New Business

Martinslovechild

Firstly, apologies, as these questions have likely been asked previously.
I've been developing a cloud-hosted web product and the cost to customers will be £50/month.  Initially, I will have only one customer who will start paying in around a fortnight.  The costs of hosting are around £44/month, so I will initially generate a tiny profit - but the plan is to hopefully grow the number of customers over the next few years.  Each additional customer should hopefully be pure profit.

Two questions - I've not yet set up the company (I plan to do this later this week).  When I'm setting up a company, I'm prompted on the government website to answer if it's for a sole-trader, partnership or limited company.  As both myself & my wife will be involved in the business, I'm tempted to go with option #2, but are there any hidden problems with this (e.g. additional taxes which do not apply for a sole-trader) - or would it be a better position for the future?  Is there any reason I should not set up a limited company?

Secondly - because it may take some time to bring other customers on board, I'm thinking that the company will barely break even during the first 6 months.  Do I have to use the services of an accountant - or can I do the accountancy myself via self-assessment?  Would I be forced to employ the services of an accountant if I opt for a partnership or limited company model?  I've been informed that even the least expensive accountants cost £60/month, which seems high for counting income of £50/month from my first customer.

Any help would be appreciated.

Sandtree

A limited company adds a small amount of additional cost, it is possible to do the returns yourself but they are more aimed at accountants so not as simple as the self assessment return but doable. Accountancy fees vary massively depending on what exactly you are asking them to do for you... some will do little more than copy paste data you give them and submit forms to HMRC and Companies House whereas others will advise if you are being as tax efficient as you could be etc.

Obviously the advantage of a Limited company is that it attempts to separate you and your business from each other so if your SaaS solution breaks or is hacked then your home in theory is not at risk when you are sued for millions.  This separation however isn't perfect and there are occasions where company directors can be sued personally for their negligence or breach of trust etc. A number of these things, irrespective of business structure, can be mitigated through insurances.

Partnerships come in two flavours, the traditional general partnership is little more than two sole traders working together though with an agreement to share profits on a percentage basis but an extra tax return is required. You do also get limited liability partnerships where liability is then capped but these are almost exclusively in the domain of lawyers and other professional services that were historically unable to operate as a limited company. 

Its possible to start life in one format and subsequently incorporate if the business proves to be viable but it will depend on how quickly you intend to grow, it may be worth considering incorporation from the beginning if it will be reasonably fast.

oldbikebloke

you need to appreciate from the outset that you should only use the word "company" in the context of a LIMITED company.
A Ltd is a separate legal entity in its own right registered with Companies House, it pays employees to do its work, and it has owners (shareholders) who extract profits as dividends. 

the gov website is asking you because if "you" are not setting up a Ltd, then for tax purposes "you" are either a sole trader or a partnership. A sole trader can indeed have employees, but at the end of the day the profits of the business belong (ie are taxed) against the sole trader.

For a partnership, it does exist in its own right, but without the legal protection of being "limited liability" . The partners remain personally liable. Therefore there needs to be partnership accounts and also the tax returns for each individual partner on which their share of the profits is reported according to the partnership profit share

sole trader accounts and tax returns can be DIY, partnerships if VERY simple can be DIY, but the average person always makes a mistake or missies something with partnership accounts so best left to an accountant. Ltd company accounts are called statutory accounts for a reason, either you have taught yourself how to prepare and file them (and kept up to date on changes each year) or you pay an accountant to do it for you. Bear in mind it takes 3 years of intense study to qualify as an chartered accountant and like many jobs, the job title "accountant" does not necessarily mean the person has experience in "small business" accounts - pick your accountant with care.

(Particularly bear in mind anyone can use the name "accountant" without needing qualifications, those calling themselves chartered are the qualified ones you want.)

Unless you expect your start up business to be turning over > £50,000 by year 2, I would caution against creating a Ltd at the start as that just adds pointless admin costs and  if you take the money out of the Ltd as personal income for yourself, it is tax inefficient on that sort of low turnover.
You can always "incorporate" the business at a later date when its performance is clearer - yes there will be costs for doing so, but unless you speak to an accountant now and get some worked examples from them looking at the totality of all your income sources, I doubt a Ltd is what you need given the scant info in your post.

Martinslovechild

Thank you both Sandtree & oldbikebloke.  Both of these responses are invaluable and much appreciated.

jonesMUFCforever

I would agree go limited company and get proper business insurance.
A cloud business - what if you are hacked or held to ransom (ransomware)? Your clients would come after you if a sole trader or partnership - in theory they could go after all of your assets - Ltd they can only go after Ltd company assets.

oldbikebloke

jonesMUFCforever said:

 Ltd they can only go after Ltd company assets.

and for a start up Ltd there will almost certainly be a director's guarantee in place so personal assets still at risk (unless they are owned by the wife of course) and the "guarantee" is worthless 

jonesMUFCforever

oldbikebloke said:

jonesMUFCforever said:

 Ltd they can only go after Ltd company assets.

and for a start up Ltd there will almost certainly be a director's guarantee in place so personal assets still at risk (unless they are owned by the wife of course) and the "guarantee" is worthless 

I have re-read the original post and cannot find any reference to any borrowing requirements made by Martin.
The reason I suggested Ltd, was if there were problems with the business, and he was sued, only the business assets would be at risk.

almanak

Martinslovechild said:

Firstly, apologies, as these questions have likely been asked previously.
I've been developing a cloud-hosted web product and the cost to customers will be £50/month.  Initially, I will have only one customer who will start paying in around a fortnight.  The costs of hosting are around £44/month, so I will initially generate a tiny profit - but the plan is to hopefully grow the number of customers over the next few years.  Each additional customer should hopefully be pure profit.

Two questions - I've not yet set up the company (I plan to do this later this week).  When I'm setting up a company, I'm prompted on the government website to answer if it's for a sole-trader, partnership or limited company.  As both myself & my wife will be involved in the business, I'm tempted to go with option #2, but are there any hidden problems with this (e.g. additional taxes which do not apply for a sole-trader) - or would it be a better position for the future?  Is there any reason I should not set up a limited company?

Secondly - because it may take some time to bring other customers on board, I'm thinking that the company will barely break even during the first 6 months.  Do I have to use the services of an accountant - or can I do the accountancy myself via self-assessment?  Would I be forced to employ the services of an accountant if I opt for a partnership or limited company model?  I've been informed that even the least expensive accountants cost £60/month, which seems high for counting income of £50/month from my first customer.

Any help would be appreciated.

I am doing that for couple of years on my own with the LTD company being dormant (only registered earlier to keep the name) since you have the same responsibilities as a director no matter if the company trades or not. It's not really difficult once you learn what to do. I've learnt that on my own. The internet is full of step by step resources on how to process. Things will get complicated once you start generating income. Important thing is to quickly react to any letters from HMRC as they will willingly unfairly fine for something if you don't.
Once you communicate with them everything is ok. This is my experience so far. I am planning to start finally and I believe balance sheet will be more complicated and here I would think about accountant at least for the first time to make sure everything is ok or if could be done better. The thing is it is difficult to find a good accountant who would actually advice you with finances, in most cases it is a very basic service you can do yourself. I was calling coupe of them and they didn't know more than me myself.  If you find any good please share this information with us.

almanak

Martinslovechild said:

Two questions - I've not yet set up the company (I plan to do this later this week).  When I'm setting up a company, I'm prompted on the government website to answer if it's for a sole-trader, partnership or limited company.  As both myself & my wife will be involved in the business, I'm tempted to go with option #2, but are there any hidden problems with this (e.g. additional taxes which do not apply for a sole-trader) - or would it be a better position for the future?  Is there any reason I should not set up a limited company?

also, be aware that if you register the ltd company using your home address this information will be visible online so you might have some privacy concerns, you can use virtual office for that reason which I recommend. There are some services where for additional quote they are setting up your company as well but I would do that myself.

Sandtree

oldbikebloke said:
and for a start up Ltd there will almost certainly be a director's guarantee in place so personal assets still at risk (unless they are owned by the wife of course) and the "guarantee" is worthless 

If we assume the OP doesn't need to raise finance... do many clients ask for director's guarantees? I've setup and ran several businesses over time and cannot ever remember being asked for one let alone giving one.

oldbikebloke

Sandtree said:

oldbikebloke said:
and for a start up Ltd there will almost certainly be a director's guarantee in place so personal assets still at risk (unless they are owned by the wife of course) and the "guarantee" is worthless 

If we assume the OP doesn't need to raise finance... 

I assumed the opposite as that is normally the first question asked by those walking in our door - "I want to set up a company, how can I get money."
So much so, the partner owning the business got himself licenced as a finance broker, not just an accountant, so now he is more or less a "one stop shop" for start ups as he does of course have legal templates or funny handshake mates who are solicitors he can ask if needed.