| Index »Ways To Do Self Employment Business |
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| Ways To Do Self Employment Business |
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| The Structures |
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| To put your business on a proper footing with HM Revenue & Customs (HMRC) and other authorities, you need to make sure that it has the right legal structure. It's worth thinking carefully about which structure best suits the way that you do business, as this will affect:
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The tax and National Insurance that you pay |
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The records and accounts that you have to keep |
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Your financial liability if the business runs into trouble |
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The ways your business can raise money |
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The way management decisions are made about the business |
| The business could be started based on one of the following three legal forms:- |
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A sole trader. This is the simplest way of starting a business |
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A partnership. This is similar to a sole trader except that two or more people run the business |
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A limited company. Where individual take shares in the limited company which identity itself from the people who run the business.(A company is a separate legal entity.) |
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In addition to one of the above legal forms, self-employment can also involve trading practices such as a co-operative - This is a business which is collectively owned and controlled by the people who work in it. At least two people must be involved. Also A franchise - An agreement which allows the person buying the franchise the right to run a branch of a business that someone else has set up. |
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| So to sum it up, you can run a business either as an unincorporated sole trader or partnership, or as a limited company.
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| Limited Company
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| Limited companies exist in their own right. This means the Company's finances are separate from the personal finances of their owners.
Shareholders may be individuals or other companies. They are not responsible for the company's debts unless they have given guarantees (of a bank loan, for example). However, they may lose the money they have invested in the company if it fails. Some businesses will want to operate as a limited company. Some trades and professions are almost obliged to do so.
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| Companies pay the Tax in the form of what is known as corporation Tax. Its is a tax on your company's taxable income or profits. You must tell us that your company exists and that it is liable to tax. Corporation Tax is due for 'Accounting Periods' which are normally 12 months long. Accounting periods can, in some circumstances be shorter than 12 months but never longer
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| The word 'company' is also used to include:
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Members' clubs, societies and associations |
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Trade associations |
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Housing associations |
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Groups of individuals carrying on a business but not as a partnership, (for example, co-operatives.) |
| The Companies : |
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Have to work out their own tax liability |
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Have to pay their tax without prior assessment by the Inland Revenue and |
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Are liable to penalties if they do not deliver a return by the statutory filing date, normally 12 months after the end of the accounting period. |
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| In addition to the tax issues, intending limited company businesses should consider the following: |
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A company is a separate legal entity from you, and its money is not your money. |
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Money you take out of the company will usually be paid as either salary or dividends. |
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If you have a personal service company, which may obtain work through an agency, you may come within what is known as IR35. This is a complex area. If you think IR35 may apply to you, it would be best to take advice. |
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There is substantial company regulation and administration. A company is ruled by the Companies Acts. You cannot just draw personal cheques on your company's bank account without making proper arrangements. The money is not yours. |
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The records to be kept are more stringent than for a private business. Annual accounts must be prepared in an agreed format, and some companies have to have an annual audit. A tax return has to be completed for the company and tax paid on its profits. You will certainly need the services of an a accountant. |
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PAYE has to be operated for directors' salaries and fees, and directors will also be taxed on private use of company cars, and possibly other benefits, on what is known as 'benefits in kind'. A form P11D has to be sent to HM Revenue and Customs in this connection. |
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Extracting cash from a company is difficult, and one has to go through the correct procedures. This applies to both annual profits and winding up a company on liquidation. The whole subject needs to be examined very carefully, and expert professional advice obtained. |
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| ADVANTAGES OF A LIMITED COMPANY
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If a limited company should fail there is less risk to personal and family assets than there is with sole traders or partnerships. |
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These days a company only needs one shareholder who can also be a director, and a company secretary who does not need to be a director. |
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Companies with a turnover below £5.6 Million do not need an audit making the cost of year end accounts much closer to those of a Sole Trader. |
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Shareholder Directors can select a package of Low Salary and Higher Dividends aimed at reducing Tax and National Insurance both for the individual and the company. |
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Shareholdings can be split between family members to spread the dividends and reduce higher rate tax liability (or eliminate it all together). |
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Limited Companies often have a higher marketing profile than other businesses. |
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Limited Companies can be easier to sell than Sole Traders or Partnerships. |
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There are a few disadvantages, but as long as the company does not trade whilst insolvent and there is no fraud there is very little risk to the directors. |
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| DIRECTORS |
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The National Insurance system works differently for directors. NI for director is calculated on a year to date basis, therefore a director can earn £5435 (08/09) before either the director or the company are due to pay any NI. |
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Directors are not usually subject to the minimum wage unless they have a contract of employment with the company. |
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If a director leaves an employment where NI has been calculated in the usual fashion, a NI rebate may well be due. |
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Directors have to pay tax on Benefits in Kind no matter how high or low their earnings (the £8,500 lower limit does not apply to directors). |
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The Directors Current Account is used to track how much is owed by the company to the directors (or vice versa). Often when a company is formed the directors introduce cash or equipment to the business, the value of which should be put into the director's current account for repayment. |
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If the Company owes money to the directors it can be paid back without any tax being due (as it is simply a repayment of a loan) and if appropriate should be repaid in advance of salary or dividends. |
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If the Directors owe money to the company, repayment should be made within 9 months of the year end, otherwise tax is due on the benefit of the loan. |
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| Sole Trader |
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| Being a sole trader is the simplest way to run a business: it does not involve paying any registration fees, keeping records and accounts is straightforward, and you get to keep all the profits. However, you are personally liable for any debts that your business runs up, which makes this a risky option for businesses that need a lot of investment.
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| Important Things To Consider |
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You need to register as self-employed |
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You make all the decisions on how to manage your business. |
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You raise money for the business out of your own assets and/or with loans from banks or other lenders. |
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You have to make an annual self assessment tax return to HM Revenue & Customs. |
| You must also keep records showing your business income and expenses. |
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As you are self-employed, your profits are taxed as income. |
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You also need to pay fixed-rate Class 2 and 4 National Insurance contributions on your profits. |
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As a sole trader, you are personally responsible for any debts run up by your business. This means your home or other assets may be at risk if your business runs into trouble. |
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| Partnership |
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| In a partnership, two or more people share the risks, costs and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved - although the business can still continue.
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| A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.Northern Ireland, partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the whole debt. They are not severally liable, which would mean each partner is responsible for paying off the entire debt. Partners in Scotland are both jointly and severally liable.
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| It's a good idea to draw up a written agreement between the partners. You should look through the Partnership agreement to check for the clauses dealing with these points:
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How much of the opening capital was provided by each partner. (This could involve a lifetime transfer on the commencement of the partnership if a part of one partner's initial contribution was assigned to one or more of the other partners. An example would be if the deceased took a child into partnership and the capital of the deceased's former (sole trader) business was credited in equal shares to each of the partners' opening capital account. |
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The type of business. |
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The date the partnership began. |
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How profits and losses were shared. (This is known as the profit sharing ratio. This ratio can be changed if the partners wish and such changes may give rise to a lifetime claim if there are substantially undervalued assets in the balance sheet at the time of change. Refer any such case to TG. This is an important point because, usually, any increase in capital values is shared amongst the partners in the same proportions as the profits are shared). |
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Rights and duties of the partners. |
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What happens on the death or retirement of a partner |
| The important Points - Partnership
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Each partner needs to register as self-employed employed |
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Partners themselves usually manage the business, though they can delegate responsibilities to employees. |
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Partners raise money for the business out of their own assets, and/or with loans. |
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It's possible to have 'sleeping' partners who contribute money to the business but are not involved in running it. |
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The partnership itself and each individual partner must make annual self-assessment returns to HM Revenue & Customs (HMRC). |
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The partnership must keep records showing business income and expenses. |
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Each partner takes a share of the profits. |
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As partners are self-employed, they are taxed on their share of the profits. |
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Each partner also needs to pay Class 2 and 4 National Insurance contributions. |
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| Limited Liability Partnership (LLP) |
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| A limited liability partnership (LLP) is similar to an ordinary partnership - in that a number of individuals or limited companies share in the risks, costs, responsibilities and profits of the business.The difference is that 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. This means that members have some protection if the business runs into trouble.
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| Limited Liability Companies |
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| Limited companies exist in their own right. This means the company's finances are separate from the personal finances of their owners. Shareholders may be individuals or other companies. They are not responsible for the company's debts unless they have given guarantees (of a bank loan, for example). However, they may lose the money they have invested in the company if it fails.
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| Franchises |
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| As the "franchisee", you buy a licence to use the name, products, services and management support systems of the "franchiser" company. This licence normally covers a particular geographical area and runs for a limited time, after which it should be renewable as long as you meet the terms of the franchise agreement. Buying a franchise is a way of taking advantage of the success of an established business.
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