Nearly all small businesses hate administration. If you are a small business you will be working out what you have to offer, who will want it, and then working flat out to market your product to them.

And more often than not it’s the admin gets put to one side whilst you’ve got more urgent and pressing things to do.

But there are some things you need to get right at the start, or they will come back to haunt you. In this article we examine some of the basic questions you should be asking.

Do you actually have a business?

Some people who buy and sell might argue that their activities are ‘just a hobby’ and not a ‘proper business’. This frequently arises where people sell online and claim it is not a business because they are doing it outside of their normal working hours, or there are ‘not many’ transactions.

Unfortunately, the taxman frequently disagrees, and is devoting ever more resources to discover these ‘businesses’ – and the lost tax revenues. In deciding whether a business exists the taxman will ask:

• Does the person use the products themselves?
• Are there more transactions than necessary for personal use?
• Are the goods sold on?
• Has a payment or e-payment service been set up?
• Are the products advertised?

Generally, if it looks as if the goods are being bought with the expectation of selling them on for profit, then the taxman will argue it is a business. And if the business has not been registered with them this can raise the possibility of several years backdated fines and penalties. Ouch!

So, what sort of businesses are there?

The main types are:

• Self-employment (sometimes called sole-traders) – these are ‘unincorporated’ businesses in which the business owner is effectively the business, and is personally liable for its debts. This includes insurance and negligence claims – even if caused by other members of staff or sub-contractors
• Partnerships – these are also ‘unincorporated’ businesses where several people are, effectively, the business. Each partner is personally liable for the debts of the business – including mistakes made by their fellow partners. For this reason they are not a popular choice these days
• Limited companies – known as ‘incorporated’ businesses, which are separate legal entities from their owner(s). The debts belong to the company and the owners cannot be personally sued, unless there is evidence of illegality
• Charities and voluntary groups – individuals can take salaries for work done but profits cannot be distributed and must remain in the business.

Should I convert from being a sole trader or partnership to a limited company?

Some of the main considerations are:

• As the owner of a limited company you are not personally liable for its debts. If the company gets in financial trouble or is sued because of an accident or mistake, then you are not personally responsible. Your own assets are not at risk
• You do not pay national insurance on the profits. This may seem a minor point, but if you are self-employed you will pay 8% of the profits which can soon amount to well over the costs of becoming limited. For example, on profits of £15,000 the national insurance savings alone will be £1,200, compared to additional admin costs of around £300
• It has greater kudos and may look more professional to some clients or funders.

Do I need to fill in a tax return?

The answer is ‘yes’ if you are buying and selling goods for profit or providing your services on a commercial basis.

And it’s a ‘yes’ too if you are a director of a limited company – even if no tax is due.

Confused? Hopefully not. But if you are our role in life is to take away the problems of accountancy and tax, and let you get on with what you do best – running your business.

Disclaimer
Please note that we cannot be legally responsible for general advice. This information is provided on a general basis and professional advice should always be taken by individuals.