We have been given the task to find out the following:
Sole traders
If you’re a sole trader, you’re running your own business as an individual. This is known as being ‘self-employed’. You can keep all your business’ profits after you’ve paid tax on them.
You can take on staff - ‘sole trader’ means you’re responsible for the business, not that you have to work alone.
Your responsibilities
You’re responsible for:
-your business debts
-bills for anything you buy for your business, like stock or equipment
-keeping records of your business’ sales and expenses
-sending a Self Assessment tax return every year
-paying Income Tax on the profits your business makes and National Insurance
-Naming your business
You can use your own name or trade under a business name. There are rules on using a business name. For example, you can’t:
-use the terms ‘Limited,’ ‘Ltd’, ‘public limited company,’ ‘plc,’ ‘limited liability partnership,’ ‘LLP’ or their Welsh equivalents
-use sensitive words or expressions unless you have permission
-suggest a connection with government or local authorities
-use a name that is too similar to a registered trademark or an existing business in the same area or sector
be offensive
You must include your own name and business name (if you have one) on any official paperwork, like invoices and letters.
Registering as a sole trader:
Being a sole trader is the simplest way to run a business, and does not involve paying any registration fees, but you must register as self employed. Keeping records and accounts is straightforward, and you get to keep all the profits. The difference is that you are personally liable for any debts that your business runs up, which can make this a risky option for businesses that need a lot of investment.
It is easy to start up as a sole trader. Simply register with HMRC within three months of the month you started up. They will also then send you the form you need if you decide to register for VAT.
A sole trader's accounts:
As a sole trader and a conventional partnership, your accounts must follow accepted accounting practice to give a true and fair picture. But the exact form of accounts is not laid down by law. In practice, this means you do not have to produce a balance sheet. It would, however, be advisable to do so to impress your tax inspector or bank manager and to help you to keep a proper check on the financial position of your business.
It is possible to do your own accounts rather than employ an accountant. If your business is very simple, you could set up your own accounting system using a spreadsheet, but generally it is better to use an off-the-shelf software package.
As a sole trader and a conventional partnership, your accounts must follow accepted accounting practice to give a true and fair picture. But the exact form of accounts is not laid down by law. In practice, this means you do not have to produce a balance sheet. It would, however, be advisable to do so to impress your tax inspector or bank manager and to help you to keep a proper check on the financial position of your business.
It is possible to do your own accounts rather than employ an accountant. If your business is very simple, you could set up your own accounting system using a spreadsheet, but generally it is better to use an off-the-shelf software package.
Getting your accounts audited as a sole trader:
As a sole trader you do not have to get your accounts audited, if you do not want to. You may consider doing so, if the cost would not be too exorbitant, as it can help in dealings with your tax inspector. It may also help you if you need confirmation of income from your business - for example, to get a mortgage to buy a house or make contributions to some personal pensions.
Paying tax and national insurance as a sole trader:
As a sole trader you pay two types of national insurance contribution (NIC). If your earnings are above a lower threshold, you pay flat-rate Class 2 contributions of £2.10 a week in 2005-6. In addition, you pay Class 4 contributions as a percentage. In 2005-6, Class 4 NICs are 8 per cent of profits between £4,895 and £32,760 and an additional contribution of 1 per cent of profits above the upper profit limit.
The business of a sole trader does not have a seperate identity from the individual concerned. So your profits are added to any other taxable income you have and subject to income tax if the total comes to more than your personal allowance.
Partnership
Register for Self Assessment
You’ll need to choose a ‘nominated partner’ - the partner responsible for managing the partnership’s tax returns and keeping business records.
The nominated partner must register the partnership and themselves for Self Assessment. The other partners register separately, they usually do this after the partnership is registered.
In a business partnership, you’re running a business as a self-employed individual but all the partners share responsibility for the business. You can share all the profits between the partners and each partner pays tax on their share of the profits.
Both the nominated partner and individual partners are responsible for:
-sending their personal Self Assessment tax return every year
-paying their Income Tax on their share of the partnership’s profits
-paying their National Insurance
-any losses the business makes
-bills for the business - eg when they buy stock or equipment
The nominated partner must also send the partnership’s tax return.
Naming your partnership
You can use your own names or trade under a business name. There are rules on using a business name. You can’t:
use the terms ‘Limited,’ ‘Ltd’, ‘public limited company,’ ‘plc,’ ‘limited liability partnership,’ ‘LLP’ or their Welsh equivalents
use ‘sensitive’ words or expressions unless you get permission
suggest a connection with government or local authorities
use a name that is too similar to a registered trademark or an existing business in the same area or sector
be offensive
You usually have to include all the partner’s names as well as your business name (if you have one) on any official paperwork, like invoices and letters.
You can use your own names or trade under a business name. There are rules on using a business name. You can’t:
use the terms ‘Limited,’ ‘Ltd’, ‘public limited company,’ ‘plc,’ ‘limited liability partnership,’ ‘LLP’ or their Welsh equivalents
use ‘sensitive’ words or expressions unless you get permission
suggest a connection with government or local authorities
use a name that is too similar to a registered trademark or an existing business in the same area or sector
be offensive
You usually have to include all the partner’s names as well as your business name (if you have one) on any official paperwork, like invoices and letters.
Limited Liability Company
Becoming a Limited company means that your losses in the company are limited to what the company owns. If, for example, you invest £500 in the business and it gets sued by a customer right away, you lose £500. If you grow the business over time, and it buys apartment buildings or creates software, someone who sues the company may be able to take those things away.
However, if you have obeyed the rules associated with running a limited company, your personal assets (which you may have purchased through a generous salary paid by the limited company you own) will almost certainly be protected.
A limited company is a “fictional person” that must pay for it’s own mistakes.
If you run your business as a sole proprietorship rather than as a limited company, you are your business. So any mistake you, your employees or contractors make operating the enterprise can result in you being sued and your personal assets being lost.
I think it is now clear why someone who runs large rock concerts, creates construction equipment, builds buildings needs the protection of a limited company. They need to limit their liability.
If you have multiple partners running a business that is not a Limited company, all of their assets are on the line for the mistakes their business makes.
There is a way to limit liability to partners in an enterprise (a limited liability partnership) but generally speaking entrepreneurs starting a business decide they are either going to be sole proprietors with unlimited liability or limited liability companies instead.
What a limited company is
A limited company is an organisation that you can set up to run your business.
It’s responsible in its own right for everything it does and its finances are separate to your personal finances.
Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.
Ownership
Every limited company has ‘members’ - people or organisations who own shares in the company.
Directors are responsible for running the company. Directors often own shares, but they don’t have to.
Legal responsibilities
There are many legal responsibilities involved with being a director and running a limited company.
Most limited companies are ‘limited by shares’.
This means that the shareholders’ responsibilities for the company’s financial liabilities are limited to the value of shares that they own but haven’t paid for.
Example
A company limited by shares issues 100 shares valued at £1 each when it’s set up. Its 2 shareholders own 50 shares each and have both paid in full for 25 of these.
If the company goes bust, the maximum the shareholders have to pay towards its outstanding bills is £50 - the value of the remaining 25 shares that they’ve each not paid for.
Company directors aren’t personally responsible for debts the business can’t pay if it goes wrong, as long as they haven’t broken the law.
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