Starting in Business - the Legal and Financial Issues

Some of the decisions and actions that have to be taken when a business is first established can have significant effects for some time. The foundations put in place at the beginning of the business are very important, and will affect the survival of the business.

This article describes briefly some of the main tax and financial considerations that are involved. It assumes that a thorough review of the market has already been conducted, forecasts have been formulated into a business plan and the necessary finance has been obtained.

The business person is also assumed to have decided to trade as an unincorporated business. Generally, most small businesses need only consider incorporation into limited liability companies after trading for several years. Initially, a limited company may not be attractive for the following reasons:

• The limited liability is of relatively little protection for shareholders who are also directors, if banks, other sources of finance, or trade creditors require personal guarantees;
• The costs of complying with company law requirements, such as preparing statutory accounts, having an audit and preparing annual returns, are greater for limited companies than for sole traders or partnerships;
• The tax, national insurance and financial position of a sole trader is generally more flexible than for a limited company.

The rate of corporation tax for small companies is considerably less than the 40% higher rate of income tax. A company may therefore be attractive where it is not necessary to withdraw profits as remuneration, which would be liable to both income tax and national insurance contributions. Most small companies pay tax at 21% on annual profits of up to £300,000 (30.5% on profits between £300,000 and £1.5m) but larger companies pay tax at 28% (on profits over £1.5m a year).

The profit steps mentioned above are proportionately reduced where there are associated companies. Since 6 April 2001, it has been possible to form a limited liability partnership (“LLP”) in the UK. An LLP offer limited liability protection in the same way as for limited companies. However, an LLP differs from a limited company in that its profits are taxed on its members in the same way as for ordinary partnerships with the main difference in comparison to salaries being a substantial saving in NICs. Thus, an LLP offers the best of both worlds – protection from liability and lower NIC costs. For many small businesses, an LLP is now the preferred business format option when starting in business.

It's important for every new business to make the right decisions on all of the above points. To ensure this, always seek professional help before the start of trading.

This free online guide will cover, in brief, many aspects of the statutory requirements upon new business start-ups and will also offer general help and advice on the following topics:

1. Income Tax and NIC
2. Capital Allowances
3. Value Added Tax
4. Taking on Employees
5. Pension and Private Insurance
6. Setting up an Accounting System

Starting a business is an exciting challenge, but quite apart from the basic commercial risk, there are many pitfalls for the unwary. It is important to identify the potential problems, as well as the benefits, as early as possible, preferably in the business plan stage. It is essential to seek competent professional advice on accountancy, tax and legal matters from the very start – preferably well before the start of trading.

The Department for Business, Enterprise and Regulatory Reform runs several small business advisory offices and these, together with various trade associations, can offer valuable assistance with the various government schemes that exist to help small businesses. The nature and scope of grants and financial assistance potentially available is now very wide and may differ according to location. It is strongly advisable to obtain specialist local advice before starting in business, and before arranging any borrowings or starting any business projects.

• Here at Geoffrey Cole & Co., Chartered Accountants, Reading, Berks we have an extensive list of online resources available for FREE DOWNLOAD in our unique Info Vault.

• It is extremely important for all businesses to note that new and amended legislation may become applicable at any time.

Geoffrey Cole & Co Chartered Accountants & Registered Auditors offer a service that both encompasses and extends beyond the provision of traditional tax, auditing and assurance services. We believe in the value of an integrated approach to your financial needs and view a substantial part of our role as being that of business adviser. In this capacity, we work alongside you, helping you identify your immediate and long-term business objectives and plan for them accordingly. Communication is key and we maintain regular contact with clients in relation to their own affairs. Our IT capabilities are extensive: wherever possible your documentation will be prepared and processed electronically. Furthermore, as SAGE software suppliers and trainers our expertise with their business packages is second to none.

Our years of experience are reflected in the range of services we provide and our extensive client list.

Managing Director Geoff Cole says:
"Our aim, as Chartered Accountants, is to help you to achieve your personal goals and aspirations. Yes, we can deal with the compliance work such as audits, tax returns and the preparation of accounts but these are not the area of our principle focus"

“It’s about you.”