Deciding on Your Business Status

If you are thinking of starting your own small business the first thing you have to decide on is what structure your business will take. Whatever structure you decide on you must inform HMRC within three months of your business starting or face a £100 fine. The easiest way to register is by phone, an up to date number can be found on thier website.

If you are not sure if you are technically employed (you may be running a consultancy business) or actually self-employed visit the HMRC website where you can see more guidance: www.hmrc.gov.uk. It's also a good idea to read leaflet 'Thinking of Working for Yourself' from: www.hmrc.gov.uk/leaflets/se1.pdf.

What Type of Business?

The type of structure you choose will largely depend on the type of goods or services you will be selling. Below is an outline of the main business formats you have to choose from:

Sole Trader

This is the basic type of business that an individual can start. All of your assets are tied to this type of business. If your business fails and has debts to pay, all of your assets including your home can be sold to pay off those debts. You pay income tax via the self-assessment system and also National Insurance contributions in class 2 and class 4. You will also have to pay VAT if your business reaches the VAT threshold.

Partnership

This type of business is started by two or more people. No formal written agreements are needed, but it is a good idea to put into writing any conditions within the partnership that relate to how profits and losses will be divided. Each partner will need to register as self-employed. Generally, partners are responsible for the debts of the entire business even if they were not created personally. Class 2 and class 4 National Insurance contributions are paid by both partners. VAT becomes payable when the partnership has reached the current threshold.

You can also set up a Limited Liability Partnership. This is precisely the same as an ordinary partnership, but the liability of the partners is limited to the amount of money they have invested in the business.

Limited Company

As their name suggests, limited companies limit the liability that the directors have if the business fails. A limited company has an independent identity in law. Any debts that exist within the company are only the companies and not those of the people that started the business.

You can create a new limited company by contacting Companies House. Or you can buy a limited company off-the-shelf. You can read a guide on how to form a limited company on the Companies House website: www.companieshouse.gov.uk/about/gbhtml/gbf1.shtml.

Company directors of a limited company must file a full set of audited accounts each year. Also, they are treated as employees of the business. As such there are special PAYE and National Insurance regulations that must be adhered to.

Limited companies can be either public or private. Public limited companies have shareholders but they can't offer any shares to the general public. Public limited companies can offer shares to the public.

Franchises

If you open a franchise the business isn't your own but belongs to the franchise owner. They are in effect renting you the right to operate that franchise in your particular area. The actual structure that is adopted by the franchiser will impact on how the business handles tax, National Insurance and VAT. More advice and guidance can be obtained from the British Franchise Association: www.british-franchise.org .

Choosing the structure for your business is an important decision to make as your liability if things go wrong will depend on what kind of format your business is based on. Also, as your business grows you can change its structure. Sole traders for instance often move to limited company status, or limited companies float on the stock exchange and become plc's.