2. Choosing a Structure & Managing Your Finances

So what kind of business do you want to have? Perhaps you're looking at setting up on your own as a sole trader. Maybe you want to rent or buy premises and employ staff. Perhaps you're not even sure yet about which route is best for you. In this episode we're going to take a […]

So what kind of business do you want to have? Perhaps you're looking at setting up on your own as a sole trader. Maybe you want to rent or buy premises and employ staff. Perhaps you're not even sure yet about which route is best for you. In this episode we're going to take a look at the different business structures why you might choose them.

The 3 main trading styles are

  • Sole Trader: You run the business, you do the work. A common route for tradespeople such as gardeners, plumbers, or hairdressers.
  • Partnership: The name says it all. You go into business with a partner and share/run the business between you. A partnership is essentially just like a sole trader split in two.
  • Limited Company: The route commonly taken by business owners looking to grow in size over time. Those who are looking to protect themselves legally by separating the business from themselves.

Also, whatever route you choose to go down, you will have to think about how you're going to manage your finances. How do you go about doing this? Should you work with an accountant or book keeper? And what tools are available to help you keep a record of what's going in and what's going out?

On this episode we'll hear from financial planner Pete Matthew, accountant Gordon Howes, photographer Julie Christie, and recruitment consultant Patricia McGuire.


Hey, I’m Colin Gray and this is UK Business Startup, the podcast which takes you, step by step, through creating your own business. This, week we’re talking structure. If you’re starting a business, one of the first decisions – after what you actually do, of course – is what structure you’re gonna follow. That’s when terms like limited company, sole trader or partnership come up. And, for a lot of people, that’s really scary – it sounds like your getting deep into the legalities at that point. This episode should be a big help here, though, giving you some tips on what company structure might suit you. Let’s get into it!

Pete Matthew: Hi. My name is Pete Matthew. I am a chartered and certified financial planner, which is just a posh way of saying I'm a financial adviser, really. Managing the finances of a business is very much like managing personal finances, but a lot of us are not very good at that, so it's important to put in good practices right from the start. If you're going to set up as a sole trader, or in a partnership with somebody else, or as limited company, you will manage things slightly different.

So here’s the nub of it – each type of business works quite differently, and, actually, it often works as a bit of a pathway. A lot of people start out at sole traders or as part of a partnership, and then move on to become limited companies over time. Others skip the path, though, and jump straight in as as limited. The question for most people is, where do you start? I asked Pete if that’s something he’s asked a lot:

Pete Matthew: Yes, it is, and usually the answer to that is tax. If you're a sole trader or a partnership, you are your own entity as far as the revenue is concerned. Any profits you make as a sole trader, or your share of the profit of a partnership, becomes your income. Now if business is good, and you get to the stage where your share of the profits is more than 42 thousand, or there about, you are going to be paying higher rates tax, 40%. That's pretty steep. Whereas in the limited company, the money comes into the company, and it pays corporation tax. The difficulty with a company is getting money out. There's two ways you can get money out of a limited company, salary and dividends. It's usually the most tax efficient environment to be in a limited company, depending on your anticipated turn over. If it's going to be more than forty, fifty, sixty thousand, I would definitely look at a limited company.

So Pete gives us a good ballpark there – in the region of £50k turnover? Then you might want to think about incorporating. Remember, though, there’s a lot more than that goes into it, and one of the biggest is even more legal: that’s liability. So, the clue’s in the name – the limited in limited company, talks to the limited liability you have as the company owner or director. When you incorporate – that just means creating a limited company – suddenly that company is it’s own entity. It’s like a person itself. It has it’s own bank account, it’s own money, and it can shoulder the blame when something bad happens. That means debt, legal issues, and a whole lot more. As a sole trader, the company is YOU and only you. As a partnership, there’s two of you, but it’s the same idea. You’re the one that takes on all the responsibility.

I asked Gordon to give us some examples and we came up with a hypothetical gardener called Bill, and a café owner called Amy. His first question for Bill would be:

Gordon Howes: Could you have substantial personal liability if something goes wrong? His liability when he starts out is only to himself. He doesn't have any employees. It's unlikely that he's going to reach the VAT threshold with his turn over, and he's going to be dealing with house holders.There's little point incorporating a company and operating through a limited company with the additional regulations and reporting requirements that entails, in his circumstances. In Amy's case, she ticks all the boxes for adopting a trading style of a limited company. A number of reasons, first of all, you have your liability. Liability under fruit hygiene standards, liability to public, who are wandering in and out of your premises. She's taken on a lease on the rented property, so again, she has a continuing liability there. Far better that these things are conducted through a limited company, where there is some shelter from personal liability. We also need to consider the size of our business. I think it's fairly likely that she'll cross through the VAT registration within a first twelve months of trading. It would be better for her to segregate any liability to tax that she can by having an incorporated company. Once again, she's employing people. The moment you employ staff, you are at risk. For example, if you dismiss an employee unfairly, there is unlimited liability. It makes sense for Amy to incorporate a company.

So, Pete mentioned turnover as one factor, then Gordon took us to liability, company size, whether you have staff. Lots of things in there. The big thing is, this should give you an idea, but every business is different of course. It’s a good idea to talk to an accountant at some point, no matter your situation. They're the ones with the numbers to hand and can give you a wider picture on the pros and cons of each approach.

Talking of accountants, that’s the next big question – do you need one? What about a bookkeeper. Technically, it’s possible to do it all yourself as a sole trader, assuming you’re happy keeping the records and totting up the numbers. Limited companies are more complicated, and generally need at least some help from an accountant. But, beyond the minimum, why might you choose to work with someone on this? Here’s Julie Christie, our photographer friend, on her experience:

Julie Christie: After a year in business, I realized I could not do my own accounts. So I hired a bookkeeper at that point and my bookkeeper kept my books up until a year ago, and then whenever I became a limited company, she said that, you know, I really should start thinking about getting an accountant. So I now have a bookkeeper, and I have an accountant, and I chose them because they were the accountants that she worked with, so it's quite a streamlined process. And that's been amazing for me, because all that time I would spend trying to organize my books, I can now spend actually trying to grow my business and bring some money in.

Just to be clear, Julie could have done her own accounts when she was a sole trader, but she either didn’t have the aptitude, or the inclination to learn! Here’s Gordon again on all of those things Julie and our hypothetical gardener would have to think about:

Gordon Howes: Bill is a self-employed trader. He deals with house folders, primarily his customers, and he is going to be issuing receipts. He is going to be receiving and making payments. He's probably very adept and competent at what he does during the day, but does he really want to come home at night and have to start logging every single receipt, every single payment. He's considering buying a van. Who's going to help him make the decision about whether or not he should purchase outright, lease the van, can he afford the new van? He might want to boost his income in the quiet season, over winter. If he goes to an accountant, he can use that accountant as a sounding board. His accountant will have a number of other clients who are in a seasonal trade and might be able to make suggestions that would help him look for new business, identify new opportunities, so that he can increase his workload and stabilize his income during the winter period.

So, that’s what it’s all about. The receipts, the sales, the invoices – a bookkeeper can be a godsend in helping with that. As Julie said, why waste time on admin when you should be growing your business. And then Gordon’s point around advice – a good accountant will really help you to grow your business, using all of their experience to guide you the right way. For limited companies, that’s not all they do – think about Amy, our café owner again:

Gordon Howes: I think Amy should certainly consider engaging an accountant early. She's got a limited company. There are reporting requirements for a limited company. Her accountant will ensure that she compliant with these reporting requirements. She's engaging staff, she's required to operate a payroll. Again, she could delegate that responsibility to her accountants. They will ensure that the payroll is filed in time, that the staffs have pay slips, and can provide her advice on HR issues if required. It's likely that she'll be registered for VAT. Once again, the accountant can ensure that the VAT returns are prepared properly, the correct submissions are made, and they're made on time.

With all that in mind, which to choose? Julie worked only with a bookkeeper when she was a sole trader, and then took on an accountant too when she went limited. Me? I did my own accounts when I was sole trader, and only started working with the pros when I incorporated and started taking on staff. Which is the right path? I depends a lot on your aptitude with numbers, and how organized you are. I’m not in the slightest bit organized, so my accounts always ended up a day of stress at the end of the year. I’d take on a bookkeeper as soon as I could afford it if I had my time over.

Ok, we’re well into the finances now – that’s a bit part of the structure. How do we organize that once we’ve set up the business?

Pete Matthew: The first thing you absolutely must do is to keep the business finances separate from your personal finances. That obviously means a separate bank account. You don't want to be mixing the money up at all. It's a fundamental no-no.

Ok, straightfoward there. Keep your money apart, no matter what structure you choose. While the new account is still just yours as a sole trader, it makes your bookkpeeing so much easier. On that note, even if you do take on a bookkeeper, there are still a few things you have to do yourself, such as sending receipts, telling them who to invoice. How do you deal with that? Pete and Patricia, here to help as always:

Pete Matthew: You obviously need to keep really good records, and this is very often the problem. Receipts very quickly get out of hand. Invoicing can be difficult and difficult to stay on top of. Too many people use manual systems to do that.

Patricia McGuire: Right from the very beginning of my business, I saved one morning a week to do all the accounting and the invoicing, although some people say you should invoice immediately. I personally put aside Friday morning, invoicing and doing my accounts. It's a really good idea, from an expenditure point of view, as well as a mental health point of view, to put aside time, have a clear system, and keep your receipts and expenditures very neatly filed.

Recording that stuff is key – keeping track of everything. It’s such a small job to do day to day, but if you leave it to pile up, it becomes huge. I mentioned I’m far from organized, so I struggled with it, but Gordon outlines why it’s so important.

Gordon Howes: In terms of knowing how much income you've got, Amy wants to know what her daily takings are. She has a cash register, she need to record the ZED reports, every day. She needs to keep her record of it. Bill, on the other hand, probably not so important for him on a daily basis, certainly on a weekly basis. He wants to know how much he's earned. He needs to issue receipts to clients. He needs to consider how much he's spending on petrol. Each of them have a different requirement for record keeping.

No matter what type of business you run, you need to record the money coming in and going out, and either send it to your help to track, or log it yourself. The way I got around it was, the way I solve a bunch of my problems – technology! Pete says it well:

Pete Matthew: There are some great software tools out there which are very, very reasonable, which can help you get off on the right footing. I use a system called FreeAgent. There's another one called Xero, X-E-R-O. And these are great, low-cost accounting systems which you can get going with really easily. It really is just about making sure you know what's coming in from what sources, you're keeping really good records.

I use FreeAgent too, check it out at thepodcasthost.com/freeagent. But any system of that sort will let you do invoices, track receipts, create reports, and it’s actually really useful to use it with your bookkeeper or your accountant. It ties everything together into one neat little package. If you’re still struggling to decide on whether you should take on the help, I’ll leave you with Julie’s ringing endorsement here. Remember, do what you do best, and leave the rest to an expert!

Julie Christie: Every year, end of January, all my fellow photographers are on Facebook moaning and groaning about filling in their tax returns. They're staying up all night for three nights in a row, and I have nothing to do. It's all done. I really can't recommend it enough.

Thanks for listening to this episode of UK Business Startup, a podcast which takes you step by step through starting a business. This episode was all about the structure of your company, and how it manages its finances. If you want a recap and links to everything we’ve mentioned here, go to thepodcasthost.com/startup

Whether you’re looking to create a company with staff and premises, or just make some additional income as a freelancer in your spare time, this is the show for you.

In each episode we’re going to dive into the nuts and bolts of a particular topic, breaking things down into bite sized and easy to understand chunks.

We’ve enlisted the help of some trusted accountants, financial advisers, marketers, authors, and fellow business owners to bring a tonne of experience and advise to the table. And pulling everything together is the host, our very own Colin Gray.

In season one, we’re going to be giving you an introduction to planning, starting, and growing your business. We’ll then take a break before moving into season two where we’ll cover one of these topics in-depth.

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