When you’re looking to set up a company it can be an exciting time, but the process inevitably comes with costs attached. To minimise those, it is important to decide which model will best suit your needs and this will involve the kind of operations you are likely to undertake. Remember that every business must have a legal structure.
If yours is to be a one-person operation, it is most likely that you will want to work as a sole trader, cover potential liabilities through insurance and handle your tax liabilities by registering with the HMRC. There are almost 3.5 million sole traders in the UK and you can find help on registering at the YouGov website. The costs are minimal and you will be able to begin trading immediately.
It is important to remember that sole traders have unlimited liability and could suffer personal loss if things go wrong.
An alternative is to consider a limited liability company. This will offer protection as the business is a distinct and separate legal entity from the owner, meaning your personal assets are not exposed if the company runs into difficulties. There are also tax advantages since corporation tax on profits is set at a lower rate than income tax. You will need to register for Corporation Tax within three months of commencing trading. Trading here means selling, purchasing, employing staff, renting premises and advertising your services.
Initially, the costs of setting up the company are not so great once you have the relevant information to hand. The Gov.UK website lists the costs with a paper application for incorporation and registration set at £40 and online applications are just £10. The Companies House web incorporation fee is £12. You can get same-day incorporation with a paper application for £100 with the software fee set at just £30.
It is vital to understand the accounting costs associated with running a limited company. Full accounts must be prepared and filed at Companies House and fines apply for late filing. Make sure you discuss the potential fees with accountants before you make the decision about forming the company. Even for a small business, these costs can run into four figures.
If you have a partner with whom you are thinking of going into business, you may consider a simple partnership. Each partner has equal liability for any claims against the company. Legal costs will be involved in drawing up a partnership and it is important to get quotes.
Since 2000 it has been possible to limit liability through forming a Limited Liability Partnership. Liabilities are limited in a similar manner to limited companies, with the advantages associated with partnership accounting. Partnership members can only lose as much as they invest. Incorporation and registration fees are in line with those of limited companies.
Remember if your company, in whichever format, is likely to have sales of more than £85,000 per year, you will need to register for VAT.
Although the costs incurred when setting up a limited company or limited liability partnership have fallen in real terms over the years, to manageable levels, it is the ongoing costs of running the company, including professional fees which are often overlooked.
When you set up a company the rule of thumb is once Corporation Tax becomes more attractive than income tax, look at incorporation.