I have written about the entrepreneurial spirit of single parents before. Financial pressures coupled with the need to work (truly) flexibly mean many turn towards self-employment and the launch of a small business as the way forward.
What OnlyMums and OnlyDads wanted to do in this post is provide step-by-step advice so that single parents can begin this process with all the right boxes ticked! We turned to our good friend on Twitter Elaine Clark of www.CheapAccounting.co.uk to spell out for us exactly what is needed….
It’s hard enough setting up and launching a business without all of the rigmarole of the tax and accounts legal aspects of the business.
But staying legal is a must if you want to have a successful business.
Registering your business with the authorities such as HMRC is essential but just where do you start?
Self employed or Limited Company?
Often when staring a business the decision to trade as a self-employed sole trader is made without much thought to the implications of such a choice.
Maybe you decided to be a sole trader as there was less formality and paper work involved in the set up.
The decision on your appropriate business structure is not an easy one – it certainly isn’t a ‘one size fits all’ answer.
Your personal circumstances should determine your choice and only you can decide the appropriate structure.
Putting aside the misleading perception that a limited company gives you greater status or credibility then, in my opinion, there are two major issues to consider in deciding your business structure:
Limited or Unlimited Liability
As a sole trader there is no distinction between you and your business. You do not need to have a separate business bank account. All the debts of the business are your debts.
If the assets of the business do not cover the debts then your personal assets could be used to pay the debts – including your house!
Conversely, the debts of a limited company belong to the company, which is a separate legal entity.
Except in cases where personal guarantees have been given, your personal assets will not be used to pay the debts of the company.
The second reason for a limited liability business is based on tax savings. Depending on the level of profit it is often more advantages for tax purposes to trade as a limited company.
Self employed Sole Trader – Getting Started
The first thing you must do is register with HM Revenue & Customs (HMRC) as being a self-employed sole trader. You should do this as soon as possible after you have started your business.
One of the reasons for registering as self-employed is that you will need to start paying National Insurance in a different way than if you were employed.
As a self-employed person you will pay the following National Insurance contributions:
- Class 2 – This is a fixed weekly amount paid either by monthly direct debit or a quarterly bill.
- Class 4 – This is a percentage of your annual taxable profit from self-employment, which you start paying when your profits reach a certain limit.
Class 4 contributions are paid along with your income tax using the Self Assessment tax return.
If you are likely to have low self-employed earnings then you could be entitled to an exemption from Class 2 national Insurance. Use a form CF10, available from HMRC, to apply for the exemption.
Self Assessment is the tax return you must complete each year if you are self-employed. It is used to calculate how much Income Tax and Class 4 National Insurance you need to pay. It can be filled in on-line or a paper copy can be completed.
Limited Company – Getting Started
It is relatively easy to set up a new limited company and many formation agents will charge less than £50 to do it.
Every company needs:
- at least one director ( private companies no longer need a Company Secretary)
- a Registered Office address where formal documents will be sent
- a name for your business that has not already been registered at Companies House
- share capital
- Memorandum of Association
- Articles of Association
- Form IN01
A limited company can be set up in less than 24 hours but ….
Business Bank Account
A limited company must have its own business bank account.
This is because the company is classes as a separate legal entity. You cannot use your own personal bank account and, in fact, doing so can lead to tax issues so it is best avoided.
The issue is that the business bank account can take anything from days to several weeks to set up depending on the bank and your history.
You will be required to give the bank proof of your identification. A poor credit history in your personal financial affairs can impact on the willingness of the bank to open a bank account for the company.
The tax affairs of a limited company are generally more complicated and it is unlikely that someone without accountancy and tax experience will be able to complete the accounts and tax returns in the legally prescribed formats.
A limited company may need a payroll, even if you are the only employee, so that you can pay yourself a mixture of salary plus dividends.
HM Revenue & Customs will send you a form – a CT41g – once the company is set up. Completing and submitting the form will register the company with HM Revenue & Customs.
The directors usually have to submit personal self-assessment tax returns in addition to the company’s corporation tax return.
The company may need to register for VAT.
About the Author
Along with easy to understand, informative social media content CheapAccounting.co.uk takes a new and refreshing approach to the essential accounting required for start-up and small businesses.