No matter what anyone may say, starting up a new company in the UK is never easy. Even if you are confident about running a business, setting one up is a whole different ball game and requires careful planning and consideration.
The reason why so many businesses ultimately fail in the first year of operations is that they make avoidable mistakes, and at Tax Driven Accountants, we have helped countless businesses avoid these mistakes through our accounting services.
We are passionate about new businesses succeeding, and in this guide, we will outline some of the common mistakes that we see businesses make and help you avoid them when starting your own company in the UK.
Choosing the Wrong Business Structure
When you first start a business, one of the biggest decisions you are going to make is choosing the right business structure. You will need to choose between being a sole trader vs a limited company, each having its own benefits and implications.
The right business structure depends on a number of factors, such as your projected profit levels, risk exposure and admin tolerance.
When to Choose a Sole Trader
It is recommended that you become a sole trader when you are starting a small, low-risk business that doesn’t run the risk of incurring debt. Think small businesses such as Etsy shopfront owners, at-home bakers or market stall operators.
Being a sole trader is perfect for someone who wants to run a simple business with minimal, inexpensive administration and complete control over their business.
Being a sole trader is usually recommended for businesses that have lower annual profits, usually not exceeding around £25k, but speaking to an accountant will allow you to get better clarity around whether that business structure will work for you before you register a company in the UK.
The Risks of Being a Sole Trader
Before selecting a sole trader structure for your business, it is important to understand the potential risks of being a sole trader in the UK.
These include:
Funding Challenges
Sole traders are often viewed as higher risk, so it can be challenging to secure funding from banks and lenders, unlike limited companies, which may find it easier to secure finance.
Fortunately, there are solutions to secure funding for small businesses. If you need help with finance raising, an accountant will also be able to give you support.
Liability
As a sole trader, you have unlimited personal liability because there is no legal distinction between you and your business. That means that if an issue arises and your business incurs debt or is sued, you are completely liable to pay.
This can have a huge financial impact, so it is important that, as a sole trader, you do not take risks that could affect your personal finances.
High Workload
As a sole trader, every task in your business falls on your shoulders. This means that you have to take care of every aspect of your business, from sales all the way to accounting and marketing, which often requires hours of dedicated time.
Luckily, you can offset some of this burden by hiring an accountant who can help with your business accounts.
Administrative Burden
As a sole trader, you are wholly responsible for ensuring that accurate records are kept and Self Assessment tax returns are filed, which can be challenging. With the upcoming implementation of Making Tax Digital, more work is expected, with quarterly filings becoming a requirement.
Again, this burden can be offset by working with an accountant to file your Self Assessment tax returns.
When to Choose a Limited Company
Starting a limited company in the UK should be considered if you have future plans to scale your business or have projected that your business is set to make high profits, exceeding at least £25k.
People also choose to set up a limited company to limit personal liability, which is particularly important when planning to scale or raise investment.
Limited companies are also a great way to reduce your tax liability by paying yourself through a mix of salary and dividends, lowering the amount of tax you’re required to pay.
The Risks of Choosing a Limited Company
Like being a sole trader, there are associated risks of choosing a limited company.
Costs
There are higher costs associated with having a limited company because you have to meet compliance requirements and ensure that your accounting is up to date, which means that limited companies really do not have a choice when it comes to hiring an accountant, as it is incredibly difficult to set up a limited company by yourself.
A question we often get is ‘how much does it cost to set up a limited company?’ : The standard online registration fee with Companies House is £100, with a same-day service available for £156 if you need guaranteed same-day incorporation. Paper registration costs £124 but takes significantly longer.
You will also need to purchase insurance and account for professional fees. The costs can grow quite quickly, and you should be mindful of this.
Public Disclosure
All limited companies are required by law to provide public disclosure by filing all accounts with Companies House. It is also required that all details of the directors of the companies are registered with Companies House, meaning that much of your information, as well as that of any shareholders, will be accessible to the public.
Many people believe public disclosure to be a negative aspect of owning a limited company, with sensitive, proprietary information available to competitors, along with the high compliance costs of ensuring your information is filed accurately.
Shareholder Disputes
Shareholder disputes in a limited company with more than one shareholder pose serious risks such as high legal expenses, major operational disruptions, management deadlock, and possible business failure. These conflicts typically stem from disagreements over strategic plans, dividend policies, or breaches of agreements.
It is not guaranteed that every shareholder will share the same opinion concerning the direction of the business, and so disputes may arise, which is something that you need to keep in mind if choosing to go with a limited company.
Taxation
Limited companies in the UK are subject to Corporation Tax on profits made from trading, investments, and the sale of assets. The rate you pay depends on your level of profit.
Companies with profits of £50,000 or less pay the Small Profits Rate of 19%, while those with profits above £250,000 pay the Main Rate of 25%. If your profits fall between £50,000 and £250,000, Marginal Relief applies – this gradually increases your effective tax rate between 19% and 25%, so you won’t face a sudden jump in your tax bill as profits grow.
Wider Tax Considerations That Come with Operating as a Limited Company
There is an element of double taxation to factor in: Corporation Tax is paid on company profits, and if you then draw those profits as dividends, you’ll pay Income Tax on them too. However, dividend tax rates are set lower than standard Income Tax rates to account for this, and many directors structure their remuneration as a combination of salary and dividends in a way that can actually be more tax-efficient than operating as a sole trader.
There is also slightly more administrative responsibility involved in running a limited company, including filing annual accounts and a Corporation Tax return.
The strict taxation rules for operating a limited company mean increased administrative burden, restricted access to funds, and double taxation of profits. This is something you should seriously consider before starting a limited company business.
Mixing Personal and Business Finance
A common error we have seen some businesses make is mixing personal and business finances. As soon as you start to see profits from your business, it is essential that you put your business finances into a separate account.
By mixing your finances, you jeopardise legal protection and complicate the tax process. If you use one account, you could lose limited liability protection, making you personally liable for any debts your business incurs.
Mixing personal finance with business finance also makes it nearly impossible to understand your business’s financial health, making it difficult to manage what you have available for it, and creating obstacles when you’re looking to grow your business.
We understand that for new business owners, setting up separate accounts can be challenging, which is why we encourage businesses to seek help from accountants to ensure their money is managed properly.
Missing HMRC Registration Deadlines
What you will quickly learn is that, as a business owner, you need to know every HMRC deadline.
If you are a sole trader or have untaxed income to declare, you must notify HMRC by 5th October following the end of the tax year in which you started your business or began receiving that income. This is separate from the deadline to actually file your Self Assessment tax return, which is 31st January for online submissions or 31st October for paper returns.
It’s important to know that if you miss the registration deadline of 5th October but pay all owed tax by 31st January, HMRC might not impose a penalty for late notification. However, failing to file on time is a separate issue; late submissions will first attract a £100 penalty. After three months, this increases to £10 per day, up to 90 days. If the return is six months late and still unpaid, the penalty will be 5% of the tax due.
If you operate through a limited company, the rules differ. Directors may still need to file a personal Self Assessment return to declare untaxed income such as dividends, but the company itself must register for Corporation Tax with HMRC within three months of starting to trade.
As always, we recommend working with an accountant who can ensure you meet all relevant deadlines, pay the appropriate amount, and help you avoid unnecessary financial penalties.
Failing to Forecast Tax and Cash Flow
Something we always make clear to all the businesses we work with is the importance of taking the time to forecast your tax costs and potential cash flow. This only highlights the importance of a business plan, where financial projections are a key element, allowing you to take the time to understand your business’s financial projections so you are equipped for any future bills or financial pitfalls.
Businesses that take the time to forecast their future tax and cash flow can plan to ensure they have the necessary resources and funds to remain compliant, while also making plans that support the future expansion of their business.
Avoid Mistakes With Tax Driven Accountants
So there you have it, the 5 mistakes to avoid when starting up a new business. At Tax Driven Accountants, we have seen too many businesses fail because of mistakes that could have been avoided with the right advice and guidance, and we are here to ensure that businesses do not repeat the same mistakes.
Do you have a small business and need help with bookkeeping, company formation or meeting deadlines? We’re here to help. Get in touch with us today to find out how we can help your business succeed through accountancy support.
