Sole trader? Ltd? Partnership? Self-Employed? READ THIS.

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Runninground
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#1
Report Thread starter 8 years ago
#1
The Entrepreneurs & Freelance section of TSR frequently gets new threads asking about starting your own business and where to start. I hope this can give you all some ideas and help. So lets start...

HMRC
When you start a business, HMRC is your friend (and also your worst enemy). They have all the rules when it comes to taxes. Their website is very helpful so you should take a look. They are the people who you will have to pay tax to when you start you business. You also need to register with them when you start up. There are three main types of legal entities you can start up as:

Sole Trader
This is what most small businesses opt for. You have unlimited liability (So if you get into large debts, your personal assets (house, car etc) can be taken to pay off the debts). It is however the most simplest way to start a business.

Basically, as a sole trader any profits you make are yours and are classed as your personal income. You can trade under your name, or you can 'trade as' another name. For example, you can be 'Joe Bloggs' or you can be 'Joe Bloggs T/A Books for Bloggs'. T/A simply means Trading As.

You are required to fill out a self assessment every year. You can fill it out online and it works out how much tax you owe. You are taxed at the normal personal income rates (Something like 20% for anything up to £35k, 40% for £35k- £150k etc). This also means you benefit from the 'personal allowance'. This is currently £8,105 so you can earn up to this amount and not pay tax.

Up to date rates are listed here.

You are also required to pay Class II National Insurance Contributions (NIC). Quote from HMRC:
(Original post by HMRC)

If you're self-employed
If you're self-employed you pay Class 2 and Class 4 National Insurance contributions. The rates are:
Class 2 National Insurance contributions are paid at a flat rate of £2.65 a week
Class 4 National Insurance contributions are paid as a percentage of your annual taxable profits - 9 per cent on profits between £7,605 and £42,475, and a further 2 per cent on profits over that amount.
If your profits are expected to be less than £5,595 you may not have to pay Class 2 National Insurance contributions.
Your Class 2 National Insurance contributions payments are due on 31 January and 31 July, the same as a Self Assessment tax bill. You pay Class 2 National Insurance contributions either monthly or six monthly by Direct Debit – follow the first link below for more information about payment dates.
You pay Class 4 National Insurance contributions when you pay your Income Tax.
As you can see, you only need to pay Class 2 NIC when you start up. This is £2.65 a week which is paid 6 monthly. (It says you can opt of of Class 2 NIC if you earn under £5.5k but I believe if you do this, any benefits you are entitled to can be affected).

You only pay class 4 NIC if you earn over £7,605.

As a sole trader, you don't need a business bank account. You can run it using your personal bank account, but many banks don't like you to do this.

You do not need to keep and submit financial business accounts. Just keep a record so you can fill out your self assessment easily.

Partnership
I'm not as familiar with this one, but I believe it is the same as a sole trader, but there is more than one of you running it. For example, if two friends wanted to start a business, they could start a 50/50 Partnership which means they both own 50%. Both have to fill out a self assessment and pay national insurance (Profits are split 50/50 so you only pay tax on your profits).

Limited Company (Ltd)
This is a bit more expensive and confusing. It is mainly used by medium-large businesses and risky businesses. You are only liable for how much you put in. For example, you you start the Ltd company with £1000, and the company gets into £7,000 worth of debt, you are only required to pay £1000.

As a Ltd it is much easier to employ people, but it's still confusing. You're best asking an accountant or expert for help.

Any profits you make as an Ltd company are not yours, they are the companies. You can still take the profits out of the business by taking a salary or dividends, but you don't have to pay income tax on the profits. Oh, and you're an employee of the company. You'll need to submit an annual return each year, along with a set of abbreviated accounts and a corporation tax return.

You'll probably need an accountant if you opt for this route. If you don't want to pay too much, you need to keep clear records and reconcile your bank. Your best bet is to keep an excel spreadsheet showing all of your expenses and income. Check these back to your bank statements. EVERY transaction on the spreadsheet should appear on your bank statement, and vice versa. If you do this properly, you should take your bank balance at the start of your accounting year, add on all of the sales from your excel spreadsheet and take away all of your expenses. The figure left should be the balance in your bank at the end of your accounting year. If you need help with this let me know.

For other help on Limited companies, go here or go to Google.

Public Limited Company (Plc)
You don't need to know this one, but i'll include it anyway. This is when companies 'float' on the stock exchange- they sell shares to members of the public. This is for big companies, like Tesco and Next (You can go onto their investor relations website and see how much money they make).


VAT
As a sole trader/ partnership you only need to charge VAT if you earn over £70k (I think). When you register for VAT, you must charge VAT on your prices but you can claim it back from things you buy (That's why a lot of business service websites don't include VAT in their prices- because most people claim it back).

As a Ltd company, I think you have to pay it when you start up.


You should register as soon as you start trading. (And Self-Employed is the same as Sole Trader/ Partnership).

Can I run a business from my home?
Yes. You may need to ask your home insurance company and mortgage providers, but generally most people go for the 'do it anyway and wait for them to notice' approach. It's generally fine if you are simply doing the paperwork in your house. If you convert your garage to a dance studio and you've got people coming and going every hour then you'll be in trouble!

Can I use my car for the business?
Yes, but you will need to upgrade you insurance for 'business use'.

I'm setting up a website, do I need to register?
If you will make money from it, yes. You are also required to have a page that shows your name, address and contact details.

I'm doing a little money making activity, should I register?
This is tricky. If you're not going to be doing it for long, then you probably don't need to register, but if you are going to be doing it for a while or make a lot of money from it, you will need to register.

Do I need insurance?
Probably. The main types are Public Liability Insurance which covers you if someone hurts themselves or damages something because of you. Generally, if you are sending an invoice, you are at risk of being sued. Public Liability insurance covers you for this.

The second type is Product Liability Insurance which covers you if the product malfunctions and causes injury. For example, you sell RC Helicopters. One of the helicopters malfunctions and cuts someones arm. The customer will sue you as you sold them the helicopter. Product Liability insurance covers you for this. (You then counter-sue the manufacturer or supplier).

I've got a job but I need to register as self employed. Is this a scam?
No. Many employers can ask you to register as self employed and they will use your services. If this is the case, you are able to refuse work from them, accept work from anyone else and are liable for your own tax. See this page for help.

Where did business link go??
They got rid of it. Most of the information can be found on Gov.UK now.


Websites that will help you
http://www.hmrc.gov.uk/
https://www.gov.uk/set-up-sole-trader
http://www.natwest.com/business/running-your-business/business-planning-software.ashx
http://www.ukbusinessforums.co.uk
http://www.ukbusinesslabs.co.uk/forums/
http://www.startuploans.co.uk/
http://www.mihmentoring.com/
http://www.horsesmouth.co.uk/
http://www.princes-trust.org.uk/
http://www.startups.co.uk/

So there you go, that lot should get you started. If you've got any more questions, post them below or in this forum. I may have made some mistakes, so please let me know and i'll edit it.

Good Luck!!!

*Disclaimer*
I'm not an expert in business, nor am I trained as an accountant*, lawyer, etc. Please take this information with a pinch of salt and do your own research too! I'm not liable for any problems you get into because of this advice!!!

*at time of writing.
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VytasB
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#2
Report 8 years ago
#2
Hey! Thanks for the nice post. What is you knowledge about import(USA to UK)? I want to start a business selling stuff from USA in UK. I am planning on registering as sole trader. Furthermore, I know everyone has to pay Import VAT and duty tax. Talking about Import VAT, is that true that when you get your VAT number and charge sales VAT you are able to fully reclaim import VAT(called input VAT)?

Ome more thing, maybe you know if there are more taxes than: Import VAT, duty tax, sales TAX(when >£70k), Insurance?

Thanks in advance,
V
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Runninground
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#3
Report Thread starter 8 years ago
#3
(Original post by VytasB)
Hey! Thanks for the nice post. What is you knowledge about import(USA to UK)? I want to start a business selling stuff from USA in UK. I am planning on registering as sole trader. Furthermore, I know everyone has to pay Import VAT and duty tax. Talking about Import VAT, is that true that when you get your VAT number and charge sales VAT you are able to fully reclaim import VAT(called input VAT)?

Ome more thing, maybe you know if there are more taxes than: Import VAT, duty tax, sales TAX(when >£70k), Insurance?

Thanks in advance,
V
I'm not to sure. Post your question on the UK Business Forums because I know there are a few there that import stuff. (Just don't mention the word china or people will be forever sending you messages to try and sell you their chinese import service!)
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Tokyoround
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#4
Report 8 years ago
#4
Not bad, stickied. HMRCs website has a lot of information, or of course you could consult an accountant on what tax reliefs you/your business are eligible for.
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VytasB
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#5
Report 8 years ago
#5
What about the approximate prices of a consultation from an accountant? is it possible to get a free consultation? If not, is there any other way?

Thanks,
V
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Vulpes
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#6
Report 8 years ago
#6
Very useful. Cheers for this!
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folded book art
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#7
Report 7 years ago
#7
I make book origami to sell on fb and need help to make sure i get all the things in place that i need i.e. what can i earn before being taxed, what insurance if any, and as i also have a full time job how does this work as an additional income..
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Emma Rosse
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#8
Report 3 years ago
#8
(Original post by Tokyoround)
Not bad, stickied. HMRCs website has a lot of information, or of course you could consult an accountant on what tax reliefs you/your business are eligible for.
I agree with your point but even though an accountant will make things easier to handle tax and other legal aspects of your new company, it's still not mandatory to do so. These days company formation agencies make it easier to register a new business in the UK with an easy to use online portal. Some of them also offer free tax and accounting consultation to make it easier for startups. Infact I registered with one of such agencies recently.
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