picture by Oberazzi
Before you start, the very first thing to do is to start looking for an accountant. The accountant, apart from you, will be the second most important person in your business so don’t ignore this part. The are numerous accounting companies or self-employed accountants who are advertised in the web space and the time you will spend looking for one will repay itself back many times over.
Look out for the following:
- Is the accountant a member of some of the accounting associations such as ACCA, ICAEW, CIMA or others? This helps not only because it means that the person is professionally qualified, but because the members adhere to the Associations very strict codes of ethics giving you additional peace of mind.
- What is her/his field of experience? Some accountants help specifically self-employed or start-ups with fees, which can be, lower for some period of time, which is helpful.
- Does he/she offer any other services such as tax advice, which can be very advantageous in the early stages of your business. Is there an additional charge?
- How easy is to get in touch with your accountant? Is there a website or a phone number which gets answered regularly?
- Do you need to go the accountants’ office or can everything be done over the phone or Internet? This is important if you are struggling to find free time.
- If it is a registered accountant company, make sure you check with Companies House (the website is mentioned below) on how long the company has existed, annual accounts if available and so on just to make sure the company is reputable and has been in the business for some time.
Make sure that you keep all records of transactions (receipts or invoices) for anything connected to the business in date order. Your accountant will decide if it will be used for your accounts or not, but it is always better to give him/her more than less.
Differences between self-employment and limited company
From a legal point of view, one of the main differences is that a person who is self-employed bears all the liabilities in the business personally, which means that if he/she has financial difficulties and can’t pay off the creditors (for example bank loans), the creditors have the right to require the self-employed person pay off the liabilities with their personal assets.
The Limited company is quite different. It is a separate legal entity from its shareholders (such as you as a director) and you will not be personally liable for the debts of the company, but the company will be. You can familiarise yourself with the Companies act 2006 and the directors roles and duties explained inside for a general idea of what it means to be a director of a limited company.
Advantages of being self-employed
If you are just starting and your business hasn’t grown yet, it is a good idea to start off small and see how things are going; Self-employed people are very often charged less money by accountants; the paperwork is not too big to handle and if you have a basic understanding of accounting, you can yourself prepare some simple calculations and keep an eye on how the business is going apart from knowing what questions to ask your accountant; you will in most cases be more flexible than some of your competitors and be able to work longer hours. Not needing an additional worker and being able to do all of the work yourself is an ideal starting point for being self-employed.
Disadvantages of being self-employed
If your business grows fast and you need people who can help you develop it, you will need to start employing, which on it’s own is a huge responsibility. You might need to register limited company and you will need to deal with your employees contracts, their salaries, make sure you have an office or premises which comply with the health and safety regulations. Your accountant in most cases will start charging you more due to the increased paperwork. Be careful when you have decided to work with another self-employed sub contractor. HMRC has very clear guidance on who can be considered self-employed and who is an employee (HMRC website is mentioned below)
Another disadvantage comes from the volume of work you can manage. It is very often the case where if you meet with potential clients and want to take on more work, you might be overlooked because someone with more staff and recourses might be able to do the job better than you (or at least this is what the person who you want the work from will think), which might leave you in disadvantaged position.
Being self-employed means that there is no such thing as 9-5 working hours. You will have to be constantly prepared to work. You will, very often, work more hours than you might want and have to sacrifice some of your social or family life.
Advantages of a limited company
Naturally the disadvantage of being a self-employed can be an advantage in setting up a limited company – having more people to work for you, will mean in most cases more revenue, more free time to commit to your family and in general better life. You will also be most likely to be given a loan from the bank for your business, since the Banks see a limited company as a more serious commitment to the developing of the business than a self-employed person.
Disadvantages of a limited company
You will have increased legal responsibilities as a director of the company towards HMRC for paying tax on time, filling in your annual return, as well as other responsibilities as prescribed in the Companies Act 2006; (most of these will be taken care of by your accountant). Higher fees by your accountants and in general increased pressure to comply with the legislation of this country in anything the company will do or want to do in future. You will have to pay VAT Tax if you get registered (for more information see the HMRC website: http://www.hmrc.gov.uk/index.htm ) as well as Corporation Tax and the employers part of the Income Tax for your employees (including yourself). It is very likely that there will be other liabilities you might need to pay, but they will depend on your business and how you manage it.
What to do if you want to register as self-employed
The first thing you need to do is contact HMRC. You can do this through their website which is very helpful and will answer most of your questions: http://www.hmrc.gov.uk/selfemployed/index.shtml
Another very useful website is the Direct Gov site http://www.direct.gov.uk/en/index.htm
What to do if you want to register a limited company
A very good starting point is again to go to the HMRC website http://www.hmrc.gov.uk/businesses/ or the Companies House http://www.companieshouse.gov.uk/
You can as well ask your accountant to assist you in registering a limited company, but be sure to find out how much you are going to get charged as it might be cheaper to do it on your own.