It’s a dream of many; to follow in the footsteps of successful entrepreneurs, to become their own boss and live life by their rules with the rewards and flexibility that it brings. For many, the challenge they face before they start up is a daunting one; for most, this leap into the unknown proves too much. Alas, the list of businesses that were never created is far longer than the list of the ones that were. That is the (perhaps) harsh reality, but the good news is that you are reading this blog. Which means you are in search of answers to best prepare yourself for the journey ahead, and to avoid falling into one of many pitfalls.
You may still be in the very early stages; you may have the name sorted; perhaps the logo or you might even have crunched some numbers to figure how this is all going to work. No matter which stage you find yourself, eventually an inevitable question will arise; “So, what do I do now?”. It’s at this point where some key decisions need to be made about the future of your business.
Decisions, decisions, decisions
Self-employed vs. Limited company – one of the very first decisions (and it’s an important one!) is whether you’re going to be self-employed or trade through a limited company.
Running your company self-employed means you and your company are considered the same legal entity. So, come the end of the tax year, you will be responsible for filing your tax return for yourself on behalf of both you and the profits of your company. Any financial obligations (e.g. tax) your company cannot fulfil will come out of your personal pocket, as you are one and the same. Which is a key reason why you might decide that trading through a limited company gives you more protection and peace of mind from unexpected bills. With a limited company, both owner and business are treated as separate entities with potentially separate deadlines for tax due. The owner would always submit a self-assessment aligned to the tax year. Yet the company’s corporation tax would be due in the month the company was incorporated i.e. not necessarily April. This could have the added benefit of a steadier cash flow throughout the year.
VAT registration – registering for VAT is voluntary (to a point), and depending on the type of business you are setting up, being VAT registered might be an essential or may not be important at all. For many small businesses, charging VAT can seem unnecessary, as it increases the price of your goods/services, which could damage your competitiveness. VAT registered businesses are also required to submit a quarterly VAT return, which would create additional admin costs for those without an accountant. On the other hand, being VAT registered means a company can claim the tax back from VAT purchases, helping to balance out the VAT liability. In fact, a company might have more VAT purchases than VAT sales, meaning they would be due reimbursement from HMRC. Additionally, some companies may only choose to do business with other VAT registered companies.
Business bank account – opening a business bank account is not a legal obligation when setting up a limited company. However, there are several good reasons why you may decide to keep your business operations separate to your personal bank account. The most important being to keep things clean between yourself and your business. Most accounting software now enables you to link your bank account, which makes running your business much more efficient when linked directly to your business. Logging your transactions such as invoices, expenses and bills are done automatically from your bank feed. Without a business bank account, it would be a manual process to split out each business transaction from your own personal transactions. In reality, many banks will insist you have a business account as part of their T&Cs.
Accounting software – there’s been a move towards businesses accessing their own accounts via accounting software, much of which is now cloud-based. There are several well-known providers, such as Xero, QuickBooks and Sage to choose from. Being a cloud-based technology, you’ll have access to your accounts wherever you are in the world. And with HMRC’s move towards Making Tax Digital, accounting software is becoming a must for businesses.
Need a hand?
If the above information has helped, then you might want to consider whether your business would benefit from a dedicated accountant. No matter your size, an accountant will prove a valuable resource, taking the leg work out the topic discussed above. This means you’ll spend less time scouring the internet for answers, and more time to focus on the day-to-day operations.
Contact us today to find out more about our services.
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