02: Starting out

There are a number of issues that you need to sort out before you start your business.

Business entity
You normally have to decide between three main types of business entity.

  • Many start-ups are as a sole trader – a person trading on their own.
  • Where two or more people are in business together, a partnership may be preferable. Partners need to be sure they can work happily together.
  • A limited company has several benefits but also some disadvantages. You might pay less tax by trading as a company but there is more administration involved.

Sometimes it is best to start off as a sole trader and incorporate later. This could be advantageous if you expect your business to take a while to become profitable.

Keeping it in the family

Consider employing your spouse, partner or a family member. If they help you, you can legitimately pay them a reasonable amount for their work. Payments to an employee are tax deductible and will reduce the tax you pay, but you will need to operate a PAYE scheme. You can pay pension contributions for them too.
Alternatively, your spouse or partner could become a part owner of your business if they are closely involved in it. This may save you tax but HM Revenue and Customs are is likely to object to artificial arrangements.

Setting your accounting date

Many sole traders prepare accounts up to 31 March each year in line with the tax year. However you can choose any other date. Your accounting date can make a difference to the timing of your tax payments, or you may prefer a date at a time when business is likely to be quieter.

VAT registration

If your sales exceed the VAT threshold, you must normally register for VAT. If you make mainly zero-rated supplies (for example food, publications or exports), it can still be advantageous to register for VAT even if your turnover is below the threshold, so that you can recover VAT charged to you.

There are some special VAT schemes for small businesses, such as the flat-rate scheme, and the scheme for retailers. Choosing the right scheme can produce savings.