Guide to starting up in business – Part 1
It can be quite a daunting prospect deciding to set up your own business. This is the first in a series of five articles covering some of the main areas for considerations from an accounting and tax perspective. The articles shall briefly cover the following points;
Who to notify
VAT and PAYE
Once you have decided that you are going to set up in business one of the first points to consider is the legal status of your business. The three most common types are Sole Trader, Partnership and Limited Company and these are briefly summarised below.
This is the most popular business type as it is easy to set up and administer. As a sole trader you are classed as self employed and in effect any profits made will be treated as your personal income and taxed as such. A common misconception is that you will be taxed on the amount of money you withdraw from the business. This is not so. There are no restrictions on the amounts you can personally withdraw but these are ignored when calculating the profit figure on which the tax liability is assessed. One of the main disadvantages with being a sole trader is that you are personally liable for the debts of the business. Your personal assets can therefore be at risk if the business cannot meet its financial liabilities. Also depending on the level of profits a sole trader may not be the most tax efficient vehicle through which to trade.
A partnership is very similar to a sole trader with the same advantages and disadvantages. The difference with a partnership is that it involves two or more people who agree to share the profits. Each individuals profit share is then treated as their personal income.
A limited company is a legal entity in its own right and is liable for its own debts. This removes personal liability from the directors so that if the company cannot pay its debts then the directors personal assets are safe. Some people feel that limited liability gives their business status and if your customer base includes other limited companies they may only deal with you if you are trading through a limited company. Depending on profit levels a limited company can also be a more tax efficient vehicle to trade through than a Sole Trader or Partnership. Disadvantages of a limited company include more complex filing and reporting obligations resulting in higher accountants fees. Also there are restrictions on the amount of money which can be withdrawn from the company by the directors and if these limits are exceeded then there can be tax consequences.
In the next article we shall look at who you need to notify that you have set up in business which will depend on the legal status chosen.
If you would like to discuss setting up in business or any other accounting or taxation issues please don’t hesitate to contact us. We are an ACCA registered accountancy practice located in the Northamptonshire village of Lamport. From Michael Paul Accountants Market harborough, Northampton, Kettering and Corby are all within easy reach.