Sole Trader versus Limited Company – explained.

You’ve made the brave decision to go ahead with your business idea and work for yourself. This is great news. It also means your to-do list is endless.  One item that needs to be on your list, is choosing the right legal structure for you. This process can be daunting.  I outline below, in basic straight forward terms what the options are and why you would want to choose one over the other. The good news is, if the one you’ve chosen does not turn out to be the right one for you, you are allowed to change it.

I am going to compare registering as a Sole Trader versus a Private Limited company as these are the two options you most likely will need to choose between.

SOLE TRADER

What is it?

• Classed as self-employed.
• You are allowed to have staff (just because you are a sole trader doesn’t mean you have to do all the work yourself).
• You are personally responsible for the losses your business makes.
• In the same vein, you retain all profits of the business.

The paperwork.

• You need to complete an annual self assessment tax return.
• You have to pay income tax on your profits.
• You need to pay national insurance.
• You need to register for VAT if takings are more than £82K a year.

Why choose this option?

• You are unsure about launching your idea and want to test the waters first without making too much of a big commitment. Remember, you can change type later.
• Lower accountancy fees and admin expenses.
• You have privacy. There is no need to declare to the world how much you are making, unlike a limited company.

LIMITED COMPANY

What is it?

• A Limited Company is registered at Companies House and has a corporate personality. It is a legal entity. It can be further divided into private and public, but if you are a start-up, I’m going to assume you are interested in ‘private limited company’ as an option and are not quite ready to go public. One step at a time!
• The company is responsible in its own right – finances are separate to your personal finances.
• Profits are owned by the company after paying Corporation tax.
• Company can share its profits.
• “Members” are people who own shares in the company.
• “Directors” are responsible for running the company.
• The legal responsibility of running the company lies with the directors.

The paperwork.

• You need to file annual statutory accounts (it is a criminal offence not to do so).
• You need to send Companies House an annual return.
• You need to send HMRC an annual company tax return.
• As above, you are required to be VAT registered if takings exceed £82K. See advice below re flat rate scheme.
• A director of the company needs to fill in a self assessment tax return and pay any income tax and NI if paid a salary by the company.

Why choose this option?

The “limited” gives the company a bit more weight and appears to be bigger giving more confidence to potential investors, clients and suppliers. Banks also tend to favour limited companies.

Tax savings. Dividends of a limited company are subject to lower tax rates than self-employment income. (0% tax for basic rate tax payers and 10% for higher and additional rate tax payers). You can distribute dividends after 20% corp tax has been paid on profits.

Risk. Shareholders have no personal liability beyond the amount paid for the shares. If you do not succeed, and go bankrupt, it is the company that goes bankrupt, not you.

Raising finance. There is the option to raise funds by selling shares.

Top Tip

• Although you don’t have to register for VAT until you reach £82K income, you may want to register for it anyway. If you have very few purchases, for instance if you are a consultant, then you can register for the flat rate VAT scheme.  Under this scheme, you cannot claim back VAT on purchases (who cares? You don’t have any anyway) and although you can charge out 20% VAT you can pay back less to the government. Exact percentage depends on what your business sells exactly. Essentially, you get to keep some of the VAT. Hooray!

This is of course a basic overview and I am by no means a tax expert. But hopefully this clears things up a bit if you find yourself at this stage of your start-up set up.

Want to read this blog as soon as it comes out? Please “follow” on bottom of page. If you need Finance Director services, from a rolling contract to one-off financial health checks, please visit my website http://www.wrightcfo.co.uk, or email me at sophie@wrightcfo.co.uk. 

Increase profits starting today. 7 easy tips.

There are some simple things you can do today, to start increasing your profits without winning new clients. Making some minor changes to the way you do business will be barely noticeable to anyone- apart from you, of course, as you’ll know you are becoming more profitable.

1. Increase your prices. No really.   A small increase in price will not drive your customers away. Even if it does drive some away, it will be a small number and you will still be better off with your remaining customers at the increased prices. “Amazon raised its price of annual Prime Subscriptions from $79 to $99 in 2014. Despite the $20 increase, the company expected to lose less than 5% of customers, resulting in a hefty $400 million increase in income.” John Boitnott, Oct 7, 2014 “In a McKinsey study with the Global 1200, they found that a 1% price increase – if the demand remained constant – would result on average in an 11% increase in profits.  Not bad.” Richard Ruff, Feb 9, 2015 Getting the picture?

2. Price alignment.  Are you charging all your customers the same amount for similar products or services? Get everyone on the same price list or rate card. You may be charging some customers the same rate card you agreed when you signed the contract in 2005. Get up to speed.

3.Do not discount. It will be the death of your company.  Just as incremental price increases can increase your profit, so can the same incremental discounts be the death of you. Don’t do it. Emphasize the value you bring. Not the price.

4. Cash discount from suppliers. It is better to get a discount to pay upfront, rather than pay full price and delay payment, even if you are borrowing. Just ask. They can only say no. And the chances are they won’t ALL say no.

5. Check supplier bills. Do not assume that everyone invoices you correctly. Humans make mistakes. Are they overcharging you? Duplicating invoices? Do they add up? I have personally seen atrocious invoicing. Checking invoices from a film production company and questioning them once saved me (or rather the company I worked for at the time) £40K for one TV ad.

6. Same fixed costs, but cheaper.  Check your running costs. Don’t change what you’re getting. Just pay less for it. There is a lot of competition out there for basic business supplies. For instance, everyone needs electricity. But are you paying the cheapest you can for it? There are companies out there who will analyze your usage and tell you what the best rate you can get is and from where. And it’s free! The same goes with phone calls, broadband, even your stationery. Prices really differ from supplier to supplier for the exact same stationery.

7. Quotes for Capital Expenditure. For IT equipment, decide on a preferred supplier, which you promise to use as long as they always charge you 10% lower than if you bought directly from source. It works. I’ve done it. Their discount is more than yours so they still make a profit. Don’t worry about them -worry about you. For any other big ticket item, never EVER buy anything unless you acquired three separate quotes. Make this a company rule.

Want to read this blog as soon as it comes out? Please ‘follow’ on bottom of page. If you need Finance Director services, from a rolling flexible contract to one-off financial health checks, please visit my website http://www.wrightcfo.co.uk , or email me at sophie@wrightcfo.co.uk. 

How to write a business plan in 4 hours

If you run your own business, no doubt you have had ‘writing a business plan’, on your to do list for some time. But who has time for that, when you are trying to get your business off the ground, right? Wrong. According to many sources, 90% of internet start-ups fail. You can lessen those odds by writing a plan. After all, “failing to plan is planning to fail”.

This is why I have created an easy to follow summarised business plan, which you can do in four hours. If you need to raise capital or are asking a bank for a loan, you will need a more comprehensive plan. You can do that later. This will get you started and focused.  It is also something you can share with suppliers, customers and potential partners who you’d like to invite come on board with you. So no more excuses.

Description.  Write one paragraph which answers these questions: Who are you? What do you do? Where do you do it?

The vision. What will this business be in five to ten years’ time?

Brand promise.  Write one paragraph. What will your company do for its clients?

Values. What are your core values that your business will stick to?  Choose three and keep it short.

Objectives.  Describe your business objectives. They should be long-term, e.g. in three years from now. They need to be SMART. ( specific, measurable, achievable, realistic and timely) Choose three . (We only have four hours remember)

Market research.  This can be a two or three paragraphs but need to cover the following. What do you know about your industry? Who are your competitors? Who are your target customers? What is your unique selling point? What methods are you going to use to deliver your brand message.

Sales. How are you going to generate leads, get in front of customers and close the sale?

Housekeeping.  This is one or two paragraphs explaining the operations of the business. Include an organisational chart showing who is involved and where they are in the organisation.(No time to make a chart? Write a list instead) Include any business processes you may have.  How are you going to measure quality satisfaction?

Financial plan.  You should have three tables.  1. List of your start-up costs.  2. Revenue projections for three years.  3. Cashflow projections for three years.

Now, when I say you can do this in four hours, it’s a bit like Jamie Oliver’s meals in thirty minutes. Before Jamie starts his clock, his kettle is pre-boiled and his kitchen equipment is laid out on the counter before he even starts cooking. So get your grande skinny cap ready, laptop is on charge, kids are out of the house (if you work from home) and you make sure you have no distractions. Don’t answer email. Just sit down and write this plan. And in four hours, it will be done. You will feel so relieved to have crossed it off your list and you’ll have a plan to get working towards. You will also have just increased your chances of business success. Congratulations!

 

Want to read this blog as soon as it comes out? Please ‘follow ‘ on the top of the page. If you need Finance Director Services, please visit my website at http://www.wrightcfo.co.uk , or contact me at sophie@wrightcfo.co.uk.  Happy business planning!