Setting up as a sole trader or limited company
Thinking of setting up a business or offering your services as a freelancer? There are a couple of steps you need to take in order to trade legally. The founder of Enterprise Nation, Emma Jones MBE, explains how you can set up as a sole trader or limited company.
Choosing the right status for your business
When you set up a business, there are two organisations you need to contact: Companies House and HM Revenue & Customs (HMRC). Before registering with either, have a think about the company status that suits you best.
- Self-employed: this status means you are working for yourself. You keep records and accounts of your own activities and, in acting alone, get to keep all the profits. If you are self-employed, you are solely liable for any debts accumulated.
- Limited company: limited companies exist in their own right, with the company's finances kept separate from the personal finances of its owners. This means your liability is limited.
- Partnership: if you'd like to be self-employed but want to work with a friend or colleague, consider a partnership. It means that two or more people share the risks, costs and workload.
The rules on registering a new business with HM Revenue & Customs are pretty clear-cut. You are required to register as soon as you start earning from any business activity. You can choose to register as self-employed, as a partnership or as a limited company.
The calculation of how much tax and National Insurance you owe is done through self-assessment. You either need to complete a form CWF1 or simply call the newly self-employed business helpline on 0845 915 4515. You should do this by 5 October after the end of the tax year in which you started your business to avoid a fine.
It's not onerous to complete the form and, once registered, you'll be classified as self-employed and sent a self-assessment tax return each year. You'll need to complete this to show your income and expenses from self-employment, as well as details of your employment elsewhere (if that applies).
You will be subject to tax and National Insurance on any profits you make, but the good news is that any losses incurred can be offset against your employed income (if you have any), which could even result in a tax rebate.
According to HMRC, a partnership is where: “Two or more people set up a business. Each partner is personally responsible for all the business debts, even if the debt was caused by another partner. As partners, each pays income tax on their share of the business profits through self-assessment, as well as National Insurance.”
In terms of filing requirements, each partner should complete a partnership supplementary page as part of their individual self-assessment tax return. This is in addition to a partnership return, which has to be submitted by one nominated partner and show each partner's share of profits/losses.
Limited companies exist in their own right, with the company's finances distinct from the personal finances of the owners. What this means is that the company is liable for any debts, not the individual owners, which is the case if you are self-employed or in a partnership.
In April 2008 it became legal to form and run a limited company with just one person, without the need to involve anyone else (prior to this you also needed a company secretary).
You can form a new limited company by registering with Companies House via GOV.UK or by using a company creation agent. As well as registering with Companies House, you also need to let HMRC know you are operating as a limited company. You will need to set up and register a PAYE scheme, as you are an employee of the company. Register a PAYE scheme here and make the most of the New employer's helpline - 0845 60 70 143
Completing your tax return
In terms of filing requirements, you should complete a self-assessment company tax return at the end of the accounting period. The return will show the company's taxable profits and whether any corporation tax is owed, and can be filed online via GOV.UK. The return should also be filed with Companies House to comply with the Companies Act 2006. This can be done free of charge, using the online WebFiling service at Companies House.
On your returns, you can claim an element of your expenses for working from home. You can also claim travelling expenses, subsistence and a proportion of your phone calls.
Remember to keep records of your business dealings - this will make it much easier to complete tax returns when the time comes. You should keep hold of the following:
- Receipts of business-related purchases
- Copies of invoices to customers
- Bank statements, especially if you don't yet have a separate account for the business (it is worth starting one)
- Utility bills (if you are starting the business from home and using part of the house for business), which can be claimed as a business expense and so reduce your tax bill.
For advice on good recordkeeping, visit HMRC.
Not sure whether to hire an accountant or manage your business's finances in-house? Emma Jones explores both options in her handy guide.
When you've invested in a business, it's important to safeguard your assets in case something goes wrong. Learn more about our small business insurance.