Compliance: Setting up the right foundations
To trade as a business, you need to meet the right compliance requirements. It’s certainly not the most exciting part of creating a business. Still, setting up the right compliance foundations ensures that you’re doing everything by the letter of the law.
Let’s look at the main steps to think about when setting up compliance foundations. We’ll also see why they’re so important to the smooth running of your business.
Decide on a legal structure for the business
First off, you’ll need to decide about the company’s legal structure. There are two key choices here – incorporated (a limited company) or unincorporated (usually either a sole trader or a partnership). The key difference here is around liability. In other words, do you want your business to be a limited company? This is where you and the business are treated as separate legal entities. Or do you want to be unincorporated, like a sole trader? In this case, you and your business are seen as one single entity.
Most startups will opt for the incorporated limited company route. This keeps your personal and business finances separate and lowering your personal liability and risk.
Open a business bank account
To trade, take payments, and pay your suppliers, you need to have a separate business bank account from your own current account. This helps create a tangible divide between the money you’ve generated from the business and your own personal cash.
Most high-street banks won’t let you use a current personal account for business purposes. Banks will offer various business accounts with varying levels of fees, overdraft levels, and additional business features. Set up the business account and then use this account for ALL transactions going in or out of the company.
Set up a bookkeeping and accounting system
It’s a legal requirement for your limited company to keep adequate records and submit annual statutory accounts. To meet these requirements, you must have a bookkeeping process and a reliable accounting system in place.
There’s a dazzling choice of different cloud-based accounting platforms aimed at the ambitious startup owner. Xero, QuickBooks, MYOB, and Sage are big names in this space. They all offer easy-to-use systems that make the accounting process relatively straightforward. It’s a good idea to engage an accountant to get the best possible accounting advice right from the start.
Register for the relevant business taxes
Tax is an unavoidable part of running any business. It’s mandatory for you to register for the relevant business taxes. You’ll also need to factor in that a certain percentage of your startup’s profits will end up going to the tax authorities at the end of each financial year.
If you’ve opted for the limited company route, you must register for corporation tax in your home territory. Corporation tax is paid based on a percentage of your year-end profits once reliefs and other allowances have been taken into account. Approximately a quarter of your end profits will end up being paid over in tax. Therefore, it’s imperative that you put this money away in a separate tax account. Or your could ring-fence it in your accounts so you have the money to pay the bill at year-end.
Other taxes to register for include:
- Self-assessment income tax – although you’ll pay corporation tax on your company’s profits, directors are also taxed on their own personal earnings. If you’re an unincorporated sole trader, this is also the way you’ll be taxed on your business profits, as your personal and business income are treated as the same thing.
- Goods & Services Tax (GST) – GST (or VAT in the UK and Europe) is an indirect value-added tax or consumption tax for goods and services. If you sell products or services that qualify for GST/VAT, you’re responsible for collecting these taxes and paying them to the tax authority on a monthly, quarterly, or annual basis.
- Pay-as-you-earn (PAYE) / Pay-as-you-go (PAYG) – if your home territory operates a PAYE/PAYG system, you’ll need to make income tax deductions from your employees’ wages and pay these taxes directly to the relevant tax authority. This is all done via your regular payroll run.
Get in touch to talk through setting up your compliance foundations. We’ll help you understand which taxes apply and how you register for them.