A couple of days ago a pal of mine, frustrated and angered by her current employer, announced she was ‘going it alone’ and setting up her own business. The question she posed me was what was the best way of doing so, what was the best ‘vehicle’ to allow this to happen quickly, easily and cost-effectively?
Self-employment is on the rise. According to the latest official figures, more than 35,000 people joined the ranks of the self-employed during the last year, raising the total number in the UK to just shy of 4 million. That, to my mind is a phenomenal amount of individuals and highlights our national talent and ability. OK, some of it will take place as a result of forced redundancy and business closure but the majority has to be driven by our desire to succeed and achieve. Good on the lot of you.
So, back to the question in hand. Once you’ve had your business idea and epiphany moment and decided to stop dancing the corporate waltz, one of the first things you need to decide is the structure your business will take. There are three main options: sole trader, partnership and limited company.
Sole Trader – As its name suggests this is the simplest way to become self-employed. As the perennial one-man band it doesn’t involve paying any costly registration fees, allows you to keep records and accounting to a minimum, and you get to keep all the profit wonga. You are, however, personally liable for all and any debts the business incurs. If you go bust, make no bones, the creditors will be after you, and in today’s banking world to receive any major credit you’ll almost certainly have had to secure such loans against your assets, usually your house.
Sole traders do need to register as self-employed with HMRC and file a self-assessment tax return each year. Profits are taxed as income, and you pay fixed-rate class 2 national insurance regardless of any profit you make, and class 4 NI on any actual profit.
If you intend to remain on your jack-jones this is undoubtedly the way to go. If you’re not running a payroll, all administration and red-tape will be kept to a minimum, allowing you to focus on growing a great little profitable business.
Partnership – A relatively simple and flexible way for two or more individuals to set-up and run a business together. As with the sole trader, partners are jointly liable for any debt and, this is important to recognise, are equally responsible for the whole of the debt, not just their perceived bit of it. Go into this form of business with your eyes open and perhaps with the phrase ‘partnerships are made in heaven and lived in hell’ ringing in your ears!
Limited Company – Setting up a limited company means you keep your business and personal affairs separate and independent of each other. It can help to build credibility with other businesses and appear more professional. The downside is that there are many more rules you have to stick to, and paperwork to complete. You’ll need to have at least one director and potentially a company secretary. The company must be registered at Companies House, it’ll be paying corporation tax and have to submit a detailed company tax return every year. You’ll also have to comply with all HMRC’s requirements concerning employer’s PAYE and, more often than not, VAT.
Setting up and running a limited company does take more time and, as you’re probably going to need the help and advice of an accountant, expense, but you can save money on tax. Most directors take a small salary and then pay themselves (as shareholders) a tax efficient dividend on any profit. Furthermore, profit left in the company will only be charged corporation tax, which allows for tax-efficient reinvestment.
Whichever one you end up choosing and you pay your money and takes your choice, self-employment’s the way to go and enjoy the journey.