This may seem a strange place to start but it actually determines a lot of the things you’ll do next. Setting up your business in the right way keeps costs down. It can also help prevent your working relationships turning sour (one of the major causes of business failure) if you are working with someone else. So first you need to decide which structure to use to set up your business:

a) A sole trader ,
b) Partnership, or
c) A limited company.

Noel’s Note: Start as a sole trader (or a limited company if you and a friend have bought this opportunity together). You can always ‘incorporate’ (set up as a limited company) at a later date. If you prefer to have the added protection of a limited company from the start, we will also look at how to trade as a limited company. This may sound daunting if it’s all new to you but you’ll be able to talk through any concerns and questions to put your mind at ease.

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Here’s some information on each structure:

Sole Trader

As a sole trader, you’re self-employed with no special legal structure. There is no distinction between you and the business. For simplicity alone, the sole trader is often the preferred choice for many start-up businesses; setting up is quick and easy and you can easily form a limited company later and transfer the business to it.

The major disadvantage is that you are personally liable for all your business debts. This means that your own assets — all of them — are at risk. Also you are entitled to fewer social security benefits, your options for raising money are limited and it is harder to sell the business or pass it on.

If you decide to be a sole trader, you must tell HMRC that you have started a business (and, if applicable, register for VAT.) (See “What to tell HMRC”.)

Each year you will be required to file a self-assessment tax return following the end of the tax year. Tax on your taxable profits is due every six months on 31 January and 31 July in the year following, so be sure to set aside sufficient provision against your profits to pay your tax. Non-payment by the due dates will result in automatic interest charges and, in some circumstances, penalties.

Noel’s Note: From your accounting spreadsheet, take the net profit each month and put 20% of this into a savings account. This will cover your tax – with more left towards a holiday! Business expenses are generally deducted from income if they are incurred wholly and exclusively for the purpose of your Bookkeeping business. Most expenses which form part of the day to day running of the business will be allowable. Notable exceptions are expenses of a “capital nature” (such as buying a computer) and entertainment (such as taking a client out for lunch).

For your expenses of a capital nature you can claim what are called “capital allowances”.

Partnership

A partnership has similar advantages and disadvantages to a sole trader, but there is one other factor to take into account which is that each partner is personally liable for all the business debts of the partnership (other than tax on profits), even if another partner caused them. So think very seriously about going into partnership with someone.

If you and a friend have bought this opportunity together then set up a limited company rather than a partnership. If you do decide to set up a partnership, to avoid disputes, we recommend that you have a partnership agreement drawn up (and agreed by all partners) which sets out the commercial understanding between the partners such as profit sharing, drawings, dissolution, retirement etc. A good commercial solicitor will draw this up for you.

For all practical purposes, much of what is said for the sole trader can also be said about the taxation of a partnership. There is, however, slightly more regulation and admin for a partnership because you have to submit a tax return for the partnership as well as one for each of the partners.

Limited Company

The final common business structure is a limited company. The first and most important point, for the owner of a new small business, is to understand that a company is a completely separate legal entity from its owner. It’s the shareholders who own the company, and the directors who govern the company’s activities. It’s really quite easy to set up a limited company so we’ve included a guide about how to do this at the end of this resource. A limited company must prepare and file annual accounts at Companies House (but you will not need an accountant to audit your accounts). Normally, the liability of the owners (shareholders who own the company’s shares) is limited to the amount they agree to invest in the company by buying its shares. However, there are still circumstances where personal liability may arise, for example, by giving personal guarantees or security on company borrowings, or the company trading wrongfully or fraudulently. As with a partnership, if your business is going to have more than one owner, the owners must determine what their working relationship will be. It is vital to discuss the main issues and write them down in a shareholder’s agreement (see below).

We recommend two further steps that the owners of a company take at the outset:

If there are only two of you (or two couples) don’t have a 50:50 shareholding: make it 51:49 so if you do fall out there isn’t a deadlock. We have known banks freeze a company’s bank account until a deadlock is resolved.
Secondly, appoint a trusted business friend you both agree on as a mediator to resolve any serious differences. What really sets a company apart from a sole trader or partnership is that a company pays corporation tax rather than income tax. This is paid on the profits (these include trading income, investment income and capital gains) remaining after deducting the salaries of the owners (which are taxed under PAYE). Corporation tax is generally payable nine months after the end of the company’s accounting period.

National Insurance contributions - both employers and employees - also have to be paid on salaries including those of company directors. For most small owner-managed limited companies it is sensible to pay the director’s salary at the level of the annual personal tax allowance (thus avoiding PAYE) and top this up with dividends which do not attract national insurance. However you can only take a dividend out of profits, so if you make losses initially while you are building up your business you will have to take your remuneration as salary. Another point to note is that further tax is payable when these (net of tax) profits are extracted from the business. The amount of tax payable depends on how this is done as there are different tax rules and rates of tax applicable depending on whether the profits are extracted as dividends by the shareholders or as a salary/bonus taken by the employees/directors. Don’t worry if this information seems overwhelming as you can ask any questions as part of your one hour call with our Chartered Accountant. On an ongoing basis, a good accountant or bookkeeper will remind or advise you.

What should be in my Shareholders’ Agreement?

A shareholders’ agreement helps all the people involved in starting a new limited company know where they stand, just like a partnership agreement. It should cover key issues for the business and likely ‘what if’ scenarios, including:

Investing money. Who contributes how much and in what form (e.g. as shares or as a loan), for what reward?
What happens if more capital is needed next year? How much will the company need to borrow and on what terms?
Withdrawing money: what dividends, directors’ fees and salaries will be paid?
What happens if one person needs to take out extra money?
Responsibilities: who makes decisions? Who is responsible for each business area? How will progress be monitored?
Growth: How fast will you expand? Into which areas of business? How much risk are you ready to accept?
Split up: can you buy each other out? Can you split the company up? How? And how will the shares be valued?
What to do if one of the shareholders dies, becomes ill, wants to retire or reduces their involvement.

Discussing and settling these issues is vital from the start. It minimises the risk of people feeling they are putting in too much time and effort for too small a share of the rewards and provides for what happens if they fall out at a later date. You can instruct a solicitor who is experienced in dealing with small businesses to draw up a shareholders’ agreement for you.

How to Register a Limited Company

This process is only relevant if you have decided to incorporate your Bookkeeping business as a limited company. You should have already chosen a business name and checked that it is available at www.companieshouse.co.uk You should now go to www.gov.uk/register-a-company-online and you will need the company’s name and registered address (probably your home address).

If you don’t want to use your home address, your accountant may allow you to use theirs or you could use a local serviced office (search ‘serviced offices [your area]’); Names and addresses of directors (probably just you); Details of shareholders and share capital (the amount of money you put in to form the company – usually a nominal amount).

Then just click on ‘Start Now’ and complete the online forms. There is no minimum amount of share capital you must subscribe for so we suggest £10; when asked for the types of share just enter @ordinary shares of £1 each. It will cost approximately £15 (at the time of writing this) and you should receive your certificate of incorporation within a week.

Congratulations! You are now both the owner of a limited company and a company director. When you register a limited company at Companies House they will automatically tell HMRC who will write to you with your unique tax reference (UTR). Keep this safe – you will need it in all dealings with HMRC and your accountant may need it too (if you have one). Treat your UTR with the same respect you give your NIC number. Your company is a separate legal entity and will be responsible for paying its own tax such as corporation tax (and VAT and PAYE if you also register for these). Any dividends you are paid by your company are treated as your income and taxed on you at your marginal rate. You must declare these on your self-assessment tax return.

PowerPoint presentation – 15 June 2021