There are 4 main types of business structures and each has various tax and liability implications for owners and shareholders: 

• Sole trader
• Partnership
• Limited liability partnership
• Limited company 

Sole trader: This is the easiest form of business to register. You are a self-employed sole trader if you start working for yourself and you must register this business with HMRC. 

You are liable to pay tax and national insurance by completing a self-assessment tax return.

Partnership: A partnership involves two or more individuals that agree to share in the profits and losses of the business. They share the risks, costs, benefits and responsibilities of running the organisation. Partnerships are often referred to as unincorporated entities in that the partners are self-employed. Each partner is responsible or liable for other partners’ negligence or misconduct. The profits or losses will be shared between the partners and this will be agreed in the profit-sharing ratio and each partner pays tax on their share of the profits. 

Limited liability partnership: An LLP is similar to a partnership except that the partner’s liability is limited to the amount of money they invest in the business. You must register the LLP with companies house and HMRC and you must file annual accounts. An LLP can be started with 2 or more members and a member can be an individual or a company. The share of the profits is set out in an LLP agreement and all members must file a personal self-assessment tax return every year, as well as pay income tax on their share and national insurance to HMRC. 

Limited company: This is a privately managed business that’s owned by shareholders and run by its directors. The company is a separate legal entity with its own legal rights and obligations. Meaning the company is responsible for everything it does and the business’s finances are separate from the personal affairs of the owner(s). 

Any profits generated are kept by the company after it pays corporation tax. Only then can the profits be distributed to the shareholders in the form of dividends. 

Limited companies can be limited by either shares or by guarantee, these are explained below:

Limited by shares: This is the case for most limited companies. It means the shareholders’ responsibilities for the company’s financial liabilities are limited to the amount that the shareholder has agreed to pay for the shares. 

Private company limited by guarantee: A company limited by guarantee does not usually have share capital or shareholders, but instead has members who act as guarantors. 

The process of incorporation

For sole traders and partnerships you don’t need to go through any formal processes to set the business up. All you need to do is register with HMRC and comply with the associated rules. 

It’s a more complex process to set up an LLP and limited company. First, you need to register the company at Companies House and draft the company’s Memorandum and Articles of Association. 

Any business must keep a record of their expenses, income and taxes. Here’s what we recommend to keep your financial records in order. 

Choose an online accounting software that works for you. Keeping all of your financial records online is so much easier than keeping paper records. We recommend using Xero, they automate calculations, allow you to run reports and give you access to the data you need. 

Have a schedule, it’s important to set aside time regularly to manage your books. Keeping on top of things can mean you don’t miss any important deadlines like VAT, corporation tax and National Insurance payments. 

Make sure you reconcile your bank statements. You need to match the information in your accounts to the transactions in your bank account, it ensures all income and expenditure is accounted for. Using Xero can make this process so much easier as the system will automatically match the transactions with the information in your account.

It also helps to know exactly what you need to record for your business. You need to keep track of:

• Receipts
• Invoices
• Bank statements

Depending on your business you may also need:

• Payroll
• Cash books
• Vehicle use logs
• Travel logs
• Tax returns
• Stock takes
• Credit card statements

If your business uses Xero, Kashflow, Freeagent or Quickbooks then simply tell us when your system is up to date and we’ll do the rest. 

If not, then we will need access to the following information:

1. Books/Records for the year covering Sales/Income, Purchases, Expenses or a copy of your computerised Book Keeping Data
2. Copy of VAT Returns filed for each quarter falling within year and workings (n/a if you are not VAT registered)
3. Sales Invoices / Summary
4. Purchase Invoices / Summary
5. All Bank Statements downloaded as a CSV file, from all the business banks and personal banks through which the business transactions operated, including Cheque Stubs and Paying in Books
6. All Bank Loan statements or mortgage statements if used for business
7. Credit Card statements if used for business payments and / or PayPal statements
8. Cash Book / Petty Cash or other details of cash expenses
9. Details of all wages paid, including any “casual labour”
10. Details of Closing Stock on hand on the last business day of the year
11. Copy of any New Loans or Hire Purchase Agreements taken out during the year
12. Details of amounts owed by the business – Creditors
13. Details of amounts owed to the business – Debtors
14. Details of any monies introduced to the business, or personal loans taken by yourself
15. Details of any new equipment / vehicles bought during the year, or any assets disposed of during the year
16. Any other income received during the year? (e.g bank interest, rental income etc)
17. Additional Information (if any)

Our clients can supply this information to us through their secure client Senta portal or emailed to accounts@brooks-accountants.co.uk