Starting a business in the UK is quick and relatively simple; more than 500,000 people a year start a business of their own. However, it is very important to choose a structure for your business. This structure will define your legal responsibilities, like:
- the paperwork you must fill in to get started
- the taxes you’ll have to manage and pay
- how you can personally take the profit your business makes
- your personal responsibilities if your business makes a loss
The three mains types of business are Sole Trader, Limited Company and Business partnership.
Other types of business are:
PLC- public limited company, LLP – limited liability partnership
Sole Trader (Self-Employment) is the simplest form of business, and we recommend it to anyone who is taking the first steps in business. It is a one-man business which you can keep all your business profits after you’ve paid tax on them. You can employ staff. ‘Sole trader’ means you’re responsible for the business, not that you have to work alone. To start a business as a self employed you must register with the HMRC, the company does not register at Companies House. As a self employed you must register within three months of the start of operations.
Legal responsibilities
You’re personally responsible for:
- any losses your business makes
- bills for things you buy for your business, like stock or equipment
- keeping records of your business’ sales and spending
As a Solet trader, you are required to submit a self assessment tax return, pay income tax on profits your business makes and pay national insurance every year, register for VAT if your business reaches the threshold.
Taxation year ends on 5th of April.
Taxes:
· For year 2014-15: £10,000 income is exempt from tax.
· Income Tax rates 2014-15:
o 20{84cd2a1ed79640e7d0414365cdf56528b155d8417f8ab9b27627206ef90f1f75} tax rate applies to income GBP 0.00 – GBP 31,865.00
o 40{84cd2a1ed79640e7d0414365cdf56528b155d8417f8ab9b27627206ef90f1f75} tax rate applies for income above £ £31,866 and £150,000 (higher rate)
o 45 {84cd2a1ed79640e7d0414365cdf56528b155d8417f8ab9b27627206ef90f1f75} – Over the income £150,001 you have to pay additional rate
Social security contributions (National Insurance). They are divided on two classes:
· Class 2 which you have to pay by direct debit.
· Class 4 is paid through your Self Assessment tax return.
Standard rates without exceptions of Premiums in the fiscal year 2014/2015 are as follows:
o Class 2 – annual net income to £ 5,885 – the rate of £ 2.75 per week
o Class 4 – Net income:
§ You pay 9{84cd2a1ed79640e7d0414365cdf56528b155d8417f8ab9b27627206ef90f1f75} on annual profits between £7,956 and £41,865 (2014 to 2015) and 2{84cd2a1ed79640e7d0414365cdf56528b155d8417f8ab9b27627206ef90f1f75} on any profit over that amount.
You must register for VAT with HM Revenue and Customs (HMRC) if your business’ VAT taxable turnover is more than £81,000. You can register voluntarily if it’s below this, unless everything you sell is exempt.
The most important merits of this form:
- · Simple tax approach
- · If you want to work with somebody you can choose who you work with. But remember the whole responsibility for your contracts lies with you (for your financial liabilities and quality of your work)
- · You own working hours, it simply means that you decide how much efforts and time you want to put in your business. You can bring together family life and work responsibilities.
- · it is great Self-Satisfaction when you are able to manage your company properly.
Company LTD is a company in which the liability of shareholders is limited to the contributed funds. The company therefore has its own legal personality. To register a company you must specify the company’s address. This is the address which will be used for correspondence with Companies House and HMRC. This correspondence must be checked on a regular basis, because they usually remind of the required returns through the post. The registration requires only one person (who performs both functions of the Director and Shareholder), the function of the Secretary is optional and is not required in the UK. Formal requirement is that the Limited Company must have a minimum of one director and one shareholder. Name of the company must end with Limited or Ltd. The financial year of the company begins from the date of registration. You can change the dates of fiscal year. At the end of the fiscal year, the company is required to account for tax in HMRC and to submit financial statements and annual report to Companies House.
In the case of LTD there is no requirement as to the minimum amount of initial capital contributed. Most small entrepreneurs invest £ 1,000 as initial capital divided into 1,000 shares, whereby the value of each share is 1.00 £. An LTD company participates in the corporation tax.
Corporate Tax Rates (1st April 2014):
Your Corporation Tax rate depends on how much profit your company makes and may change on 1 April each year.
- 20{84cd2a1ed79640e7d0414365cdf56528b155d8417f8ab9b27627206ef90f1f75} corporate income tax with an income of no more than £ 300.000
- Profits above £ 300.000 21{84cd2a1ed79640e7d0414365cdf56528b155d8417f8ab9b27627206ef90f1f75}
- Main rate tax for companies with revenue of more than £ 1,500.000
- The Director is responsible for the submission of annual reports about the status of the company and any changes in its structure and the obligation to submit annual tax returns.
The most important merits of this form are:
- Limited liability – shareholders are responsible for the actions of the company to the extent of the contribution
- Minimized taxes
- The possibility of obtaining foreign capital
- Protection of company – Companies House will not register another company with the same name
- A more reliable form of activity – the register of companies and their status is given to public, every potential customer can check with Companies House for example information about the company status, address, financial reports, etc.
- No limit as to the minimum initial capital.
Other unincorporated legal forms:
∞Unincorporated Association
Unincorporated Associations are groups that agree, or ‘contract’, to come together for specific purpose. They normally have a constitution setting out the purpose for which the association has been set up, and the rules for the association and its members. They are typically governed by a management committee. All members of the management committee will again have unlimited personal liability, unless they are specifically indemnified in the constitution. As for a Sole Trader, there is a limitation on raising finance, minimal regulation, and self-employed tax status for management committee members.
∞Partnership
A Partnership is a relatively simple way for two or more legal persons to set up and run a business together with a view to profit. A partnership can arise, without any formal agreement, when people carry on a business in common, but typically there is agreement to trade as a partnership. Partners will usually draw up a legally binding partnership agreement, setting out such matters as the amount of capital contributed by each partner and the way in which they will share the profits (and losses) of the business. Again the Partnership has no separate legal personality. Partners share the risks, costs and responsibilities of being in business. Because partners generally bear the consequences of each other’s decisions, partners usually manage the business themselves, though they can hire employees. Partners usually raise money for the business out of their own assets, and / or with loans, although again being unincorporated limits borrowing in practice, and not being a company with a share capital prevents the business itself from raising equity finance by issuing shares.
∞Limited Partnership
The form is similar to a Partnership, with the main differences being that the limited partners may not be involved in the management of the business and their liability is limited to the amount that they have invested in the partnership. Note that limited partners are different from ‘sleeping’ partners in a Partnership or Limited Partnership, who do not take part in running the business but remain fully liable for its debts. Limited partnerships must register at Companies House, and do not come into existence until they are registered. Changes to the partnership must also be registered.
∞Trust
Trusts are unincorporated and have no legal identity of their own. They are essentially legal devices for holding assets so as to separate legal ownership from economic interest. A trust holds assets on behalf of an individual or another organisation and governs how they are to be used. A trust is run by a small group of people called trustees who are legally responsible for the administration of the trust and personally liable for any debts or claims against it that cannot be met out of the trust’s own resources. Trusts make their own set of rules – enshrined in a trust deed – which sets the trust’s objectives and may be used to ensure that assets and profits are used for a particular purpose. Trusts do not typically raise finance – they simply manage assets and do not distribute profits. Trusts are often used in conjunction with unincorporated associations, which cannot themselves own property
Other incorporated legal forms:
∞Limited Liability Partnership (LLP)
A Limited Liability Partnership is a body corporate with a separate legal personality similar to a company. Unlike in a normal partnership, the members of an LLP enjoy limited liability as the name suggests – liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. Each member takes an equal share of the profits, unless the members’ agreement specifies otherwise. Each non-corporate member of an LLP needs to register as self-employed with HMRC, and both the LLP itself and each individual member must make annual self-assessment returns HMRC. Non-corporate members of an LLP pay income tax and national insurance contributions on their share of the profits. LLPs must register and file accounts and annual returns at Companies House. At least two members must hold additional responsibilities – it is they who appoint auditors and sign off and file the accounts at Companies House. Limited Liability Partnerships have much more freedom than companies over arranging their internal affairs, for example in the way in which decisions are made, and the way in which profits are distributed to members.
∞Community Interest Company (CIC)
A Community Interest Company (CIC) is a form of company (limited either by shares or by guarantee) created for so called ‘social enterprises’ that want to use their profits and assets for community benefit. CICs are easy to set up and have all the flexibility and certainty of the company form, but with several special features which ensure they serve a community interest: First, all companies applying to be registered as CICs must submit a community interest statement to provide the CIC Regulator with evidence that they will satisfy a community interest test defined in law. The company must continue to satisfy the test for as long as it remains a CIC, and must report annually to the Regulator. Second, a CIC must have an “asset lock” which restricts the transfer of the company’s assets (including any profits generated by its activities) to ensure that they are used for the benefit of the community. Third, CICs are subject to caps on dividends and interest payable – to strike a balance between encouraging people to invest in CICs and the principle that the assets and profits of a CIC should be devoted to the benefit of the community.
∞Industrial and Provident Society
Co-operative Society (Co-op) A Co-operative Society is a membership organisation run for the mutual benefit of its members – serving their interests primarily by trading with them or otherwise providing them with goods, services and facilities – with any surplus usually being ploughed back into the organisation, although profits can be distributed to members. A Co-operative Society may or may not be a social enterprise, depending on its activities and how it distributes its profits.
∞Community Benefit Society (BenCom)
A Community Benefit Society (BenCom) is similar to a Co-operative Society except that it conducts business for the benefit of the community, rather than the members of the society. Indeed a BenCom must be run primarily for the benefit of people who are not members of the society and must also be in the interests of the community at large. Profits are not distributed among members, or external shareholders, but returned to the community. BenComs also often apply an asset lock, which protects their assets for the future benefit of the community. It is unusual for the BenCom to issue more than nominal share capital (eg one share valued at £1 per member. If more than nominal share capital is issued or if members make loans to the BenCom, dividends and interest paid are capped at a reasonable rate needed for the business to retain the capital it needs.
∞Financial Mutuals
There are three other types of mutual form, not covered in detail here, that specifically exist to provide financial services: Building Society Building, Credit Union, Friendly Society.