Setting up a New Business
Setting up a new business is fairly straight forward. There are several things that you should consider:
- What type of entity would best suit you and your business? A limited company, sole trader or partnership?
- Are you really self employed, or are you actually employed?
- Who do you need to register with and when? How do you inform the Revenue of your new business? Do you need to setup a payroll?
- What records do you need to keep? How long do you need to keep them?
- What about tax? What types of tax affect your business
You do not need to set up a limited company to start a business. You can trade in your own name or in partnership with one or more people (or companies). Even though you are deemed to be a “sole trader”, you can still employ people.
There are less regulations (though still plenty!) involved with running an unincorporated business. For example, you do not need to file accounts with Companies House which means that the only people that see your accounts are those you give them to, e.g. your bank. You do not need to worry so much about how you are taking your personal money out of the business as the business is “you”. In a limited company you must ensure that there are sufficient profits to take dividends.
The downside to running an unincorporated business, as opposed to a limited company, is that you have less flexibility in regards to how you are taxed. In summary, you are taxed, and pay National Insurance, on the profits you make in a particular tax year, whereas with a limited company, you can potentially restrict dividend payments and thereby delay, or totally avoid, paying higher rate tax.
You need to inform the Revenue that you have started to trade within 3 months of the day you commence. If you do not do so, you are likely to be fined by them. You can either ask me to do this or you can do it online but make sure you take a printout of the summary before submitting, as it has been known for businesses not to be registered, despite the information being sent!
A limited company is an entity where, as long as the share capital is fully paid up, the shareholders are limited in their liability to third parties. I.e., if you have paid for all your shares and have been trading properly (i.e. not fraudently), you will normally have no further personal liability to, or on behalf of, the company.
Limited companies are subject to corporation tax, the rate of which currently depends on your profit levels. To see the appropriate tax rate chart, click here.
While unincorporated businesses have their own regulations, incorporated businesses i.e. limited companies have a lot more regulations. For example, they need to follow the Companies Act, which requires them to file annual accounts and an annual return with Companies House each year. They are also more controlled in the way that, as a director and/or shareholder you can withdraw funds from the company. You do not necessarily have to be both!
Partnerships are very similar to sole traders when it comes to tax and accounts. The difference is that there is more than one owner. The accounts and partnership tax return are prepared for the partnership as a whole. However the partners pay tax and National Insurance on their individual share of the profits through their individual tax returns.
While you are not as restricted as with limited companies when it comes to taking out money, if you are in a partnership, the partners will have to agree on how money is withdrawn.
It is always advisable to draw up a partnership agreement when starting up. This would cover areas such as: -
- how the profit is split
- how the partners take money out of the company
- what happens if the partnership changes or ceases, etc.
At the start, you may feel that you do not need a formal agreement. As circumstances often change, it always helps to have agreed procedures beforehand.
Again, all partners and the partnership need to be registered with the Revenue within 3 months of the day you commence. If you do not do so, you are likely to be fined. You can either ask me to do this, or you can do it online, but make sure you take a printout of the summary before submitting, as it has been known for businesses not to be registered, despite the information being sent!
One downside to partnerships is that each partner is considered to be jointly and severably liable for each other, when it comes to matters involving the partnership. For example, this means that if one partner does something wrong, or does not pay their tax on their share of the partnership, the other partner(s) could be held liable as well. This is where a limited liability partnership would be better, as it limits the liability of each partner.