Setting up your own business can seem a daunting task that poses lots of questions. Should you be a sole trader or a limited company? Who do you need to tell? What will it mean for your tax? Here are nine things you’ll need to think about before you take the plunge.

1. Sole trader vs limited company

To begin with, you’ll need to decide on what kind of structure you want for your business - the vast majority of self-employed trade businesses will either fall into the sole trader or private limited company options. 

What is a sole trader?

Sole traders have the simplest structure; you run your own business, and you keep any profits left after tax. You are also responsible for any debts the business incurs. This kind of business structure works for anyone working for themselves. 

While you’re referred to as a business, you don’t have to have business premises or even a business name that differs from your own name - it just describes someone working for themselves.

What is a private limited company?

Setting your business up as a private limited company may suit you best if you want your business to be a separate legal entity to you, but it is more difficult to set up. 

Firstly, limited companies must be registered on Companies House, where a director - usually the person who started the business - and at least one shareholder must also be set up. You’ll have to pay corporation tax on the profits the business makes, and what’s left is split between stakeholders. 

As the director, you’ll need to submit a company tax return to HMRC annually, in addition to a self-assessment tax return detailing your personal income. 

Limited partnerships

This is a less common business option, which is suitable for anyone who is setting up a business with one or more other people. 

All members of the partnership are responsible for any debts the business incurs, and will all need to submit a self-assessment tax return to declare their personal income for the business, while someone will also have to submit a tax return for the business itself.

Limited liability partnerships

This option sits between a partnership and a limited company; like a partnership it can be set up between two or more people, but the company must also be registered on Companies House, and be legally separate from the people who are running it.

2. Register your business with HMRC

Once you’ve decided what kind of business you’re setting up, you’ll need to tell the tax authority it exists.

Sole traders will need to apply for a National Insurance number (if you don’t already have one) and register for self-assessment by the 5 October ahead of when your first tax return is due. 

So, if you set up your business in September 2020, you’ll have to make sure you’re registered for self-assessment by 5 October 2021, as your first tax return for the 2020-21 tax year won’t be due until January 2022.

This process is slightly different if you work in construction.

If you’ve opted for a limited company, you’ll need to register an official company address, and choose a ‘SIC code’ to identify what your business does - you can search through them online. 

You’ll also need to register your business with Companies House, as well as for corporation tax. 

Find out more in our guide to corporation tax

3. Consider your self-assessment income tax

As mentioned above, depending which kind of business you choose to set up it will affect your personal tax liabilities in different ways, but a self-assessment tax return will be required whichever option you choose. 

This must be submitted each year; if you file on paper it must reach HMRC by 31 October, while online submissions must be received by 31 January. 

Being late with your tax return can incur some hefty penalties - see our guide on late tax returns and penalties for mistakes to find out more. 

4. Do you need to register for VAT?

You must register for VAT if your business’ VAT taxable turnover is more than £85,000 - this is the total value of everything you sell that isn’t exempt from VAT. 

If your turnover is less than this, you don’t have to register for VAT but it might be beneficial if you pay a lot of VAT on items bought for your business, such as laptops, tools and even stationery. If you register for VAT, you’ll be able to claim the VAT tax back.

The downside of voluntarily registering for VAT is that you must then also charge VAT on goods and services you offer, and submit a VAT return to HMRC every three months. 

Find out more in our guide to self-employed VAT returns.

5. Traditional accounting vs cash basis

You’ll need to decide how to process the money your business makes, as this has a bearing on your tax return.

Most self-employed traders will opt for the cash basis option - this is suitable for those with an annual turnover of less than £150,000 operating as a sole trader or in a partnership. 

Cash basis is when you pay tax and claim expenses based on when the money enters your account; so in cases where you invoice someone several weeks before getting paid, you’d only look at the date you were paid for tax purposes. 

For instance, say you invoiced a client in February 2020 for work, but didn’t receive the money until mid-April. While the work may have been agreed in the 2019-20 tax year, you wouldn’t need to report the income until you were doing your 2020-21 tax return, as that’s when the money was received. 

However, with traditional accounting you pay tax and claim expenses based on the invoice or billing date, whether you’ve received the money yet or not. 

6. What kind of insurance do you need?

Any business - whether you’re a sole trader or employ several people as part of a limited company - needs to have relevant insurance to protect it, should anything go wrong. 

One of the most important types of insurance for traders is public liability insurance, which will cover the legal costs and compensation of injury or damage should a member of the public sue your business. It’s also necessary in order to be endorsed by schemes such as Which? Trusted Traders.

If you have business premises, these and the contents within them will need to be insured, too, while professional indemnity insurance will cover the costs if a customer finds fault with your work.

Find out more in our guide on public liability insurance. 

7. Do you need a business bank account?

You don’t necessarily need to have a business bank account if you’re a sole trader or in a partnership, although it can be helpful - and you will definitely need one if you’re running a limited company. 

A business bank account is an easy way to keep your business finances separate from your personal spending, which can also make it simpler when declaring your income to HMRC.

Some accounts will charge a monthly fee, so make sure you opt for one where you can make the most out of all the services it offers.

You’ll find business bank account options from most of the big UK banks, while challenger banks such as Starling also have app-only options, which could be handy for those who are happy not to have branch access.  

Find out more in our guide to business bank accounts.

8. Tell your landlord or mortgage lender

By deciding to become self-employed, you’re making a big change to your employment status and therefore your landlord or mortgage lender should be notified - especially if you’re planning to run your business from home.

If you rent, you may need to get your tenancy agreement updated to reflect the changes. 

Mortgages can be trickier, though, as many residential mortgages prohibit running a business from home. You’ll need to speak to your lender to get permission, as breaching the terms of your contract may land you with a penalty. 

If you’re looking to buy a property after becoming self-employed, the process of getting a mortgage might look a little different. See our guide on mortgages for self-employed buyers for more information.

9. Consider signing up to Which? Trusted Traders

An endorsement scheme like Which? Trusted Traders can give new businesses a great platform. 

Not only are your skills and services formally recognised with our well-known logo that many customers around the UK have come to trust, but having a Which? Trusted Trader profile can also help you reach lots of potential customers.

What’s more, you’ll also be given a dedicated Which? Trusted Traders account manager who can help answer your business-related questions and make the most of your membership. 

If you want to find out more about how being a Which? Trusted Trader can help you stand out from the crowd, sign up to Which? Trusted Traders now.

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