Your Helping Business

Business Structure

Quite early on you’ll need to decide how your business is structured and what status it has in the eyes of the authorities.

There are effectively three options.

Sole Trader

A Sole Trader is someone who operates a business without any formal company structure.

Income from the business is treated by the HMRC as personal income and taxed accordingly and there are fewer options to claim expenses against tax as there are as a formal company.

Further, as this is personal income it is also treated as household income and is not protected in any way from any ‘claims’ that may be made by anyone else deemed to be part of the household such as in assessments for benefits or in the case of a divorce.

You don’t need to do anything special to set up as a sole trader and you don’t need a separate bank account. Even if you do set up a separate account it is still treated as part of the household income.

All you are required to do is fill in a ‘self-employment’ form to declare your income on your annual tax return.

Limited Company

A Limited Company however is an entirely separate entity – from you and your household. It is not ‘you’, but you own it.

My book, “What They Don’t Tell You About Starting a Business” explains this in more detail.
You need to set up a business bank account and the income you receive has to be paid into that account or separately accounted for in the case of cash receipts and purchases.

Limited Company income does not form part of ‘your’ income and is taxed separately under the Corporation Tax rules – sometimes at a lower rate than it would be as personal income.

Your Limited Company income and account is ring fenced from any personal affairs. It’s not ‘your’ money and cannot be construed as such.

When you set up a company you allocate yourself ‘shares’ in the company, usually 100 at a nominal value of £1 each. That is the extent of ‘your’ money in the company and is all you are liable for – hence the name Limited (liability) Company. (In the US these are called LLCs).

It’s easy to set up a Limited Company. It costs £12 on the Government website and the Personal Business Creation System takes you through it step by step.

There are also some ‘loss leader’ deals on offer from various ‘company registration’ providers. You can set up your company for less than £12 as long as you do not take any of the ‘optional’ extra services!

We strongly recommend that you set up as a Limited Company, primarily because of the tax advantages and ‘the big Secret’ that many people don’t know about or don’t understand. You’ll find this under ‘Rules of the Game’ in the Finances section.

There are more advantages to being ‘Ltd.’, but if you are marketing to public sector organisations and some larger corporates they often insist on trading only with Limited Companies rather than Sole Traders.

Contrary to popular belief a Limited Company only needs one person to set it up – one ‘Director’.

There are a few rules around how you organize a Limited Company and what you are required to do and one thing to remember is that every year you have to submit outline accounts and pay a nominal registration fee to Companies House, the national registrar of companies.

Limited Liability Partnership

The third type of company structure is the LLP or Limited Liability Partnership which requires at least two people to be involved.

These are popular with groups of professionals such as accountants and lawyers but also sometimes appropriate for coaches and therapists working together as it allows for an element of separate trading by individual partners under the limited liability umbrella.

Involvement

Next you will need to consider who is involved in your company.

As a sole trader it doesn’t really matter, but as a Limited Company owner-director you have to declare any ‘persons of significant control’ (including yourself) who may have some sort of controlling interest or influence over what you do or how you do it.

This could be someone who has loaned you money to get started and who may or may not be a shareholder, or it could be someone who has significant control over what you do in another way.

This does not, by the way, automatically include your spouse unless he or she is also a shareholder.

There is more to this which is covered in the Personal Business Creation System.

One thing though is really important – really important.

If you have anyone involved in the business with you including a spouse or (non-business) partner then you MUST draw up a partnership agreement which defines what happens ‘if’ – and there can be as many ‘what if’s’ as you want.

I advise that you find an independent business lawyer (not necessarily a solicitor) who has experience of independent start up businesses to help you with this.

If you employ anyone, the situation is more complex. First you have to have a contract of employment and you also become responsible for a myriad of health and safety rules, employment law rules, and the need to set up a workplace ‘auto-enrolment’ pension scheme for your employee(s).

Note that if your business formally employs you – which it doesn’t have to – and you are below pensionable age then you are also required to set up a ‘workplace pension’ for yourself.

When looking for a specialist to help you with this you must make sure that they are experienced in dealing with small start-up businesses and price their services accordingly.

You may know or work with someone as a trusted advisor or business mentor and you might consider appointing them as a Non-Executive Director (NED) of your company. They then have the duty and right to advise you on all matters pertaining to the business but do not have the right of veto when you decide to do something against their strong advice (in which case they’ll probably resign anyway).

Having a NED in your business gives you someone you can discuss things with in confidence, someone to be accountable to and someone you can rely on for expert advice.

Non executives are subject to a standard set of guidelines laid out by the Institute of Directors but you’ll also need a specific agreement with them.

If you personally are ‘not sure’ about how the finances work, the regulations with which you need to comply, or what to do about marketing your business the this could be an option as long as you choose someone who has a clear, even intimate, understanding of what you do and is ‘on your wavelength’.