Business Task 2

Research for Report Part 1

Trading

Sole Trader

The quickest way to start your own business is to start as a sole trader. You don’t need to do anything particular apart from notifying HMRC that you have started trading and that you will be taxed as self-employed. You only need to keep basic accounts and you can still employ people, should you wish to do so.
It is also important to remember that operating as a sole trader, or as part of a partnership, means that you are personally liable for all of the debts of your business and this can include your home being at risk.  It is especially important to remember that each partner in a partnership is liable for the debts of the business.  If your partner absconds, you could be left with all the liabilities.

Limited Company

Many people think that setting up a limited company is the answer to all of their prayers – corporation tax is payable at a lower rate and having a limited company means that your personal liability is limited. Rightly or wrongly there also remains a perception that a limited company is more heavyweight than a sole trader.
Setting up a limited company is relatively easy and you can do this yourself online. There is, however, a very small fee to pay. Once your company has been set up, there are ongoing requirements such as filing an annual return and accounts, notifying any changes of directors and so on. However, a company does also give you some extra flexibility – for example you can sell shares to outside parties or use them to reward employees. Registering your company name can also be a useful first step in trying to protect that all important brand.

Limited Liability Partnership

Limited liability partnerships are pretty expensive and complicated to establish. They do though have the advantage of (as their name suggests) allowing you to limit your liability in the way that a standard partnership doesn’t.
Limited liability partnerships have been very popular for professional practices such as Solicitors and other professional advisers.

Legal Aspects

There are a lot of legal aspects of running a small business that must be considered before a company can be set up. Things such as health and safety, fire safety, environmental issues, employees and data protection. All of these things and more must be considered before any money can be made from a product. You are responsible for the effect your business may have on the health and safety of your employees and members of the public. You may need to register with the Health & Safety Executive (HSE) or with your Local Authority. You must protect the legal rights of your employees. If you take over an existing business, you must usually keep the existing terms and conditions of employment. If your business involves keeping information about people, you will have to be careful about the sort of information you keep and how it is used in relation to the Data Protection Act. You may have to register if you keep such information on computer. The Data Protection Act 1984 grew out of public concern about personal privacy in the face of rapidly developing computer technology. The act covers personal data about living, identifiable people that can be automatically processed. To keep such information on your computer legally, you may have to register. For a range of useful free information booklets or to register, contact them direct. A licence is required for many businesses, not just the obvious ones like casinos or public houses. For example, you need a licence to run a hotel, a guesthouse, a mobile shop or to be a hairdresser. You should always check whether your business requires a licence to trade.

Tax

Tax is something that simply can’t be ignored by anybody trying to run a small business, as it is illegal to avoid them.

                Income Tax

Income tax is the tax you pay on your income, however, you don’t have to pay tax on all types of income. You pay this on things like money you earn from employment, profits you make if you’re self-employed, some state benefits, most pensions, income from trusts, benefits you get from your job, and many more.

Sole trader tax is paid on your business’s profit. Assuming you don’t have any other income, such as salary from a job, as well as what your business makes, then you’ll start paying income tax on your business’s profit once it goes over the personal allowance, which is £10,600 if you’re under 75. If your business is a limited company, you could pay income tax on any salary or dividends you take from the company. Whether you pay income tax, and how much you pay, depends on how much you take out. Income tax kicks in on your salary if it’s over £10,600, you’re under 75 and you have no other income. If your circumstances are different – say you have another job as well as working for your own company – then you may start paying income tax on your salary sooner. If you’re paying income tax on your salary, your employer, in this case your own company, will deduct it from your salary under the PAYE (Pay As You Earn) scheme. PAYE isn’t a tax in its own right, it’s a method HMRC use to collect income tax.

                National Insurance

National insurance is either payed by the employee and is deducted from their pay, or is paid by the employer directly. The amounts you pay are dependent on a few different things. These are the employees national insurance category letter (A, B, C, H, J, M or Z) or by how much of the employees earnings fall within each band.

Sole traders pay two kinds of NI. If you’re a sole trader, you’ll pay a flat weekly rate of NI called Class 2 NI, unless your business’s profits are under the Small Profits Threshold, which is £5,965.  Class 2 NI is £2.80 per week. If your business’s profits are under the Small Profits Threshold, you can still pay Class 2 NI voluntarily, to protect your entitlement to State Pension and other benefits.  You’ll also pay Class 4 NI once your business’s profits go over £8,060.  Class 4 NI is worked out as a percentage of your business’s profit. If your business is a limited company, and the company’s paying you a salary of £8,060 or more, then it’ll have to deduct Class 1 employee’s NI from your wages and pay that over to HMRC. The company will also have to pay Class 1 employer’s NI to HMRC unless that’s covered by the employment allowance.

Corporation Tax

Corporation tax is paid on profits from doing business as a limited company, any foreign company with a UK branch or office or as a club, co-operative or other unincorporated association.

Limited companies pay corporation tax on their profits. There’s no equivalent of the personal allowance for limited companies, so as soon as a company makes any profit, unless it’s previously made losses, it will start paying corporation tax. Sole traders do not pay corporation tax. This is the main problem with Corporation Tax – the payment deadline is different from other major taxes, such as income tax and VAT, and you have to pay corporation tax before you file your company tax return. Invariably, you have to pay your corporation tax within nine months and one day of the end of the accounting period for your previous financial year. So, if, like many firms, your accounting period comes to an end on March 31, you must settle your corporation tax bill by January 1 the following year.

VAT

VAT (value added tax) is a type of tax added incrementally, increasing in value as the product becomes more and more valuable during its manufacture and shelf life. It is essentially compensates for a shared infrastructure provided by a state and funded by its taxpayers. This is the main problem with Corporation Tax – the payment deadline is different from other major taxes, such as income tax and VAT, and you have to pay corporation tax before you file your company tax return.

Invariably, you have to pay your corporation tax within nine months and one day of the end of the accounting period for your previous financial year. So, if, like many firms, your accounting period comes to an end on March 31, you must settle your corporation tax bill by January 1 the following year.

Sources of Finance

Loans

Loans can be a great way to kick start your business, but you need to be constantly vigilant when dealing with them. One wrong move or lapse in memory can land you in extremely hot water, and run you out of house and home. They can be a great way to initially become solvent and work to give you a small boost to your company while you get yourself setup.

There are some thing that must be thought about when it comes to loans, first you must qualify for a loan by looking at things like your age, nationality and the current lifespan of your business.

Overdrafts

An overdraft is a small buffer that gets added onto your bank account to cover any times you may drop below a zero balance. There are a few options for overdrafts, such as small ones for individual private use, and larger, more private ones used for businesses and companies. Banks are, however, trying to move away from giving out overdrafts in favour of more secure and observable bank loans.

Start-up Schemes

There are a great deal of start-up schemes in the UK, all committed to helping get your business off the ground and up and running. These can be things like saving money on rates and premises to buying cheap plant or IT equipment. All of these work to help out new business owners who may be less experienced in this thing. They can even involve getting people loans, up to £25,000, with 6% interest.

Financial Systems

            Solvency

Solvency is the degree to which the current assets of an individual or entity exceed the current liabilities and expenses. Solvency can be achieved through a number of different things such as keeping track of your expenditures and spending’s and is best measured using the net liquid balance (NLB) formula.

            Indebtedness

Indebtedness is the act of owing someone or something money, simply. It can, however, be quite dangerous, as being in debt to somebody means you owe them, and that can be the end of some small business, especially if the entity owed the money charges a high interest rate. A small business that is just starting out must always be aware of when they are approaching debt, and must act on it swiftly.

                Profit Margins

A profit margin is the amount by which revenue from sales exceeds costs in a business, so essentially, a profit margin indicates how much extra money you are making over what you are spending.

            Cash Flow

Flow is basically the flow of money in an out of your business. This can be used in reference to all the money coming in and out of your business, as well as referencing just a portion of it. It is very important to keep a constant eye on this, as not doing so can lead to you running out of money and ending up in debt. It is also very important to keep an eye on the money coming into your business too, as this is how you make money, so you need to make sure clients are paying you on time and in full.

Overhead costs

Overhead costs are things that less directly related to your business, but must still be accounted for, as in, things that are not directly tied to the manufacture of your product or the delivery of a service. Things like; rent, bills, legal expenses, utilities like gas and electricity as well as employee costs all fall under this roof.

Record keeping

Record keeping is an extremely important part of running your own small business. Any amount of information is as important as anything else, and losing or misplacing any of it could potentially end your company. With modern data protection laws it is becoming easier to keep track of paperwork since most everything is online, however some things are only done on paper for legal reasons, and these are the really important pages that must be kept safe.

Invoicing

An invoice is essentially a document that itemizes a transaction between a buyer and a seller. Normally an invoice contains the terms of any agreement between these two entities, specifying what each person must do to keep this agreement in check.  It is also used to lay out the terms of payment and pricing for the material being exchanged and contains payment information.

Software Accounting Systems

If a business owner can’t afford a real human accountant to do their accounting, then there are many different automated services that do basically the same thing for you, albeit with a colder less relatable tone. These services work to cut down the amount of accounting you have to do yourself by providing shortcuts or doing some things for you, and any kind of accounting system is imperative to running a business, and if you can’t afford a human accountant then this is a must.

Credit Control

            The Importance of Credit Control

Credit control is the system used by a business to make certain that it gives credit only to customers who are able to pay. With debt and cash flow issues being some of the main reasons that small businesses fall apart it is imperative that credit is controlled properly by any business owner, whether directly or outsourced. The longer a debt remains unpaid the harder it is to get it back from the customer, making maintaining customer relations just as important. A good way to get around this worry is with a good diary system so you never lose track of what needs paying and when.

Simple Credit Control Techniques

There are many ways to keep on top of your credit. Some of the simplest can be doing things like messaging the right person about the right material, on time and in enough time for them to get it to you. Maybe you could go and meet your customers personally to help build a good relationship to keep them on your side, this way they are less likely to avoid payments.