Early stage accountancy advice 2

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In the second installment of our early stage accountancy advice article AAT Vice President, Henry Cooper FMAAT offers advice on investing your time to build up your knowledge

My second tip for budding entrepreneurs is to invest your time in building up your accountancy knowledge.

Here’s why:

  • How can you succeed if you don’t know how much your business is worth? Or you don’t know the difference basic terms such as cash flow and profit
  • How can you communicate effectively with not only your accountant but also your investors, suppliers and employees if you don’t understand the basic
  • Gaining accountancy knowledge and know how will allow you to make better and more strategic business decision
  • Businesses that do their own bookkeeping and do it well can use their accountants for a higher level of expertise
  • You can monitor your competitors by having a firm understanding of their annual reports

I often think this should be obvious. Surprisingly, it isn’t. Most entrepreneurs either don’t invest time to understand the basics or lack interest in this area of the business. However, there is no excuse nowadays to turn a blind eye – there is such an array of resources available to the SME market and often these resources are free.

In the first instance Business Link should always be the first port of call. Not only is this website a hub of knowledge but a place in which links directly to HMRC and businesses can take advantage of doing their VAT return online through the site.

Companies House, will provide a key tool for company directors as will the actual HMRC website. All these websites will keep you up to date on changes to tax legislation and accountancy standards.

My third tip is to think wisely about your business entity

This will take a lot of thought and again it’s worth seeking professional advice and guidance in order to weigh all the options. Also, take note that whatever legal business structure you decide to be, you have to register with HMRC.  Things you must understand before you make a decision:

  • Understand the differences between the various business structures with strong emphasis on sole-trader, partnership and Limited Company/ Limited Liability Partnership

Sole-trader and Partnership

The process of setting up your business under the entity of sole-trader or partnership is relatively straightforward. All you are required to do is register with HMRC. You don’t have to publish your accounts publically and you only pay tax on the profits you make.

However, the disadvantage is that you have little security and no unlimited liability. Therefore if you acquire debts that can’t be paid then your creditors are in a position to seize your personal assets.

Limited Company

Registering your business under this title means that you will have a lot more regulations to abide too.  Not only do you have to register through companies house and let HMRC know how many employees you have, you will also have to pay national insurance and income tax.

The advantages are that you benefit from limited liability and your personal assets are more protected. In more corporate environments this type of structure is seen as more reputable. Legally you are also required to publish a yearly basic financial report, in which this data is available for anyone to purchase.

It’s wise to consider:

  • The pros and cons for each business structure and to think wisely about your business needs now and in the foreseeable future
  • Be aware that depending on what structure your business becomes this will have consequences on what records and accounts you have to keep
  • While you can change your business structure, it’s important to be aware that being a sole trader/partnership is taxed differently to those businesses that operate as a limited company and therefore if you change from one business structure to another then you should wait until the end of the tax year

Don’t miss my final installment of tips on 5 September when I will look at how to implement an accounting system which is right for your business requirements.


Henry Cooper FMAAT was AAT's 32nd President.

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