When considering how to set up a small business, there are a number of requirements that – from a legal point of view – must be met. Firstly you will need to decide on your trading name and your business structure. From the point of view of your prospective clients, advertising and marketing materials you will probably want to give your new business a name. However, it is perfectly possible to register as self employed in your own name and trade for yourself or contract your services to other businesses.
Your business structure can be:
- sole trader (a business run by an individual)
- partnership (a business with shared ownership and responsibility)
- limited company (a company with shareholders and directors).
Assuming you have decided to give your business a name, there are a few points to consider. The name must be unique and different enough from other similar businesses and trademarks, so as not to be confusing. There are rules to be followed on this and it is important to be sure that you search for your chosen name, both online and at Companies House. Many pet sitting businesses are sole traders, working alone or with contractors, and sole traders do not need to register with companies house. It’s still in your interests not to choose a name too similar to either a large national company, like Barking Mad, or other local companies in your area. Remember, if prospective clients can easily confuse you with someone else, you may stand or fall on their reputation, which is a powerless position to put yourself in. You also can’t use terms like Ltd, PLC etc. There are a number of other considerations when choosing a name for your business – a process which is it wise not to hurry – and you can find a wider discussion here.
As a sole trader you can use a business name to trade and on headed paper, invoices and such like, but you also need to include your own name on such documents.
How to set up a small business – registering with HMRC
The next step when considering how to set up a small business is to register the business with HMRC. This is actually a relatively straight forward procedure and the HMRC website will walk you through the steps needed. You need to register as a sole trader (unless you have decided to enter a business partnership with another person). To clarify, being a sole trader simply means that it is only you who owns and is responsible for the business. It doesn’t mean you can’t have co-workers or employees. You need to register by October 5th in your second tax year. For example, if you begin trading during the tax year 6th April 2015 to 5th April 2016, then the latest you can register and be certain of no penalties is October 5th 2016. However, it is best to register as soon as possible so that you are prepared for the process of submitting your first tax return.
If you’ve completed a self assessment tax return in the past, you will still need to register your new business, but you’ll need to use the same self assessment account and the same unique 10 digit taxpayer reference number (UTR), as this enables HMRC to link all your interests together.
How to set up a small business – accounting
As a sole trader you are responsible for keeping accurate, complete and readable business records and accounts. Your income for the first few years will almost certainly be under the threshold for cash basis accounting, and this style of accounting works well for a pet service business. In essence this means that you only record actual cash flow in and out of your business. So while you might invoice for a dog board a few months ahead of the payment becoming due, you would only add the income to your accounts when the payment is actually made. This keeps everything very simple in a system where many of your invoices can remain unpaid for months. The threshold for maintaining cash basis accounts is £83,000 turnover per annum.
Whatever income and expenses you add to your accounts you need to be able to prove. With this in mind you are responsible for keeping all invoices, bank statements, cheque book stubs and expense receipts for at least 5 years from the self assessment submission deadline for that tax year. You’ll need a system for keeping records in some semblance of order. Once again, I recommend Pet Sitter plus software because it does everything for you in terms of record keeping, other than store the hard copy receipts and contractor invoices (if you contract services out). An A4 document file with sections can be good for this:
or a small, 2-drawer filing cabinet when you outgrow this:
If you don’t want to use a software package for all of your client information, bookings, invoicing, accounting and receipts, then I would recommend this pre-prepared small business accounts book. It will record income and expenditure, but you’ll have to have other manual systems for recording client information, bookings, invoicing and receipts of payment.
How to set up a small business – NICs, tax and VAT
When you first register your business you will also register for Class 2 NICs. These are paid once you make a profit of more than £5,965 per annum, at a rate of £2.70 per week in two 6 monthly installments by direct debit.
Once your yearly profit exceeds £8,060, you will also pay 9% of all profits over this amount as Class 4 NICs. This is part of your yearly self assessment procedure and any amount due will be generated automatically when you make your submission. If your profit is over £43,00 you will only pay 2% on anything above this threshold.
The threshold for tax is £11,000 for a single person, and any profit over that is taxed at 20%. For tax purposes, you are the business and the business is you, so you’ll be taxed on the profit, regardless of whether or not you have paid yourself any income. You should also note that if you have other sources of income these will also be part of your self assessment and will count towards reaching your tax threshold.
Your business won’t need to be registered for VAT until the turnover exceeds £83,000.
I’ll go on to discuss the detail of financial record keeping and tax relief for self assessment in another post.