You may be surprised to know that freelancers, sole traders, consultants, contractors and partnerships can all come under the heading of a small business. It’s more of a generic term for any sort of business with less than 50 employees, and very often will have just one!

• A freelancer typically works for more than one client at the same time
• A sole trader is a person who is self-employed and runs their business as an individual
• A consultant provides specialist services, usually for a specific project or to resolve particular business issues
• A contractor usually has a contract with one client at a time and will deliver specific services to their clients
• A partnership is two or more people that share responsibility for a business and have a legal arrangement

Usually, how you refer to yourself will depend on the industry that you are in and how you want to present yourself to clients.

Definition of a small business

A small business is one that has any 2 of the following attributes:

• 50 or less employees
• A turnover of £10.2 million or less
• £5.1 million or less on its balance sheet

Those figures are high and consequently, the majority of people will fall into the category of small business. In fact, small and medium enterprises make up 99% of businesses in the UK*.

Does it matter if you are self-employed or a limited company?

As a small business owner you can be self-employed or a limited company. Here’s a reminder of the differences:

• If you are self-employed, that can take the form of a sole trader, a consultant, a contractor or a partnership. You will be responsible for all aspects of your business and its finances but the business doesn’t have a separate legal entity.
• If you are a limited company, your business is a separate legal entity from you and has entirely separate finances from your personal ones.

Legal requirements of a small business

When setting up your small business – in whatever form it takes – there are a number of legal requirements. There are:

• Registering your business name.

This will depend on the type of business you are running as to whether you need to register with HMRC, Companies House or both. The latter two are only relevant for limited companies.

• Understand your tax obligations.

As a sole trader or partnership you are required to submit a Self-Assessment tax return annually as well as pay income tax on profits and Class 2 and 4 National Insurance. As a limited company you must submit your accounts and a Company Tax Return annually. In addition you will pay Corporation Tax along with Self-Assessment.

• Understand relevant business laws and regulations.

Very often this won’t apply but you do need to be aware of any relevant laws and regulations in the industry that you operate in so as to ensure you are complying.

• Obtain any relevant permits and licenses.

Again, this will only apply to certain industries, but you don’t want to jeopardise your business by not knowing the correct procedures. Be aware of what is required in your industry and follow the requirements to the letter.

Why does it matter what category I fall into?

Because it can have an impact on how you run your business and what is expected of you. And can be beneficial to you in a number of ways.

Not least, there are all manner of small business grants available – depending on the size of your business. Unlike business loans, as long as you fulfil certain conditions, grants don’t need to be paid back.

In addition, when it comes to paying business rates it’s beneficial to be classed as a small business. If your property’s rate value is below £15,000 you’ll qualify for small business rate relief, and if the value is £12,00 or less you won’t have to pay anything at all.

The size of your business can also affect your energy rates, how much you can borrow through a business loan, and the amount of VAT and National Insurance Contributions that you pay.

What tax will I need to pay?

This will depend on what kind of business you are in and what business model you have chosen (be it sole trader, partnership, limited company etc). To re-iterate, here’s which  taxes are relevant for different types of business:

• Corporation Tax – only if a limited company, annually
• Self-Assessment Tax return (SA100 for sole traders and SA400 for partnerships) – for all sole traders and partnerships, annually. Limited Companies must also file a Self-Assessment return annually.
• VAT – if registered for VAT. You must be registered if your turnover exceeds £85,000 for the year 23/24 and prior years, increasing to £90,000 from April 2024 for the years 24/25 onwards
• National Insurance – for sole traders, partnerships and limited companies
• Income tax – if you’re a small business company director you pay income tax on any salary you take from the business, in line with the tax thresholds employees pay
• Business rates – these won’t be applicable if you run your business from your home and don’t have visiting customers.

Pros and cons of being a small business owner

Some of the benefits of being a small business owner include:

• You’ll have more independence and be able to manage your own time in the way that best suits you
• You can potentially make more money – how much you want to work and expand is up to you. What’s more, being a small business owner will give you access to tax-breaks such as claiming expenses – including travel costs, office equipment, utility bills – against the company.
• The satisfaction that comes with working for yourself – simple but true!

Some of the downsides of being a small business owner include:

• Financial risk as you’ll no longer have a fixed pay check at the end of the month, how much you earn and how successful you are is down to you and, if you have any, your employees
• There’s no denying it can be stressful at times – and there is a certain amount of necessary admin that goes with doing your chosen work

For further information about the pros and cons, take a look at these articles:

Here at Integro we offer small businesses a comprehensive, bespoke service, all the details can be found in our services section: Small Business & SME Accountancy packages.

Talk to us about how we can help you make your small business a success and take some of the admin off your hands on 0207 096 2659 or book a call back request for your convenience.

(*source: Business statistics – House of Commons Library).