Today I welcome Raj Dhokia, Managing Accountant to share his advice in a Q&A style post that will inform digital business owners.
At Kona Seven they specialise in accounting and consulting services to the creative industries including bloggers, vloggers, designers, movie makers, content creators and many more. He says, ‘Our tagline of ‘Creative Accounting’ feeds everything we do from understanding the niche-needs of this rapidly growing sector and adopting creative ways of dealing with business operations e.g. cloud accounting and virtual advisors’.
Read the Q&A with Raj and feel empowered.
Can you list the different ways you can trade, and how these are distinguished?
The most important thing in trading is surprisingly simple – to trade. Many people get wrapped up in the fine print and the unknown of finance and taxes that they stifle their trade. When setting up a business you can be either,
– Sole Trader
– Limited Company
– Community Interest Company
The most relevant for small businesses are Sole Trader and Limited Company, and this is the BIG question – which one?
I usually recommend that all my clients, be a limited company. The main driving force here is security and safety. You should always seek professional advice when making this decision or use the HMRC’s website to understand the differences.
There is something exciting about being a Director of your own company but it does involve more responsibility and a little more work. Looking at some of the main topics I’ll compare the effect.
Who do you work for?
As a Sole Trader you are self employed and you ARE your company. Your money is yours and you can spend it as you wish. All expenses come out of the same pot. As a Limited Company you work FOR your company. Any money you make, belongs to the company and you can pay yourself as an employee and shareholder.
Concentrating on Income Tax – generally, every individual gets a tax free-allowance of £11.5k. Up to this amount, you won’t have to pay any income tax. As a sole trader you pay Income Tax on all of your profit above this level. All of your income from all employment and self-employment sit in one pot. Depending on the level of this, determines your tax. The is a weekly NIC payment that needs to be made.
As a Limited company, you are subject to Corporation Tax which currently sits at 20%. You will pay this on all profit from £1. It’s not all bad though as you pay yourself through the company and make use of the £11.5k tax free-allowance.
This is big one. As I said before, as a Sole Trader you are your company, this means that should anything go wrong, you can lose everything. As a Limited Company, you can only lose what belongs to the company and therefore only anything you have put into it or that it owns. Everyone should have insurance that should cover you to an extent however with more of our clients working with contracts that deal with a company’s reputation and in a fast-growing and uncertain industry, anyone is subject to legal action should a contract, deal or piece of work go south.
To be blunt, if you were to get sued and lose, as a sole trader you could lose your house, as a limited company you generally wouldn’t.
As you hopefully grow and scale up as a business, you may look to hire staff, find investment or work with larger, more demanding clients. When this happens, being a limited company has it’s benefits. The admin when hiring staff is easier when you are a limited company and separating these costs is easier. With published accounts and regular updates, investors are more likely to look at you and value your business without the need to filter out the personal cost. Also, if they want a ‘piece’ of the company, you would need shares which come with a limited company. Some clients also demand that a company is Limited as company directors are held accountable for their actions also it shows them that they are working with a legitimate company and not a hobbyist.
What tips can you offer on keeping on top of your accounts along with the benefit of hiring an accountant as the business grows?
Admin can be tough when you have a busy business. Bookkeeping, compiling accounts, paying the right taxes at the right time. All of this can be managed by an organised and informed Director. Use material on the HMRC website and various blogs and info site. We give a lot of information to prospective clients too because it is always good for a business owner to understand their financial and legal obligations. However, we know that many business just don’t have the time for admin, they don’t have the time to understand in depth their accounts and struggle with actioning their responsibilities. Kona Seven take it a step further as we recognise the creative need of out clients and do what we can to keep people creative and elevate the admin work. Many clients just want to know the tax bill and when it needs to be paid.
When trying to look after your accountants yourself, there are a few things you can do to make life easier for yourself –
Get a separate bank account
Use a program or spreadsheet to track business income and expenses
File your receipts in separate months – either using envelopes or an index card box and separators
Know the dates of when you need to send what to HMRC
Don’t be scared to call an accountant or the HMRC
Find an accountant that understands what you do and are happy having a regular conversation with.
Understand what does and doesn’t count as a business expense.
Hoping an accountant or a bookkeeper can elevate most of the stress of understanding the numbers and you get commentary on how the company is being run. We review our client’s business every quarter and tell them which area of their business is doing best e.g. ‘sponsored post earn twice as much as display advertising, so concentrate on getting more sponsored content’.
What are the implications of hiring staff, part time and then on the payroll?
Becoming an employer is a big step and usually cause for celebration. The business is growing and you are sharing the journey with someone and taking the weight off your shoulders or taking advantage of an opportunity you weren’t able to take before. With this comes responsibilities. Usually there are four ways to hire staff.
There are financial implications of each method and different tax treatment. In general, Interns should be paid through payroll a nominal minimum wage and expenses. Part time staff are on your payroll and paid through your payroll for the relative hours they do. Full time staff work the full hours available, have a full salary and benefits. For part-time and full-time staff, an employer must also provide a pension scheme. Many people work as freelancers now and this way you pay an invoice provided by the worker at a set rate and a set amount. This doesn’t got through payroll and counts as a cost to the business. Often it is easier and simpler to hire freelancers when starting but eventually when a business is stable and requires it, hiring your own staff is a great buzz and provides security to the business.
What is the benefit of trademarking your business (as I have)?
Trademarking is a method of protecting your business name. It’s not difficult, has some cost and makes a statement about the brand. You are essentially saying that the name of your business is now a brand. Honest Mum for example may have started as a blog, but as the reputation grows, the identity becomes stronger and that can be protected by using a trademark.
Can you explain VAT (something I pay)
Value added tax (Vat) is a tax on goods and services by the HMRC. We pay Vat on most things and when you are business, you can charge Vat if registered. When your company makes £82k in revenue, it must register for Vat. However, you can register for Vat before this if you think it will be useful for your business. Currently the general VAT rate is 20%. It’s best to speak to a professional but in general – if you have a lot of expenses that include Vat then consider registering. You must consider that if you want to claim Vat back from the HMRC then you must also charge it to your clients. This then balances out into a payment to you or to HMRC. There are other setups for Vat but you should speak to a professional about it.
Becoming Vat registered takes more admin but if you must do it, it does become a routine task. An Accountant can do this but organised record keeping really helps here.
Thanks Raj for your sound advice!