As previously mentioned, an SME can be identified either by the amount of employees or its annual revenue. When running a small business, it is important to remember that there are different rules to follow, whether it comes to accounting or the law. A small business is
- A turnover of under £100m
- Located and run in the UK
- Independently owned and operated
- Not more than 500 headcount
When starting an SME, you also need to decide whether you are a small business owner or self-employed – after all, it can affect what your profits are. If you are self-employed, you can either be a sole trader, part of a partnership, or an independent contractor. As a sole trader, you are essentially a one-man business, responsible for all elements of the business and finances without a legal entity. Being in a partnership is very similar – it essentially involves two or more individuals who own the business and act as sole proprietors without a legal entity. Contractors are freelance workers who undertake contract work for other businesses. In all three categories, you are not considered to be an employee (unless you are a contractor who is employed by an agency). Instead, the business begins and ends with you (and your partners).
If you run a small business, then you have employees. Having employees means taking responsibility for their taxes and salary, and requires a whole new area of accounting knowledge. One of the most common business types for a small business is a limited company. These are companies that bring together the concept of a corporation with a partnership or sole proprietorship. Limited company owners are not responsible for company debts or liabilities.
HMRC classifies an SME as a business with fewer than 500 employees and an annual revenue of less than £100 million when it comes to awarding a Research and Development Tax Relief. The Department of Business categorises an SME as a company with less than 250 employees when they collect statistics. Companies House considers a small business to employ under 50 people and have an annual income of less than £6.5 million for accounting purposes. Medium sized enterprises have less than 250 employees and have an annual income of under £25.9 million according to Companies House.