Thinking of starting a business, but not sure what you need to know? Begin your journey here with my basic guide to business start-ups. In my role as Editor for The Business Show and Business Startup, I have talked with literally thousands of business owners and entrepreneurs about what they really need to know, not what a business guru thinks they need to know. This series is the result. Today’s blog looks at the various formats your business could take, how they differ and what your legal requirements would be for each.
Which Format Should You Choose For Your Business?
You’ll need to decide which legal structure is right for your business before you register and start trading. This will affect what paperwork you need to fill in to get started, the taxes you’ll have to pay, how you can take profit from your business, and your responsibilities if your business makes a loss. This is also a good time to consider what kind of business insurance you may need. There are three main kinds of business format, so let’s look at each in turn.
You’ll run your own business as an individual, even if you employ staff. You can keep all your profits after tax. You’ll also be personally responsible for any losses, bills for things like stock or equipment, and keeping records of your sales and spending. You have to register with HMRC, send a self-assessment tax return every year, pay Income Tax on the profits your business makes, pay National Insurance and register for VAT if you expect your business’ takings to be more than £79,000 a year.
This organisation is responsible in its own right for everything it does, so its finances are separate to your personal finances. After Corporation Tax, any profit is owned by the company, which can then share its profits. Every limited company has ‘members’, who own shares in the company. These can be people or organisations. The shareholders’ responsibilities for the company’s financial liabilities are limited to the value of shares that they own but haven’t paid for. Directors are responsible for running the company and often own shares, but don’t need to. They aren’t personally responsible for debts the business can’t pay, as long as they haven’t done anything illegal.
You must set up the company with Companies House and let HMRC know when the company starts business activities. The company must register for VAT if you expect its takings to be more than £79,000 a year. Every financial year, the company must complete statutory accounts, send Companies House an annual return, and send HMRC a Company Tax Return. The director must fill in a self-assessment tax return every year, and pay tax and National Insurance through the PAYE system if drawing a salary from the company.
You and your business partner (or partners) share responsibility for your business – and the profits. Each partner pays tax on their share of the profits. You’re personally responsible for your share of any losses and bills. A partner can be a limited company, but you must have a ‘nominated partner’, who must register the partnership with HMRC, keep records and manage tax returns. All partners need to send a personal self-assessment tax return every year, pay Income Tax on their share of the profits and pay National Insurance. The partnership must register for VAT if you expect its takings to be more than £79,000 a year. There are also limited partnerships and limited liability partnerships, where limited partners aren’t personally liable for business debts (unlike General Partners), as their liability is limited to the amount of money they invest in the business.
Only you can decide which format is right for you. There are pros and cons to each and different businesses can benefit in different ways, so the smart move is to talk to a professional with experience of the implications of your decision. Accountants are good at this, or you could find an experienced business mentor.
NEXT: How to attract investment
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