What Accounting Setup Do I Need When Starting a Business?
Starting a business involves more than launching a product or service. Behind the scenes, you’ll need a solid financial setup to ensure everything runs smoothly — from handling sales and expenses to paying taxes on time.
A common question for new business owners is: “What accounting setup do I need when starting a business?” The answer depends slightly on the type of business you’re starting, but the essentials are broadly the same.
This article walks through the key steps and components of setting up your accounting from day one.
1. Choose a Business Structure
Your first decision impacts how your accounts are managed.
Sole Trader: Simple to set up, fewer reporting requirements, but you’re personally liable for debts.
Partnership: Similar to sole trader but shared between partners.
Limited Company: Separate legal entity. More admin but offers protection of personal assets.
Your structure affects the type of accounting records you’ll need, how you file tax returns, and what reports are required.
2. Register with HMRC (and Companies House if Limited)
Sole traders must register for Self Assessment with HMRC.
Limited companies register with Companies House and must also register for Corporation Tax.
If you expect turnover to exceed the VAT threshold (currently £90,000 in the UK), or you voluntarily register, you’ll need VAT registration.
If you employ staff, you’ll also need to set up PAYE for payroll.
3. Open a Business Bank Account
Limited companies must have a separate business account by law, as the company is a separate entity.
Sole traders are not legally required to have a separate account, but it’s highly recommended. It keeps personal and business finances cleanly separated, making bookkeeping and tax easier.
4. Choose Accounting Software
Manual spreadsheets can work at the very beginning, but accounting software quickly becomes invaluable.
Popular cloud-based options include:
Xero
QuickBooks Online
FreeAgent
Sage Business Cloud
Benefits of using accounting software:
Automated bank feeds
Easy invoice generation
VAT submissions directly to HMRC
Real-time financial reports
Simplified record-keeping for taxes
5. Set Up a Chart of Accounts
A chart of accounts is simply a list of categories you’ll use to track income, expenses, assets, and liabilities.
Most accounting software comes with a default chart of accounts, but it’s worth reviewing to make sure it fits your business.
Typical categories include:
Income: Sales, consultancy, commissions
Expenses: Rent, software, advertising, travel
Assets: Bank accounts, equipment
Liabilities: VAT owed, loans
6. Keep Proper Records
Legally, you must keep accurate financial records. This includes:
Sales invoices
Purchase receipts
Bank statements
Payroll records (if applicable)
VAT records (if registered)
In the UK, HMRC generally requires you to keep records for at least 6 years.
7. Understand Tax Requirements
The taxes you’ll deal with depend on your business structure and whether you’re VAT registered.
Sole traders: Submit an annual Self Assessment tax return.
Limited companies: File Corporation Tax returns, annual accounts, and Confirmation Statements.
VAT: Quarterly VAT returns (if registered).
Payroll: Monthly payroll submissions if you have employees or pay yourself as a director.
Making sure your accounting setup allows you to track taxable income, expenses, and liabilities is essential for staying compliant.
8. Set Up Invoicing and Payment Processes
You’ll need a system for:
Creating and sending invoices to customers.
Tracking who has paid and who hasn’t (accounts receivable).
Managing supplier bills and payment schedules (accounts payable).
Most accounting software handles this. Alternatively, some small businesses start with templates or spreadsheets but often move to software quickly.
9. Plan for Bookkeeping Frequency
Decide whether you’ll do bookkeeping:
Daily – Ideal for busy businesses with high transaction volumes.
Weekly – Keeps things manageable and up to date.
Monthly – Minimum advisable to stay organised for VAT, payroll, and tax.
Falling behind on bookkeeping leads to rushed tax returns, missed payments, and poor visibility of your finances.
10. Consider Professional Help
Many business owners handle their own bookkeeping but outsource tasks like:
Year-end accounts preparation
Tax returns
VAT submissions
Payroll
Even if you handle day-to-day records, an accountant can provide tax advice, check accuracy, and help optimise your setup.
11. Understand Deadlines
It’s critical to be aware of key deadlines:
Self Assessment: 31st January (for previous tax year).
Corporation Tax: Due 9 months and 1 day after the year-end.
Companies House accounts: Typically due 9 months after year-end.
VAT returns: Usually quarterly.
PAYE: Monthly (for salaries).
Setting up calendar reminders or alerts within your accounting software helps ensure deadlines aren’t missed.
12. Prepare for Making Tax Digital (MTD)
If you’re VAT registered, you must already comply with Making Tax Digital (MTD) — meaning VAT records must be kept digitally and VAT returns submitted via compliant software.
MTD for Income Tax is coming (currently delayed but planned for future years), so starting with cloud software now helps prepare for that shift.
13. Backup and Security
Make sure your financial data is backed up. Cloud-based software handles backups for you. If you’re using spreadsheets, set up secure cloud storage like Google Drive or Dropbox.
Enable two-factor authentication on all financial accounts, including banking and software logins, for added security.
14. Keep Personal and Business Separate
One of the biggest mistakes small business owners make is mixing personal and business finances. Keeping them separate avoids confusion, makes bookkeeping easier, and keeps HMRC happy.
