Setting up your business foundations
To trade as a business, you need to meet the right compliance requirements. It’s certainly not the most exciting part of creating a business, but setting up the right legal, accounting and tax compliance foundations ensures that you’re doing everything by the letter of the law.
Here are the main compliance steps to think about, and why they’re so important to the smooth running of your business.
Decide on a legal structure for the business
First off, you’ll need to make a decision about the legal structure of the company. There are two key choices here – incorporated (a limited company) or unincorporated (usually either a sole trader or a partnership). The key difference here is around liability. In other words, do you want your business to be a limited company, where you and the business are treated as separate legal entities? Or do you want to be unincorporated, like a sole trader, where you and your business are seen as one single entity.
Open a business bank account
To trade, take payments and pay your suppliers, you need to have a business bank account that’s separate from your own current account. This helps to create a tangible divide between the money you’ve generated from the business, and your own personal cash.
As an accountant I cannot emphasise enough how important it is to keep your private transactions away from your business transactions so a business bank account really is a must.
Most banks won’t let you use a personal current account for business purposes. Banks will offer a variety of different business accounts, with varying levels of fees, overdraft levels and additional business features. Set up the business account and then use this account for ALL transactions going in or out of the company.
Set up a bookkeeping and accounting system
It’s a legal requirement for you to keep adequate records and to submit annual statutory accounts. To be able to meet these requirements, it’s essential that you have a reliable accounting system in place.
There’s a dazzling choice of different cloud-based accounting platforms aimed at all sizes of business. Most offer easy-to-use systems that make the accounting process relatively straightforward but don’t be fooled by the hype on some of these, they will not replace the expertise and tax saving advice and guidance you will get from a good accountant. So, right from the start, make sure you get the best possible accounting advice.
Register for the relevant business taxes
Tax is an unavoidable part of running any business. It’s mandatory for you to register for the relevant business taxes, and you’ll also need to factor in that a certain percentage of your startup’s profits will end up going to the tax authorities at the end of each financial year.
Whichever route you’ve opted for when setting up your business you will need to register for tax as either self employed or for corporation tax if you have followed the limited company route. Either way it’s imperative that you put money away in a separate tax accounting, or ring-fence it in your accounts, so you have the money to pay the bill at year-end. Many of the new challenger banks allow yout to set up “pots” or “spaces” where you can leave this money ready to make the duties.
Other taxes to register for include:
- Self-assessment income tax – although you’ll pay corporation tax on your company’s profits, directors are also taxed on their own personal earnings too. If you’re an unincorporated sole trader, this is also the way you’ll be taxed on your business profits, as your personal and business income are treated as the same thi
- VAT – is an indirect value-added tax or consumption tax for goods and services. If you sell products or services that qualify for VAT, you’re responsible for collecting these taxes and paying them to the tax authority on a monthly, quarterly or annual basis.
- Pay-as-you-earn(PAYE) – if you have employees, you will need to set up and adminster a PAYE scheme with HMRC. You’ll need to make income tax deductions from your employees’ wages and pay these taxes directly to HMRC. This is all done via your regular payroll and the information must be declared to HMRC every time you pay your staff via an electronic submission.
Get in touch to talk through your compliance needs. Remember, we are the experts and can help you understand which taxes apply and how you need to register for them.