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The financial side of setting up a business

From registering as a business, to keeping your accounts in order and paying tax – it’s important not to overlook the financial aspects of your enterprise, says Louise Farrand

If you’ve decided to set up your own business instead of becoming a full-time retiree, or are perhaps still mulling it over, you may well feel daunted by the financial aspects of setting up on your own. Especially if you’ve never been self-employed before.

The first decision to consider is how you’re going to structure yourself as a legal entity, for the purposes of paying your tax and National Insurance (if applicable). There are two main ways to set up: you could be a sole trader or a limited company. 

Starting a limited company 

If you’re thinking about starting your business as a limited company, it’s probably a good idea to have a chat with an accountant first, to understand the process and what’s involved. 

“It’s not always a straightforward decision. Yes, there are tax advantages to being a company, but compliance and administration is more work,” explains Jenny Tolmie, partner at accountancy firm Griffin Stone Moscrop & Co. 

If you choose to go down this route, the government has a step-by-step guide to setting up your own company. 

You’ll need a company name - although be aware that there are rules on what it can and can’t include - a registered address, and at least one director and shareholder, as well as various bits of administrative paperwork. One you have these to hand, you can register your company online for a fee of £12. 

Some accountancy firms will handle the registration for you if you sign up with them to provide booking keeping services. 

“With incorporation comes the requirement to file accounts that must comply with the latest legislation. You must also file a Corporation Tax return. These two requirements will significantly add to your annual accountancy bill,” says Clare McCullagh, owner and managing director of Heavenly Online Accountants.

One big advantage of being a limited company is the protection it gives you.  “A limited company is a separate legal entity, separated from your personal assets thereby protecting them if the company gets into financial trouble,” says Victor Korman, managing director of Cogent Accountants.

However, it’s important that you understand your obligations, as you may be personally liable for your company’s business liabilities and be fined, prosecuted or disqualified as a company director if you fail to follow the rules. 

Another point to weigh up is that if you’re trading with other companies, they may expect you to be VAT registered – “to be seen as a big enough player,” as Jenny puts it. Depending on the type of business you’re thinking of starting, this could be a big issue or totally irrelevant. 

“An incorporated business may be easier to sell. Potential buyers may have more faith in filed accounts on which they may base their decision to buy and what price to pay,” says Clare, summarising another advantage. 

Becoming a sole trader 

On the other hand, there are several pluses to starting up as a sole trader. “So many people rush to become a limited company and it’s not always the best thing for them,” says Jenny. 

As a sole trader, you’re likely to spend less time on administration than you would if you were a limited company – which is a pretty big advantage if you’re trying to grow a business. 

“Many first time business owners start as a sole trader as it is usually the easiest and cheapest option,” says Victor. It’s fairly straightforward to go online and register as self-employed: if you’ve never done it before, you can click here to register.

Being exposed to financial risk can put people off opting to be sole traders. However, as a sole trader, you can take out insurance to minimise the various risks of running a business, leaving you less open to lawsuits which could hit your personal finances. 

If you’re a consultant, consider taking out professional indemnity insurance, which gives you protection if you make a mistake in your work or offer the wrong advice.

If your business is run from a shop or a café, or if you run events for people, you should consider taking out public liability insurance, which covers you if, for example, someone becomes injured on your premises.

“If you decide to incorporate your business, you can incorporate when you want, either online directly with Companies House or through a third party (accountant, solicitor, agent) for a nominal fee. You could also purchase a ready-made limited company from an agent,” says Victor.

A final point to note – regardless of your business structure, if your turnover passes £83,000 (figure for the April 2016-April 2017 tax year), it’s compulsory to register for VAT with HMRC within a week. 


Retiresavvy is brought to you by Skipton Building Society. This article has been commissioned by retiresavvy and any opinions voiced are the author's own. Information correct at the time of publication.

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