Barbering and beauty businesses are amongst some of the most popular start-ups for would-be UK Entrepreneurs. Choosing the business structure that is the right fit is a question many barbershop or beauty salons struggle with.
Am I a Sole Trader or Limited Company?
The main business models that salons use is working as a sole trader or a limited company. When choosing between the two will depend on many factors:
Your legal structure
Projected Income
Financial liability issues
VAT registration (once turnover exceeds £85,000)
Employing any staff
The first step is to decide whether it is best to work through your own limited company or become self-employed (which could be on your own or partnering with someone else). Consider this carefully because it could affect your liabilities and tax.
To help you decide, Fusion Accountants in London has put this article together so you can weigh up all the options before deciding on the type of business you will be running and the tax structure that would fit you best.
Starting up as a self-employed
Starting up as a Sole Trader
Starting up a Limited Company
Additional Bookkeeping requirements
Summary: Choosing the best structure for your beauty business
Starting up as self-employed
You may enjoy the freedom of working for yourself as a barber – different locations, meeting new people and clients and working for different companies. Whilst you may take on contract work, you are in charge of your schedule and workload and refer to yourself as self-employed, managing your finances and tax.
If you choose to be self-employed, your income is taxed via Income Tax and Self-assessment and paying National Insurance contributions on top.
Starting up as a Sole Trader
PROS
As a service provider that delivers customer service to the highest standards, running your barbershop or hairdressing business as a sole trader could be a viable and simple solution. You will have less paperwork to complete, and the set-up of a business is much easier and less time-consuming.
When you decide that you want to start trading as a sole trader, your first step is to contact HMRC and register online as self-employed and registering means that you will need to provide a self-assessment tax return each year.
(Self-assessment tax returns are issued in April every year and cover the year from the previous 6th April to 5th April. So, for the 2020-21 tax year, this covers the period from 6th April 2020 to 5th April 2021. The deadlines for self-assessment and payment come later in the year).
You can also start employing staff, but it will be your responsibility to collect income tax and National Insurance contributions (NICs) from them and make payments directly to HM Revenue & Customs (HMRC). You will also need to operate a payroll system. You will have to keep detailed financial records and, if your turnover is more than £85,000, you will need to register for VAT.
If your salon continues to be profitable, taking advantage of Corporation tax would help your business continue that upward trajectory. In which case, a Limited company would need to be set up.
CONS
There are some downsides to be aware of – Yes, you take all the profits, but you also carry all the risk. Sole traders are not legally separated from the business they run, so you are personally liable to pay any debts incurred. Trouble can begin if the debt forces you to stop trading and shut up shop, as not only will you be receiving no income, you will still need to pay any outstanding monies.
If you run your business as a sole trader, you should not have large loans or any other business commitments connected to it that could pose a risk. If you encounter any form of risk, it would be worth your while moving your business structure to that of a Limited company, as any liability is limited, and all loans and risks do not rest with you but with the company as it is an entity in its own right, which means your personal assets are protected.
Starting up a Limited Company
PROS
This is by far the most common business model for barbershops and salons.
Running a successful limited company certainly has its benefits and rewards, but with great power comes responsibility!
The first thing you need to do is register your salon with Companies House and have at least one named Director. You will also need to provide a registered office (most beauty businesses we provide accounting services for use our Head Office address).
They will issue you a certificate of incorporation detailing your company number and date of incorporation and Articles of association and shares, company director and secretary details.
From this point onwards, you will need to pay Corporation tax and submit a set of company accounts. You do not have to be VAT registered (well, not until you reach a turnover of £85,000), but if business is good and you are likely to hit this figure soon – get ahead of the game and start the process now and give yourself real peace of mind to focus on running and develop your business.
You may also have to complete a self-assessment tax return if you have income coming in from elsewhere.
The main advantage of setting yourself up as a Limited company is that your enterprise is a separate legal entity. If there are any debts, losses, or legal claims, they will be associated with the company, the owners/shareholders are protected.
Another plus is that you may attract the attention of larger clients or third-party product suppliers who are only willing to work with a limited company, but this will mean completing additional paperwork, as well as a few more HMRC regulatory hoops.
CONS
The “disadvantages” listed below do pale compared to the great tax advantages, a boost to your business profile, and limited liability protection you will enjoy.
Becoming your barbershop or beauty business boss means that you may initially be juggling several roles, from staff management, developing haircare products and services, marketing to EPOS systems, and perhaps most importantly of all, looking after your finances; making sure you keep the lights on!
There is more day-to-day business paperwork involved as well. You will be required to follow strict record-keeping requirements, including taking minutes of meetings and keeping a record of all decisions taken by directors and shareholders. There will also be more accounting requirements to be taken care of.
Additional Bookkeeping requirements
Although some bookkeeping can be completed in-house, many businesses opt for an accountant for at least some of it.
Regular bookkeeping is essential. Not only does it make it much easier to manage the barbershop and complete tax returns, but it is also a legal requirement. Everyone must keep records of their income and any capital gains for at least 22 months after the end of the tax year. If self-employed or as a sole trader partnership, records must be kept for a minimum for five years and ten months after the tax year end.
Summary: Choosing the best structure for your beauty business
Setting up as a sole trader is free. There is very little administration associated with running this type of business, ideal if you are a freelancer or small business owner just starting and beginning to build a loyal client base and generate a small income/profit initially.
Company formation gives you added security as it reduces your liability in the event of your business facing financial difficulty. A limited company also offers numerous tax benefits and will raise your profile in the beauty sector attracting new business opportunities with industry influencers.
When choosing the best structure for your business, base your decision on personal preferences. Think about what your business objectives are and what your 1, 3 or 5-year strategy will be? If you are not sure, speak to an accountant who can offer tailored advice. Working with you, you will have a clearer understanding of your business objectives and long-term plans to take your barbershop or beauty business forward. Of course, this will require more time and investment for the additional administration and accounting requirements you will have to deal with. Still, a good accountant will understand this and reduce your admin burden as much as possible.
If you are still unsure about your next steps, why not test the water first by starting as a sole trader, and then, when the time is right, move your business into a limited company.
Fusion Accountants for Hairdressers and Beauty Salons offer sound and cost-effective advice supporting the needs of your salon or barbershop.
As a hairdresser or a barber, we want you to be able to focus on developing your business and your profitable products and services and let us worry about your accounts and any tax responsibilities using the latest accounting software, third party apps and EPOS system knowledge.
Fusion Accountants in London is proud to be a partner of The British Master Barbers Alliance supporting the wealth of barbering talent across the UK with tailored Accounting services and tax advice.
