taxes and file your annual tax return as well as pay VAT if necessary.
Registering your Company
Register for HMRC Taxes
Starting Up a Business
Before starting operations, you need to have a written business plan. Your business plan should include a budget and a financial plan. You should also write a business marketing plan. You also need to ensure you have enough funding for the near- and medium-term. You may need to look for funding from financial institutions and other sources, such as your Local Enterprise Partnership (LEP) and government grant and loan programmes.
Business Finance Support Finder
Checklist for Setting up your Business
Some key things that you need to do include:
- Register with Companies House
- Register with HMRC for tax purposes
- Check with Companies House that your business name is available
- Check and registered your trademark
- Obtain a business licence, if necessary
- Obtain insurance cover for your business
- Open a business bank account
Also, ask yourself:
- Do you have a suitable space that meets your business needs?
- Do you have adequate office furniture?
- Do you have the equipment you need (for example, computers, printers, telephones, etc.)?
- Does your workspace have good lighting and ventilation?
- Do you have enough storage space?
- Do you need to hire staff?
Business consultants provides a range of services to help businesses set up and start operations. Banks, universities, business organisations and other groups also provide advisory services to entrepreneurs and new business. Using a consultant or advisory service can help you save time and money, as well as provide the expertise you need to get your business off on the right footing.