Why solo entrepreneurs should think twice about their business structure
by Startacus Admin
Henna Sheth writes for Gorilla Accounting, a technology-driven, accountancy provider for Contractors and Freelancers. Here she discusses why first-time entrepreneurs should think thoroughly about their business structure.
As a one-man band, a contractor, or an aspiring business tycoon, the first step to building your empire will be deciding on a financially efficient operating structure that abides by HMRC guidelines, and suits your working style.
You’ve taken the leap into entrepreneurship; helping you convert your organic ideas into reality. Now it’s time to sift through the fine print of your plan and gain some insight into a business structure that could be used to form your business.
As a solo entrepreneur, you’ll require a business structure that functions as a stepping stone, such as operating through a limited company or umbrella, before you reach the stage of expansion and recruitment.
During the research stage, it’s key to analyse the political landscape of the moment, such as the general election result and upcoming legislation changes to foresee how this could affect your decision. Before deciphering how this could financially implicate your company, let’s look into the anatomy of a limited company. 
Limited Company
- The limited company is a separate legal entity to you which means that it will need its own bank account, and registered office address.
- As the director, you will only be liable for the extent of capital that you invest.
- As the director, the administrative duties will lie with you, including preparing accounting records and handling business dealings.
In terms of the financial structure of a limited company, you will have greater tax planning opportunities as you can pay yourself through dividends, and allocate a salary accordingly.
If you reach the specified threshold, you could have access to the flat rate VAT scheme which allows you to claim back a portion of VAT from HMRC. Through your limited company, you will be able to claim expenses such as subsistence relief.
Use a take home pay calculator to work out your potential income and ensure that you speak to a specialist accountant who will advise you on the best operating structure, in terms of financial efficiency.
Umbrella Company
In reality, working through an umbrella company could dissolve your brand as you would essentially become an employee of the umbrella company, in order to be paid through their payroll service.
If you’re in the process of building funds to launch your solo business, running short-term contracts through a payroll service could be the most tax efficient way to operate.
- The umbrella company will work with your end client.
- You will submit your timesheet to the umbrella company, who will then pay you.
- You will be taxed at source as an employee would, (Income Tax and NIC).
Time to talk politics
The gig economy was at the forefront of the political agenda in the run-up to the general election, so it’s fair to say that the industry may be subject to change, but how could this affect your decision?
- Prior to the general election, Chancellor Philip Hammond proposed that Class 4 NIC for the self-employed will be increased. After a successful backbench revolt, the measure was actually scrapped but it’s a clear reflection of Theresa May’s intentions.
- It was announced during the Spring Budget that the dividend tax-free allowance would be reduced from £5000 to £2000. This measure was put on hold whilst the election took place, but there’s no doubt that it could soon be enforced, now that the coalition government has been formed.
- The Matthew Taylor Report looks into the treatment of the self-employment, and is expected for release during the summer period. The review will analyse the gig-economy tax system, and the rights and benefits of gig workers.
- IR35 legislation was introduced to tackle employees disguising themselves as contractors to reap the tax advantages. If you’re working on a public-sector contract, the public-sector body will now be responsible in determining your IR35 status. 
Brexit
It’s been the overhanging cloud over the UK for quite some time now, but as Brexit negotiations have officially commenced, Theresa May has announced key legislation that could affect your decision.
- Immigration Bill – ‘Allow the Government to end the EU’s rules on free movement of EU nationals in the UK.’
As Theresa May has formed a coalition government with Northern Ireland’s Democratic Unionist Party after failing to secure a majority, it may mean that she’s likely to campaign towards more popular measures to gather votes. It’s worth keeping in mind how this could affect your future as an entrepreneur, and how this could financially implicate you.
Henna Sheth is a blogger and copywriter at Gorilla Accounting. Cheers Henna - another great read. If you like this read, you might want to read Henna's previous article on how startups can generate business through Facebook.
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Published on: 8th July 2017
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