Trading as a sole trader or partneship is the least formal way of running a business. If you want to test the market then its an ideal way for an entreneur to begin. If it takes off and you want to go limited thats fine. Whats the difference? Well, a limited company does what it says on the tin. It limits liabilities and offers protection to individual. If the ship goes down its the company that takes the rap. As a sole trader/partner you will be liable for all debts and in some cases creditors may pursue you. Anyway, enough doom and gloom!
When you start your business make sure you let HMRC know. You must do this within three months and you can do it online.
As a sole trader you only have yourself to answer to. It gives you a great deal of freedom and if you are a self-motivated entreneur then you are more likely to succeed. If you are formiong a partnership, make sure all areas are pre-determined, such as who is doing particular jobs. How much you are all putting into the business and how much you will take out. This is absolutely crucial as further down the road and hopefully when you prosper you will be glad you laid things out properly.
Most sole traders/partnerships will link in with the fiscal year. Even if you start you business halfway through, September for instance, its a good idea to have your accounts end date as 31st March. You will be filing an SA100 and that will always be dated as at the end of the tax year. So do contact an accountant (hopefully us) soon after the March following formation of your business to have your accounts and tax filed with HMRC.
Its still important to keep a decent set of books, so do contact and an accountant to discuss the best way forward. Its very likely an Excel based system will be ideal for you. Making Tax Digital won`t affect you just yet, but it may be introduced from 2020 so be prepared!
Now, the thorny subject of tax! You will pay personal tax on your profits, thats to be expected, but do bear in mind a few other things. You will still have the benefit of your personal allowance, but all the income is grouped together, so if this is a part-time job then any profits could well tip you into the higher rate zone. A nice problem to have, but you should be aware. The other item that is overlooked is that you will also pay two types of National insurance. One is class 2, it used to be call “The stamp” and it went toward protecting your benefits such as NHS and State pensions etc. The other National insurance payable is class 4, which is paid on a portion of your profits. As your accountant we will prepare accounts for you and when we send the draft you will see the breakdown for yourself.
The good news is that as a sole trader/partner there are a lot of items that you can offset against tax, so its not all bad news! The main thing is concentrate on sales, keep the costs down and cash is KING. A sale is never made until its paid for.