Remember, when you are starting your business you don’t necessarily have to name it after what you are going to be selling – you may start off selling pet products and later decide to another ecommerce website selling car accessories, in which case being called ‘My Pet Products Inc’ may confuse your new customers!

You can pick a name such as ‘Online Retail Inc’ etc that will allow you to sell anything online and still portray a professional image across different markets you enter.

Choosing A Company Name
Whether you decide to set up a LTD company or just operate as a sole trader you will need a name. to trade as.
You should pick a name relevant to what it is your selling, for example if you have decided to sell sunglasses then perhaps a good company name would be ‘UK Sunglasses LTD’. However you may want to sell lots of different things online and have multiple Ecommerce stores so it may be better to have a name such as ‘UK Web Retail Ltd’ or ‘Your Name’ trading as ‘UK Web Retail’.

You will also need to check that the name you would like is available and you can do that by going to companies house and doing a search.

The basic rules regarding registering a name with companies house for limited companies are that:

• your company name ends with limited, plc or Ltd for companies, or limited liability partnership, LLP or Welsh equivalents – this must not be used anywhere other than at the end of the name
• the name isn’t offensive
• the name isn’t the same as – or very similar to – one already in the register
• the name doesn’t include any sensitive words or expressions – unless you have obtained permission to use them

Limited Companies Explained

Generally there are 3 reasons for becoming a LTD company and they are:

• Potential suppliers will take you more seriously as will customers. If you are not a Limited company with a registered company number, some suppliers may argue that you are not a trade customer

• Your own personal possessions are generally protected from any claim made against the company.  A limited company in effect is a shield.

• There is more flexibility in handling how you take money from the business and consequently ways to minimise your tax liability. In recent budgets, this has become more apparent, making incorporation an increasingly attractive option.

Are There Disadvantages?
Your accountancy costs will increase, so you will need to be convinced that there are sufficient savings to justify the cost. The company will be regulated by Companies House, which has strict rules for reporting trading accounts (hence the price increase) and for the conduct of directors and other company officials. You will need a good accountant to make sure you are doing everything you need to do.

You can start as a sole trader and later incorporate. In fact, this is a common route when a new business is unsure of how large it will grow and whether the saving will outweigh the costs. You will need to speak to an accountant to ensure that any transition is done properly.

Becoming A Sole Trader

Being a sole trader is the simplest way to get started in business. Once you have informed the government agencies of your intentions to go self-employed, you can start trading right away.

As a sole trader, you can quickly adapt to changes in your business with minimal and have complete control over your business and accounting . However, a sole trader is also ultimately responsible for any liabilities should anything go wrong.

Setting Up

As a sole trader, you will not need to notify Companies House, nor deal with any administrative or accounting requirements which are required of limited companies.

If you start working for yourself, you must register with HMRC as self-employed, even if you already send in a tax return. There are some exceptions and special rules for particular industries, like the construction industry.

If you’re not sure whether you need to register as self-employed, read the leaflet entitled: IR56 – employed or self-employed (PDF Format).

If you’re thinking about becoming self-employed, call the HMRC Helpline for the newly self-employed on 08459 15 45 15, and read the official HMRC advice pages here.

You should register the moment you start out as a sole trader, otherwise you could incur a financial penalty.

To register, you need to fill out and complete Form CWF1 from the HMRC site (PDF format).

Tax & National Insurance

Essentially, your business income is counted alongside your existing personal income, so the accounting side of your business will be very straightforward. As the name suggests, you will be personally liable for any debts you incur in the running of your business which you wouldn’t be under the limited company route.

In terms of accounting, you will need to submit an annual self assessment form to HMRC and keep accurate and up-to-date records of all business transactions and accounts. You will also pay income tax on all profits and pay national insurance contributions on those profits. Losses can be offset against tax on other income.

In the April after your business starts, HMRC will send you a self assessment tax return to fill in. HMRC will also use the return to assess any profit-related (Class 4) NI contributions you may need to pay.

Self employed people are also liable for Class 2 NI contributions (currently £2.40 per week: 2009/10 Tax Year).

If your income from self employment is low, you may be able to apply for the Small Earnings Exception.

Also, if you’re already paying NI contributions in another job, you may be able to defer paying your Class 2 contributions until the end of the tax year. There is a dedicated Class 2 NICs Helpline on 0845 915 4655 where more advice is available.

Value Added Tax (VAT)

Even though you will have registered as ’self employed’ when setting up, you won’t automatically be VAT registered. You don’t usually need to register for VAT until your turnover reaches a certain limit in any 12 months, or you expect it to do so. This limit – the ‘VAT threshold’ – is currently £68,000 (from 1/5/2009 – previously it was £67,000).

The standard rate of VAT has been reduced from 17.5% to 15% from 1st December 2008 until 31st December 2009 following the 2008 Pre-Budget Report.

Your annual turnover is normally the total amount of money coming into your business from the goods or services you sell. You can read our VAT Guides for more details.

Insurance and Banking

Once you’ve decided to become a sole trader, and have informed the authorities, you should think about taking out the appropriate business insurance cover for your new venture. You may need to take out public liability insurance and employers liability cover as well as insurances specific to your trade or industry.

You will probably also want to open a business bank account. As a sole trader, you can open an account such as “John Smith Trading As BLT Construction”, which will enable you to keep a separate account to your personal one. The choice is up to you.

So to summarise, if you want to start small then perhaps become a sole trader and if you find companies won’t deal with you then you can always become a limited company.

Sole Proprietor Or Incorporated?
This question depends on a couple of factors, the first being what  the limits are in your state.  Most small business begin as a sole proprietor, because it is the least expensive route to starting your own company.  For those who work as a sole proprietor, all that needs to be done tax-wise is a Schedule C on a personal return.  This reported business income goes into your personal taxes instead of a separate entity as a corporation.

While it may be less expensive to start as a sole proprietor, there is a legal aspect to consider.  Those who work solo have no legal protection over personal assets.  This translates to you being liable from a personal standpoint for actions that occur within your work – so if someone wants to sue you, your assets (home, car, savings, etc) are at risk.

Do You Need A Business License Or Permit?
Check with your local city or county government to make sure you are in compliance.  Some in home businesses are exempt, but most businesses do need a license.  This helps with planning for tax reasons and the county growth.

Permits are required for certain occupations or businesses.  If you are not sure, just ask.

What Corporate Forms Should You Use?
There are three primary forms used for businesses.  You should consult with your lawyer or your business accountant to decide which form is best for your business.  Most small businesses choose either and “S” corporation or LLC (Limited Liability Company) since these two forms put a limit on your personal liability, yet still allow the profit and loss statements to be filed under the individual returns.  There is also the “C” corporation form.

Special Tax Numbers
Having a special tax number is safer for sole proprietors than giving out your social security number, so even with the smallest business it is advisable.  To get your EIN, or employer ID number, all you have to do is call the business line with the IRS, and you can have it assigned over the phone.

If you are a corporation or have employees that are on your payroll, then you  will need an Federal Employer ID number.  This number is assigned as well, as puts your business on the IRS’s books.

State ID numbers may be assigned, depending on the laws in your own state.  The best way to figure out if you need a state number is to visit StateLocalGov.net for a quick reference and further directions on what to do.

Other License/Permits
Depending on your business, if you are going to be reselling goods purchased, you will need to sign a resale license or statement of intent.  This states that the end consumer will be paying the sales tax, and you will be exempt as the “middleman”.

If you are not using your name for your business you will need to file a DBA so people will know who owns the business.  You can also often open a separate checking account under the DBA name, which will allow you to write checks with your business name printed on it.

Make sure you know all of your write-offs before you start, so you don’t get slapped with total income receipts at the end of the year.  Small business have to keep meticulous records, so have a good filing system to write down and keep all of your paperwork.

Starting a business takes a lot of planning and hard work, but with the right steps planned ahead, you can avoid a lot of tax and legal issues at the end of the year.  Make sure you are working with a good accountant, and remember it’s ok to start small.