Refreshingly Simple Finance for Small Business

A straight-talking guide to finance and accounting

Emily Coltman

• Publisher: Harriman House
• Year: 2011
• ISBN:
  9781908003065
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

**Updated for 2013**"I'd never manage the business side of it. The income tax and the bills and the VAT... I can't even add two and two."Is fear of the money side of running a business holding you back? Would you love to turn your passion into a small business, but are frightened of getting on the wrong side of the taxman? Do you run a small business and find it's a desperate struggle to keep all your paperwork in the right place, never mind work out how much tax you should pay each year?In this friendly, informative ebook, bilingual qualified accountant Emily Coltman guides you through what you need to know on the finance and accounting side when you're setting up and running a small business.Bi-lingual? Emily speaks plain English as well as accountants jargon! She has many years experience of helping small business owners with their finance and accounting, and this ebook is written for anyone running a small business for whom double entry might as well be double Dutch!This ebook explains the different ways a business can be set up and structured legally and what the advantages and disadvantages of each kind of structure are, including the different taxes that each has to pay, and when those taxes have to be paid.It looks at where you might find the money to start or grow your business, and why you might choose the different sources.There are suggestions for how to organise your paperwork and advice on what records you need to keep and for how long.You'll hear how to keep on the right side of the taxman, what expenses you can and can't claim tax relief on, and how to claim tax relief when you buy equipment for your business - and what 'tax relief'' actually is!How do you work out whether your business has made a profit, and why do you need to know that? Do you have enough cash coming in to pay your bills? Where will that cash come from? Do you need to be registered for VAT? Will that help your business or just cause more administrative hassles? Could you even save money by being registered for VAT? When, if ever, should you hire an accountant or bookkeeper? What can a good accountant do for you? What should you look for and what should you avoid when you're choosing your accountant? And where would you like to take your business for the future? Where will the cash come from to help you meet your dreams for your business, whether that's moving into new offices, employing your first team member, start selling your product overseas, or keep going as you are?All those questions and more are answered in this easy-to-read bitesize guide to finance and accounting for small businesses.

Chapter 1. How should you set up and structure your business?

Remember the big question: why am I in business?

If you have a hobby business, or your priority is to keep your records as simply as you possibly can, or if you’re worried that you might fall foul of tax traps, you might want to go for the simplest set-up available.

But if you feel more confident, your business is larger, and/or you want to (legally!) pay as little tax as possible, you might want to structure your business differently.

In the UK, there are four different ways you can set up your business for tax:

1. Sole trader
2. Partnership
3. Limited Liability Partnership (LLP)
4. Limited company

Let’s have a look at what each of these means.

1. Sole trader

This is the simplest structure available and it’s for businesses where only one individual is running the business. So if it’s just you, your computer and your dogs (who don’t count as business partners even if you’re going to spend most of the profits on feeding them), then this could be for you.

As Wendy Pascoe puts it, “you wake up one morning and decide to start selling cut flowers from the bottom of your garden. That’s it: you’re now a sole trader”. ^[2]

The advantages of being a sole trader are:

• The business is simple to set up and simple to run.
• There’s nowhere near as much mandatory paperwork as is required for any of the other business structures.
• You don’t have to put your address on any of your business documents except the invoices you issue to your customers, which helps keep your details private, especially if you’re working from home.
• When you’re working out your business’s tax, if your business makes a loss in its first few years of trading you can set those losses off against your other income in current or previous years. This means you may get an upfront tax refund, which would help with your business’s cashflow.

But there are disadvantages to being a sole trader:

• Legally, there’s no difference between you and your business. You are the business. So if the business is sued, you’re sued – which means, in the absolutely worst-case scenario, that you could be at risk of losing your home, your car, and other personal belongings.
• Being in business on your own can be isolating. Make sure you have a good network out there. The web is a good place to start – check out sites like Bitsy (bitsythis.com) and UK Business Forums (www.ukbusinessforums.co.uk/forums). And do think about getting yourself a mentor to bounce ideas off.
• As a sole trader you can also pay more tax than you would if you ran your business through a limited company.

Who must I tell that I’m a sole trader?

You must tell HMRC that you’re in business and you do so by submitting form CWF1 (www.hmrc.gov.uk/forms/cwf1.pdf). You have to do this within 3 months of starting your business or you’ll be hit with a £100 fine, but unfortunately you can’t register in advance of starting your business.

HMRC then require you to fill in a self-assessment tax return (often just called a tax return) every year. See chapter 5 for more information about these.

And that’s it. You don’t have to tell any other official agencies. For example, you don’t have to tell the VAT man – unless you decide your business should be registered for VAT. More about that in chapter 5 too.

Hang on a minute, I thought HMRC was the VAT man.

They are. But you have to fill in a different form to register your business for VAT and there are criteria for this, which we’ll look at in more detail in chapter 5. Business Link (www.businesslink.gov.uk) do plan to set up a section on their website ^[3] where you can register your business for all taxes at once, but that’s not available at the time of writing.

What taxes do I pay as a sole trader?

You’ll pay income tax and class 4 National Insurance on the profits your business makes.

It’s similar to having income tax and National Insurance deducted from your salary when you’re an employee. However, when you’re a sole trader you only pay tax and NI twice a year. More about that again in chapter 5 (I know I keep sending you there).

Unless your business is very small (its profits are under £5,315 in the 2011/12 tax year ^[4] ), you’ll also have to pay class 2 National Insurance, which is charged at a flat rate per week and doesn’t vary with the amount of profit your business makes. In the 2011/12 tax year the rate is £2.50 a week and this is usually paid by direct debit, on a six-monthly basis.

Is a sole trader self-employed?

Yes. A freelancer isn’t necessarily a sole trader, though. Some freelancers run their own limited companies.

2. Partnership

A partnership is just like a sole trader, except there is more than one individual running it and each partner must fill in HMRC form CWF1 within 3 months of the business starting.

Partnerships are taxed in the same way as sole traders, with each partner paying tax and class 4 NI on his/her share of the profits, and each partner being liable for class 2 NI. More about this in chapter 5.

There are some additional advantages to being in partnership, over and above being a sole trader:

• You’ll have someone to share your business worries and triumphs with. Don’t underestimate this!
• You can either choose a partner whose business strengths match yours or whose strengths complement yours.
• By having more than one of you working in the business you should be able to earn more money to cover the costs.

But there are some disadvantages to being in partnership:

• In legal terms, partners are what’s called “jointly and severally liable” for the business and its debts. What that means in plain English is that if one partner steals the business’s cash, the other partner(s) are still liable for the business’s debts. And, just like a sole trader, legally there’s no separation between the business and the partners, so partners could lose their homes, cars, etc.
• You and your partner(s) may want to take the business in different directions. For example, one might want to be the next Richard Branson, and the other might want a small business that won’t grow beyond the kitchen table. Have a good chat about this and be frank with each other before you start your business. Better to not start at all than fall out and wreck the business.

I can’t stress enough that if you’re going into partnership you must always, always, draw up a partnership agreement. That holds true even if you’re going into business with your spouse or your best friend. You never know what might crop up when you’re in business.

The partnership agreement should include:

• How much money each partner will put in, both for the initial start-up costs and for ongoing funding if the business runs short of cash.
• How much money each partner will take out, and when (each month, each year, every 5 years or so). When you’re in partnership, as when you’re a sole trader, there are no tax consequences for how you take money out of the business.
• The process for resolving any disputes. They will happen. Believe me, they will. No, honestly.
• What action will be taken if a partner leaves the business, or dies.
• The taking on of new partners: under what circumstances, if any, would you do this? How much cash would each new partner be required to put into the business, and how much could they take out on an ongoing basis?
• The expected retirement age of each of the partners. Remember, this may vary between partners. Does one partner want to keep working till they drop, and the other partner want to retire at 50 to their villa in the South of France? What would happen if one partner fell ill, or had a serious accident, and needed to retire early?
• How should the profit be divided between the partners? Most often the split is 50:50 but it doesn’t have to be. Should the partner that puts in more cash, or does more work, be entitled to more of the profit?
• What will happen if one partner wants to close or sell the business and the other partners want to keep going. Whose decision will be final?

You can find template partnership agreements on various sites such as Partnership Agreement (www.partnership-agreement.co.uk). For extra protection, speak to a solicitor to make sure your agreement covers everything you need.

3. Limited Liability Partnership (LLP)

This is like a partnership (that is, more than one person owns it) but, as its name suggests, the liability of the partners is limited.

That means that, rather than the partners’ own personal assets being at risk if the business is sued, they only have to pay out as much as they’ve put into the business.

An LLP, unlike an ordinary partnership, is a legal entity in its own right. That means it has its own identity separate from that of the people who own it. If the business is sued, it’s the LLP that’s sued not the partners – unless the partners have personally been guilty of wrongdoing.

LLPs are very common in some industries, for example firms of solicitors and accountants are often set up as LLPs. But in most business sectors they are quite rare.

If you turn your partnership into an LLP you get the advantage of limited liability, but the disadvantages are:

• An LLP must register with Companies House (www.companies-house.gov.uk) because it’s a separate legal entity. Companies House is a government body that keeps details of all LLPs and limited companies in the UK, including their names, registered addresses, who owns them, and their accounts.
• LLPs must file accounts every year at Companies House, which anyone can d...

Table of contents

• Cover
• Publishing Details
• Acknowledgements
• About the Author
• Introduction
• Chapter 1. How should you set up and structure your business?
• Chapter 2. Where’s the initial money coming from?
• Chapter 3. The paperwork
• Chapter 4. Simple accounts
• Chapter 5. Tax
• Chapter 6. Do I need an accountant?
• Chapter 7. Planning for the future
• The End
• Bibliography
• BlackBerry
• About this eBook
• About Brightword Publishing