Starting out - doing the groundwork

Looking to make the move from employee to salon owner or freelance hairdresser? Here is the lowdown on the legal loopholes to look out for, the alternative ways to do it, and the experts you might want to employ to make life easier.

Type of business

You have to decide which type of business vehicle to create. In simple terms, the most likely options are a sole trader, partnership or limited company.

Sole trader (or self-employment) is the simplest, in which you work on your own account, either under your own name or a different trading name. You

are entitled to all profits but are personally liable for

all debts.

Costs are low as formation is free, and financial accounts do not have to be audited or filed at Companies House. You draw money from the business as required, and pay tax on the net annual profit.

A partnership consists of two or more people (or entities) carrying on the same business together. You are each dealt with separately for most tax purposes, but are all jointly liable for partnership debts. This kind of set-up requires formal structure in the form of a written partnership deed.

Limited companies are the most common entity chosen because they are registered under the Companies Act, and your liability is normally limited to the amount of shares you have bought.

But limited companies have costs attached to them with accounts, registration and so on. Also, companies are taxed on their profits, and their members - you - and employees are taxed separately on remuneration and dividends received from the company.

Tax

You must tell HM Revenue & Customs (HMRC) that you are trading so that it can deal with your tax and national insurance position. You may also need to register for VAT. Registration is voluntary if your turnover is under the VAT threshold of £73,000. But remember that this is a rolling 12-month threshold. If at any point it is possible that your turnover for the next 12 months could exceed the threshold, you must register for VAT. Miss this, and you will be penalised for not registering, charged the missing VAT, and be left without recourse to charge that VAT back to your customers.

With regards to VAT, there are numerous schemes that HMRC offers to make life easier. These include a flat-rate scheme where you only pay VAT on a flat percentage of your turnover (but you can't reclaim VAT on your purchases).

Choosing advisors 

• Accountants

If you don't have anyone in mind, or are unsure where to look, start with the professional bodies. Several organisations (details listed at the end) exist to help and protect the public, as well as regulate the accountancy profession. The main two are the Institute of Chartered Accountants in England and Wales (ICAEW), and the Association of Chartered Certified Accountants (ACCA).

For Scotland and Ireland, there are two separate but associated bodies to the ICAEW - the Institute of Chartered Accountants of Scotland (ICAS), and the Institute of Chartered Accountants of Ireland (ICAI). The members of all of the organisations listed above have undergone training and examinations. They are professionally qualified and each organisation has its own method of supervising members and dealing with complaints.

• Lawyers

Apart from personal recommendations, the best way to find a good lawyer is to consult one of the two 'professional bibles' - The Legal 500 and Chambers and Partners Directory. Both are useful as they are a review of lawyers for clients. They both list companies by region and their specialities, together with firms' own editorial about themselves. Also listed is a rundown on experience and fees, as well as partners' names and firms' addresses. But if you prefer, you could try contacting The Law Society for names of firms with known expertise in given areas.

Finance your future

To open a bank account you will need various forms of documentation, including several forms of identity (for you) and for the company or partnership if appropriate.

Despite what you may have heard, you don't automatically have to pay bank charges. For example, both the Royal Bank of Scotland (Business Banking Direct) and NatWest (Advantage Business Account) offer some virtually free business bank accounts. You can find plenty of bank comparisons at http://bba.moneyfacts.co.uk/

Finally, there is a benefit to being self-employed. Employees have tax and national insurance deducted from their pay automatically at source. Not so for the self-employed and businesses. Taxes, national insurance and VAT are paid in arrears.

So whenever invoices are settled automatically, take all of the VAT and a fixed proportion of the net and put it into higher-rate interest savings accounts so that the money can work for you. It also means that you'll have all of the money you need to pay your taxes to HMRC when they are due.

Seek financial advice

Being employed brings plenty of benefits, including a company pension, healthcare and death-in-service benefit. But now that you are on your own you'll have to fend for yourself.

The least you will need is critical illness cover (pays out a lump sum on any one of a set of illnesses or diseases); income protection insurance (pays a monthly allowance based on your income where you cannot work because of illness or disablement); life insurance (pays your estate if you die); and if in business (partnership or company) with someone else, keyman insurance, which pays a sum sufficient to allow you to buy out your partners' share of the business should they die.

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