STARTING A NEW BUSINESS? WHAT YOU NEED TO KNOW

Released On 18th Jun 2024

If you’re preparing to start your new venture, there are steps you need to take to make your launch as smooth as possible and comply with commercial law.

Planning ahead can help you avoid contravening important regulations and minimise your financial liabilities – protecting your cash reserves for future investment in your business!

Here’s everything you need to know before starting your business, from tax planning to filing with Companies House.

Choosing a business structure

The legal structure of your company will impact the rest of your financial planning, so it’s important that you make this decision early.

There are several factors to consider when choosing a business structure, including:

Financial liability
Whether you want to employ staff
Capacity for administrative tasks
How many people are starting the business with you
Tax obligations

You could operate as:

A sole trader – You operate your business as an individual and your finances are legally tied to the business, meaning you can keep any profits but must also pay any debts or taxes owed. You’ll be taxed via Self-Assessment for Income Tax.
A partnership – You and a partner run the business jointly and bear joint responsibility for its success, losses and debts, paying tax via Self-Assessment for Income Tax.
A limited company – You register the business with Companies House, making it a separate legal entity, thereby removing financial liability from yourself, although you will need to bear additional administrative responsibilities, pay Corporation Tax, and extract profit through salary, dividends and director’s loans.

You might also consider a limited liability partnership (LLP), in which partners are limited in liability to the capital they have invested.

You can adopt a different business structure further down the line if your commercial needs change.

For example, a sole trader may decide to incorporate as their business grows and they want to transfer risk to a separate legal entity.

Tax planning

There are typically two ways to pay tax as a business owner, depending on whether you have incorporated or not.

As a partner or sole trader, profit from your business is considered personal income, meaning you need to report it via Self-Assessment and pay National Insurance and Income Tax through your online account with HM Revenue & Customs (HMRC).

Directors of limited companies are generally salaried, meaning tax is paid through PAYE. You may need to report dividend income via Self-Assessment.

Additionally, the business itself will be subject to Corporation Tax at the rate of:

Profits under £50,000 – 19 per cent
Profits over £250,000 – 25 per cent
Profits between £50,000 and £250,000 – a tapered and increasing rate between 19 and 25 per cent.

You will also need to register and pay VAT if you exceed a taxable turnover of £90,000 or more per 12-month period.

To minimise tax liabilities, you’ll need to plan around considerations such as allowable expenses or deductible expenditure, such as staff costs or plant and machinery (e.g. office equipment).

Accounting requirements

When starting a business, it’s important to remember that you’ll need to keep records of all transactions, including expenses and outgoing and incoming invoices.

These will be used to determine your taxable income/profits.

You’ll need to report this via your Company Tax Return or Self-Assessment, whichever is applicable to your business type.

Depending on the complexity of your operation, you may need to consider integrating accountancy software into your accounting procedures.

Accessing finance

Many business owners need to access capital to fund their new business.

Depending on your business type, there are several funding options available to you, including:

Loans – Such as from a bank or building society, these are repaid with interest to the lender as with a personal loan. They may be more widely available for businesses but require good credit and the ability to make repayments.
Investment – Many new businesses receive private investment in exchange for a certain percentage of profits when the business begins to succeed.
Grants and Government funding – For new businesses in certain high-growth sectors such as life sciences or sustainable energy, non-repayable grants may be available.

You’ll need to plan around tax liabilities when accepting new funding and pay careful attention to reporting requirements and profit-sharing agreements.