Everything you need to do when you set up a business

Everything you need to do when you set up a business

If you want to know everything you need to do when you set up a business, you have come to the right place. You may have been planning for some time now to start a new business, but don’t really know where to start and what to do.

First things first, you have to decide the business structure, because there are different formalities and different obligations depending on the type of structure you set your business up with. There are several types of business structures, but you are most likely to fall into one of these two: (1) sole trader and (2) limited company.

And since you want to know everything you need to do when you set up a business, let’s first see what these two forms of business really mean, then you will be able to choose the right one for your business.

1. Decide your business structure

Sole Trader is the most common type of business when you first start out. The main characteristics of your business when you are a Sole Trader are as follows:

  • You are the self-employed owner of the business
  • You are solely responsible for work & liabilities
  • You have minimal reporting requirements
  • You pay tax via Self-Assessment, once a year at the latest on the 31st of January
  • You pay yourself through drawings (this is how the money that you take out of your business earnings to spend on your personal expenses is called)

 

If you set up your business as a Limited Company, then the following will apply to your business:

  • The business is a separate legal entity to you
  • You have limited liability
  • There are more reporting requirements
  • Tax is paid via Corporation Tax
  • You can pay yourself salary and dividends (which are declared via Self- Assessment)

 

Now that you understand the difference between these two types of business structures, let’s move on to the next four steps. These will ensure you are compliant with HMRC, you understand your reporting requirements and will help set you off on the right foot as a small business owner.

2. Understand your obligations

2.1. If you are a Sole Trader

2.1.1. Tax obligations

As a sole trader, you are responsible for your own taxes and liabilities. These are personally recoverable from you. This means that, should you fall into arrears with HMRC, they can pursue you through debt collection agencies and the courts. This is why you must keep a record of all your income and expenditure in the form of invoices, receipts, bank statements, etc and submit your tax return as a self-assessment every year at the latest on the 31st of January.

2.1.2. Insurance

While this is not mandatory, many business owners feel they should be insured. The type of insurance you need will depend on the type of services you offer, for example if you have customers visiting your premises or if you employ people. You need to consider if you need Professional Indemnity Insurance, Public Liability Insurance and Employers Liability Insurance at the very least. If you need help deciding on these, or you feel you need more information in order to decide, at LAS Accounting we are more then happy to guide you through the meanders of this complex topic.

2.1.3. Expenses

It is very important to remember that any expenses you claim through your business must be 100% for business use only.

2.1.4. Drawings

The amounts money that you take out of your business earnings when you are a Sole Trader to spend on your personal expenses are called Drawings.

Please remember that drawings should be taken from any profit the business makes as post tax deductions: this means that they do not reduce your tax liability, which is calculated on the profit BEFORE drawings are taken out.

2.1.5. Record keeping & GDPR

You will need to keep records of all your income and expenditure in relation to the business, this includes keeping copies of invoices and receipts. These can be stored digitally rather than keeping the paper copies. HMRC is in the process of making Income Tax fully digital as part of their Making Tax Digital for Income Tax initiative. This means that from 2024 you will be required to keep all business records in digital format and submit your self-assessment tax return electronically through HMRC approved accounting software. At LAS Accounting we use Quickbooks as well as Sage, which are fully approved by HMRC.

If you store any personal client data, such as home addresses or email addresses then you will need to comply with the General Data Protection Regulations (GDPR) and register with the Information Commissioners Office (ICO).

2.2. If your business is a Limited Company

2.2.1. Tax obligations

As a Limited Company Director, you are responsible for ensuring the business pays its taxes and liabilities.

This includes any PAYE and National Insurance contributions for employees, VAT and Corporation Tax.

2.2.2. Accounts

A Limited Company is required to submit annual accounts, which includes Profit & Loss report and a Balance Sheet to Companies House every year.

2.2.3. Confirmation Statements

As a Limited Company Director you are responsible for ensuring the company’s Confirmation Statement is submitted to Companies House every year.

The Confirmation Statement contains details of the Registered Office address as well as full details of all Directors and Shareholders.

2.2.4. Expenses

It is very important to remember that any expenses you claim through your business must be 100% for business use only.

2.2.5. Salaries & Dividends

A Director usually takes a salary as with any other employment. You will be an employee in your Limited Company. Since you will top this up with Dividends (the money that you take out of your business earnings to spend on your personal expenses), then usually the salary is kept below the Personal Allowance threshold to help you not pay more tax than you should.

3. Register your business with HMRC

All businesses must pay taxes and therefore register with HMRC. However, you pay your business taxes in different ways depending on the structure you have chosen, either Sole Trader or Limited Company.

3.1. Sole Traders

If you are a Sole Trader, you must register as self-employed on the HMRC website:

– You will need your business details, personal information & National Insurance number

– Once registered, you’ll be sent a Unique Taxpayer Reference (UTR)

– Tax is paid via Self-Assessment. The reporting year is between 6th April and 5th April and the tax due on the profit reported is payable on the 31st January the following year

– If your tax liability is more than £1,000, you will have to pay Payments on Account (PoAs) for the current tax year, which are paid in two instalments (31st January and 31st July each year)

­- Failure to register as self-employed can result in a penalty from HMRC.

3.2. Limited Company Directors

If you are the Director of a Limited Company, you must also register as self-employed on the HMRC website.

– Once registered, you’ll be sent a Unique Taxpayer Reference (UTR)

– Tax is paid via Self-Assessment. The reporting year is between 6th April and 5th April and the tax due on the profit reported is payable on the 31st January the following year

­- Failure to register as self-employed can result in a penalty from HMRC

4. Business bank account

Setting up a separate business bank account is highly advisable for Sole Traders and it is a legal requirement for Limited Companies. Not only does it help to keep your business and personal income and expenditure separate, it makes doing your accounts and tax returns so much easier and your accountant will thank you for it !

There are lots of great business accounts out there, some with free accounting software and others offering incentives and bonuses for new start-ups. Do your research and find a bank account that is suitable for your business structure.

5. Use Accounting Software

Using accounting software makes it easier to keep all your business’ financial records in one place. It will save you time and give you peace of mind. There are many benefits to having digital accounts; you can produce and email invoices, automate payments, set up bank feeds, photograph expenses and submit taxes.

There is increasing pressure on small businesses to digitise their accounting and tax reporting. Digital compliance is becoming a necessity given the emergence of Making Tax Digital (MTD). If you are a VAT registered business, then submitting digital returns to HMRC has been compulsory since April 2022.

From April 2024, MTD for ITSA (Making Tax Digital for Income Tax Self-Assessment) will apply for business owners with total business income above £10,000 per year, so it’s wise to invest in digital accounting software now to prepare for this. At LAS Accounting we use Quickbooks as well as Sage, which are fully approved by HMRC.

Your first step to using accounting software, which would save hours of administrative work, could be to record your expense paperwork instantly using a scanning app service, such as Autoentry or Dext. This type of software allows you to send photos of your expense receipts from your smartphone directly to your accountant. You can also automate regular supplier invoices and bank statements as well as electronic receipts, ready for bulk processing.

There are lots of great accounting software packages available. As mentioned before, at LAS Accounting we use Quickbooks as well as Sage, as we have clients with different needs and complexity.

How can LAS Accounting help ?

LAS Accounting Ltd can look after your payroll, corporation tax & VAT returns and compliance, saving you time and money to focus on doing what you do best – running and growing your business. We can also help you understand your business finances, monitor your cash balances, plan for future tax liabilities and pinpoint trends to help support important business decisions.

Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the accounting advice you need.

Don’t hesitate to get in touch for any further enquiries at: info@las-accounting.co.uk

 

 

 

Share This Post

About the author

If you need help with your accounts, please contact her at:

Newsletter

If you would like to receive my monthly newsletter containing useful information to help you with your accounts, tips about saving on taxes, or relevant HMRC news deciphered in lay terms, please sign up.

Your e-mail will not be disclosed or sold to third parties and will only be used to send you my newsletter.