All businesses are required to report their annual accounts to the government for tax purposes at the end of the financial year. The annual accounting statements are also used by enterprise owners to evaluate the success of their business operations. For partnerships, having a business account is essential as it helps in managing joint finances and meeting legal obligations. Moreover, the Her Majesty Revenue and Customs (HMRC) regularly checks the company accounts to assess if all taxes have been paid regularly and if regulations have been followed. Along with being accurate and fair, company accounts also have to be compliant with the industry accounting standards and tax legislations.
Company accounts are usually categorised as:
- Sole trading accounts
- Partnership accounts
- Limited company accounts
A partnership bank account is crucial for managing joint business activities effectively.
All three types of company accounts have to be managed in different ways. Here are the basic difference between these accounts.
| Sole Trader / Partnership | Limited Company | |
| Risk Mitigation | As the company is solely-owned or by the partners, anything that goes wrong legally or financially, the brunt has to be bored by the owners/partners. | For a limited company any issue is dealt at the company level and the Director doesn’t get affected – financially or legally if the statutory compliances have been adhered to. |
| Setup Cost | To start the business the formalities and registrations are nominal. You only need to ensure that you register yourself with the HMRC within 3 months. | A lot of setup cost as the number of registrations and statutory compliance is very high. |
| Statutory Compliance | For both sole and partnership accounts, the statutory compliances to meet are very less. | In a Limited company these are many that need adherence and have frequent audits. |
| Information Privacy | Mostly all information is confidential and is with the owner / not shared publicly. | All information like company financial data, Director’s salary, sales and related is available publicly. |
Understanding Sole Traders, Partnership and Limited Companies in Detail:
Sole Trading Accounting
When an individual decides to start a business and begins chasing leads and generating sales from customers, he/she starts functioning, by default, as a sole trader. The first thing that a sole trader should do is to get registered with the HMRC. The registration can be done online on the HMRC website or by filling the CWF1 form within three months of starting the business.
Income Tax and Class 4 Insurance
All sole trading accounts are liable to income tax and the Class 4 National Insurance on the profits made. For starters, sole traders have to maintain records worth six years of client invoices and business expenses. They have to keep track of the money earned throughout the financial year, along with expenses and have to file their personal tax declaration to declare business profits for the accounting year. They are also required to pay the self-assessment tax.
Business Registration and Business Bank Account
It is not mandatory for sole traders to register their company name or set up a business bank account, but many sole trading companies do them anyway to prepare for the future. Having a registered company name helps build customer trust via credibility, and on the other hand, it is always a good idea to keep the business and personal bank accounts separate. However, it is mandatory for sole trading companies to register for National Insurance. Once registered with HMRC, sole trading companies start receiving bills for quarterly National Insurance Class 2 contributions and annual Class 4 contributions. Moreover, sole trading companies don’t need to register for VAT as long as they are below the £85,000 threshold. For tax payments, sole traders have the flexibility of paying twice a year: first on the 31st of January and the second on the 31st of July via the ‘payments on account’.
FAQs on Sole Trader Accounts
How do I register as a sole trader for tax purposes?
To register as a sole trader for tax purposes, you need to inform HM Revenue and Customs (HMRC) that you are self-employed. You can do this online or by phone, and you will need to provide details about your business and personal information.
What records do I need to keep as a sole trader?
As a sole trader, it is important to keep detailed records of your business income and expenses. This includes invoices, receipts, bank statements, and any relevant financial documents. Keeping accurate records will help you to complete your tax return accurately and on time.
How do I calculate my tax as a sole trader?
As a sole trader, you are required to pay income tax on your profits. To calculate your tax liability, you will need to deduct your allowable business expenses from your business income. The remaining amount is your taxable profit, on which you will pay income tax based on the current tax rates.
Do I need to file a Self Assessment tax return as a sole trader?
Yes, as a sole trader, you are required to file a Self Assessment tax return with HMRC each year. This tax return will detail your business income, expenses, and profits, and you will need to pay any tax due by the relevant deadline. Failure to file your tax return on time may result in penalties.
Partnership Accounting
When two or more people get together to start a business that is not a limited company, they usually form a partnership which work very similarly to sole trading companies, and the business partners are all self-employed individuals. To register a partnership business with the HMRC, one of the partners must be designated the ‘nominated partner’, who will be responsible for registering the company and sending the partnership tax returns to the HMRC, whereas the rest of the partners should register separately and inform the HMRC that they are now self-employed. Moreover, all partners have to separately file their individual tax returns. It is crucial to maintain a capital account for each partner to accurately track their contributions and share of profits.
Partnership accounts can be registered online or by filling the SA400 form. When a partnership is registered, the nominated partner automatically gets registered for self-assessment. All individual partners are personally responsible for any loss or debt incurred in the partnership business. Proper management and distribution of partners’ capital balances, including the allocation of residual profit, appropriations of profit, partners’ salaries, interest on capital, and interest on drawings, are essential to ensure fair and transparent financial practices.
Taxation and National Insurance
For tax purposes, partnership accounts are supposed to submit annual self-assessment forms to the HMRC, one on behalf of the partnership along with separate forms for each partner. It is also crucial to maintain up-to-date records of all business profits, losses, transactions, receipts, invoices, etc. Income tax and National Insurance contributions are to be paid on the overall profits made by the partnership. Additionally, capital interest is calculated at a pre-defined rate based on the period for which capital has been used in the business, including interest on the opening balance of the capital account and any newly introduced capital.
Legalising the Partnership with a Partnership Agreement
Since partnerships are not assigned any legal status, even if one of the partners backs out, the entire partnership has to be dissolved. It is, therefore, advised that the partnering individuals sign a partnership agreement wherein all aspects of the business are addressed, including how to manage future hiccups. A crucial part of this agreement is maintaining each partner’s capital account to manage contributions and withdrawals. All profits from the partnership are equally shared among the partners, and each partner is deemed to pay taxes on his/her individual share. Partnership businesses can be traded under the actual names of the partners or a single name can be chosen for the entire business. Just like sole traders, it is not mandatory for partnership companies to register their business name.
FAQs on Partnership Accounting
How should profits and losses be distributed in a partnership?
In a partnership, profits and losses are typically distributed according to the partnership agreement. This agreement outlines the percentage of profits or losses that each partner is entitled to based on their contribution to the partnership.
What are the key financial statements that partners should review to monitor the financial health of the partnership?
Partners should regularly review the partnership’s balance sheet, income statement, and cash flow statement to monitor the financial health of the business. These financial statements provide important insights into the partnership’s assets, liabilities, income, and expenses.
How can partners ensure transparency and accountability in managing partnership accounts?
Partners can ensure transparency and accountability by maintaining accurate financial records, conducting regular financial reviews, and involving all partners in financial decision-making processes. It is important to communicate openly and honestly about financial matters within the partnership.
What steps should partners take to resolve financial disputes or disagreements related to partnership accounts?
– Partners should first try to resolve financial disputes or disagreements through open communication and negotiation. If a resolution cannot be reached internally, partners may consider seeking mediation or legal assistance to address the issue. It is important to follow the dispute resolution procedures outlined in the partnership agreement.
Limited Company Accounting
Limited companies operate as separate business entities in which the company owners/directors are legally responsible for paying the company’s debts, but only to the extent of their investments in the company. The first task is to register the company with Companies House. This process is known as incorporating the company, and it will require the following details:
- A company name that is not similar to any other limited company; Companies House doesn’t permit offensive names or the use of certain sensitive words or phrases
- A suitable company address
- At least one decided company director
- Details of company’s shares, with at least one shareholder (who may also be the director)
- Company’s nature of business and SIC Code
In business accounting, the market value is often used in the calculation and treatment of goodwill, equating it to fair value in various partnership scenarios.
A limited company can be registered online, via the post or with the help of agents and third-party software. The government’s online services can be used to register the limited company for corporation tax and PAYE (informing HMRC that employees will be hired, including the company directors).
FAQs on Limited Company Accounts
What are the key financial statements that a limited company must prepare and submit?
Limited companies are required to prepare and submit a profit and loss account, balance sheet, and cash flow statement annually.
How often should a limited company file its annual accounts with Companies House?
Annual accounts must be filed with Companies House within 9 months of the company’s financial year-end.
What is Corporation Tax and when is it due for payment by a limited company?
Corporation Tax is a tax on a company’s profits. It is due for payment 9 months and 1 day after the end of the company’s accounting period.
What are the penalties for late filing of annual accounts by a limited company?
Late filing of annual accounts can result in penalties ranging from £150 to £1,500, depending on the length of the delay.
Are there any exemptions for small companies in terms of preparing and filing accounts?
Yes, small companies may be eligible for exemptions, such as filing abbreviated accounts or being exempt from audit requirements, based on certain criteria outlined by Companies House.
Taxation and National Insurance
If employees and directors are receiving salary, then the income tax and the National Insurance Contributions (NIC) are deducted at the source. Moreover, the corporation tax registration has to be done within three months of starting the limited company, post which the HMRC notifies the deadline for paying the corporation tax. Thereafter, the company tax return has to filed, even if the business is in loss or has no corporation tax to pay. Limited companies are also required to register for VAT, which can be done online on the HMRC website. Limited companies may also encounter additional taxes such as the income received personally by the owners, especially in the form of salary or dividends drawn.
A quick note on pros and cons of sole trading, partnership and a limited company.
| Sole Trader / Partnership | Limited Company |
| In case of debts a sole trader or partners are liable to pay | In a limited company, a director is liable to pay to the extent of unpaid amount on shares. |
| In a legal dispute, the owner is sued. | In case of a limited company, the company is sued and it is very rare that the director is. |
| Owns the business and is self-employed. | Director is treated as an employee. |
| Pays class 2 & 4 of the NI (National Insurance) | The company pays corporation tax on the profits. |
Our dedicated business accountants for Sole Traders and Limited Companies have helped business run smoothly. Talk to us to know how we can help you manage your accounts, payrolls, bookkeeping, taxation and much more while you can focus on your core business.
If you still have confusion, Please drop an email at info@targetaccounting.co.uk and one of our experts will be in touch with you or call us on 03300 887 912.