From Side Hustle to Startup Business: Your First 12 Months of Accounting, Taxes, and Getting It Right
Starting a business is one of the boldest moves you’ll ever make. But in those first 12 months, financial clarity is often what separates a thriving new venture from a struggling side hustle. Accounting and tax might not be the most exciting part of your founder journey, but they are the backbone of your long-term success.
Mastering accounting basics is essential for maintaining accurate financial records, ensuring compliance, and making informed decisions that drive your business forward.
This guide walks you through the critical milestones, compliance checkpoints, and smart decisions that define your startup’s first year. A solid business plan is also a critical tool for planning, strategy, and long-term goal setting for new entrepreneurs. If you want to grow with confidence, attract investment, and avoid costly surprises, this is the blueprint.
Month 0–1: Getting Set Up
Choose Your Business Structure
Choosing the right business structure at the outset is one of the most important financial decisions a founder will make. Each option carries different legal, tax, and administrative implications, so it’s not just a formality—it directly impacts your income, liability, tax implications, and the long-term growth of your business.
Sole trader: This is the simplest and most flexible structure, ideal for freelancers, consultants, or side hustles testing the waters. As a sole trader, you and your business are legally the same entity. You’ll be taxed on all profits via self-assessment and are personally liable for any debts. It’s straightforward to set up and requires minimal admin, but personal risk is higher and you might hit credibility limits when applying for funding or contracts. The tax implications here include paying income tax and National Insurance on all profits, with fewer opportunities for tax planning.
Limited company: A limited company is a separate legal entity. That means the business, not the founder, holds liability for debts. It offers more tax efficiency through dividends and salary splits and is often viewed as more professional by clients and investors. However, it comes with stricter reporting obligations—such as filing accounts with Companies House, submitting corporation tax returns, and maintaining statutory registers. Most growth-focused startups opt for this route due to its scalability and access to schemes like SEIS and EIS. The tax implications for limited companies include paying corporation tax on profits, and the potential for more tax-efficient ways to extract income.
Partnership: A partnership allows two or more people to run a business together and share profits. There are general partnerships (where each partner is personally liable) and limited liability partnerships (LLPs), which offer more protection. Partnerships are often used in professional services but can complicate tax and profit distribution unless properly structured. The tax implications for partnerships depend on the structure, with general partners taxed on their share of profits and LLPs offering some liability protection but still requiring careful tax planning.
In most cases, startup founders aiming for scalability and funding prefer to incorporate as a limited company. But if your focus is on simplicity, speed to market, or testing a concept with minimal risk, starting as a sole trader might be the right first step. The best choice depends on your goals, appetite for admin, and whether you’ll be raising investment or hiring staff in the near future. Having your own dedicated accountant can help you navigate the tax implications and complexities of choosing the right structure for your business.
Register With HMRC and Companies House
Your responsibilities begin as soon as you start trading. Registering your business early ensures you’re compliant with HMRC for Corporation Tax, and with PAYE and VAT if they apply. Early registration is essential for tax compliance and helps you avoid penalties for late or incorrect filings. If you’re setting up a limited company, registering with Companies House is a legal requirement. This step also establishes your company’s public record, which adds credibility and is often required by banks, investors, and professional service providers—including accountants—before they can fully support you.
Open a Business Bank Account
Clearly separate your personal finances from your business finances to simplify bookkeeping and tax preparation. It’s more than just tidy bookkeeping—it’s foundational to running a serious business. Using a dedicated business bank account helps you track income accurately, monitor outgoings in real time, and ensure your books are clean and audit-ready. It also eliminates confusion when it’s time to file tax returns. More importantly, it builds trust with investors, lenders, and HMRC, showing that you treat your business like a business—not a hobby.
Month 2–3: Build Your Finance Foundation
Choose Your Accounting Software
The right tool doesn’t just save time; it sets the tone for how you run your business. Good accounting software for startups offers reliable features, user-friendly interfaces, and seamless integration capabilities, making it easier to manage finances and support business growth. Cloud-based platforms like Xero, QuickBooks, and Zoho Books go beyond invoicing. They connect directly to your bank, reconcile transactions automatically, and generate live reports that make cash flow visible at a glance. When it comes to accounting for startups, the right software reduces guesswork, supports decision-making, and helps avoid surprises at tax time. Look for software that scales with you, integrates with payroll and payment systems, and supports your accountant in delivering real-time insights—not just year-end reports.
Set Up Your Chart of Accounts
In the early stages, your chart of accounts should reflect how your business earns, spends, saves, and invests. Keep it focused and aligned with your core activities, such as project income, contractor costs, or R&D spending. A tailored structure from the start makes it easier to track performance and meet reporting obligations. As the business grows, the same framework can be expanded to support more detailed management accounts, financial planning, and compliance. A well-built chart provides the foundation for confident decision-making at every stage.
Implement Expense and Income Tracking
Start by choosing a system that suits your workflow—whether it’s app-based receipt capture, automated bank feeds, or spreadsheet logging. Categorise all income and expenses consistently, using your chart of accounts as a guide. Link every receipt or invoice to its corresponding transaction, and set aside time weekly to reconcile your records. Regularly reconciling bank statements and credit card statements is essential to ensure accuracy and detect errors in your financial data. Tools like Dext, Xero, and QuickBooks can automate much of this, reducing manual entry. Keep documentation organised and store backups digitally in case of review or audit.
Understand Your Tax Obligations
In these early stages, make sure you’re clear on the range of tax obligations your business has. These may include Corporation Tax, VAT, PAYE, and potential liabilities under self-assessment if you’re a sole trader or director receiving untaxed income. You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. Voluntary registration is also an option for businesses looking to reclaim input VAT or appear more established to B2B clients. Monitor your revenue regularly to anticipate when VAT registration becomes necessary, and ensure your accounting software is set up to handle VAT returns in line with Making Tax Digital requirements.
As part of managing your tax obligations, identify all eligible tax deductions and look for opportunities for tax savings to reduce your overall tax liability.
Staying ahead of these obligations and reporting deadlines helps you avoid penalties, manage cash flow effectively, and streamline your year-end tax processes.
Month 4–6: Start Reporting, Planning, and Hiring
File your first VAT return (if registered)
If your small business crosses the VAT threshold (£90,000 in taxable turnover) or registers voluntarily, your first VAT return will usually be due during this phase. Make sure your accounting software is set up for Making Tax Digital to ensure compliant submissions. If you're voluntarily registered, use this period to check that your invoicing, expense tracking, and input VAT records are consistent and accurate. Submitting on time helps maintain a clean compliance record and supports smoother cash planning around VAT payments or refunds.
Build cash flow forecasts
Cash flow forecasting helps you understand when money will move in and out of the business so you can plan with confidence. Financial forecasting also plays a crucial role in strategic planning, budgeting, and supporting business growth by providing insights into future financial performance. Start by listing expected income from clients or contracts alongside all fixed and variable costs—like software subscriptions, payroll, or upcoming tax payments. Update your forecasts monthly and build in a buffer for unexpected costs. Use templates or the forecasting tools in your accounting software to visualise your projections. This practice is especially useful if you’re considering investment or planning for seasonal revenue shifts.
Consider hiring a dedicated accountant
At this point, managing everything solo becomes a bottleneck. A dedicated accountant can take on your core compliance, but more importantly, provide proactive advice on structuring your finances, preparing for tax liabilities, and maximising reliefs. Choose someone who understands startup business models, funding mechanics, and growth planning. Working with professional accountants who have experience with startups ensures you receive expert guidance on compliance and strategic financial decisions as your business grows. Expert startup accountants offer tailored financial solutions and support at any stage of business development, becoming an embedded partner who helps you transition from basic record-keeping to more strategic financial management.
Document basic accounting principles
This is the time to write down how your business handles core financial activities—from how expenses are approved to how income is categorised. These internal accounting principles shape how your team, software, and accountant maintain consistency. Decide how you'll handle accruals, prepayments, tax credits, and revenue recognition. Clear documentation is especially useful as you scale or bring on new finance team members. It also strengthens your reporting and keeps you audit-ready as the business matures.
Month 7–9: Formalise Financial Strategy
Create management accounts
Monthly or quarterly management accounts give you a structured view of business performance over time. These reports typically include a profit and loss statement, balance sheet, and a cash flow summary. For startup businesses, they create a consistent rhythm for reviewing performance and allow founders to spot issues early—like margin erosion or rising operating costs. Use these accounts to inform investor updates, board meetings, and internal planning sessions. Over time, this discipline becomes the backbone of strategic decision-making.
Plan for corporation tax forecasts
Avoid surprises by forecasting your corporation tax liability several months ahead of your year-end. Use current-year profit estimates and tax-adjusted figures to build a rolling projection. Your startup accountant should help you factor in allowable expenses, capital allowances, R&D relief, and any prepayments. This forecast helps you manage cash flow, set aside reserves, and avoid last-minute tax stress. It also opens the door for early planning around tax optimisation, such as investing in eligible equipment or planning salary-dividend splits.
Strengthen financial management processes
This is the time to refine how your finance function operates on a day-to-day basis. Review your accounting services, check how often your records are reconciled, and identify manual tasks that could be automated. You might introduce payroll automation, implement regular financial reporting cycles, or define approval workflows for spending. These internal processes reduce errors, create transparency, and prepare your business for scale or investment due diligence. By optimizing these processes, you gain valuable insights that support strategic financial planning and growth. Use this window to lock in dedicated support ahead of your first year-end tax return.
Invest in solid expertise
Whether you hire internally or bring in external advisory support, adding financial expertise to your team can transform how you operate. A finance specialist can guide you through performance analysis, scenario planning, and tax strategy. They’ll help align your day-to-day decisions with your long-term financial goals. Prioritise professionals who understand small business dynamics and the common funding routes startups explore, from angel investment to SEIS. Raising finance through various investment schemes is crucial for securing the backing needed to facilitate growth. Strong investor relations are also essential, as they help maintain investor confidence and support future funding rounds. This expertise helps position your company not just as compliant, but as investment-ready and financially confident.
Month 10–12: Investor Readiness and Compliance
Finalise year-end reporting
Your financial statements should present clean, reconciled figures across all key accounts. This includes a well-structured balance sheet, accurate income statements, and supporting records that meet filing standards. Work closely with your accountant to ensure your accounts reflect reality—not just for tax purposes, but also to prepare for investor due diligence or loan applications. Use this process to correct any historic categorisation errors, reconcile any discrepancies, and archive year-end documentation in a secure, accessible format.
Explore Enterprise Investment Schemes
If you’re planning to raise external funding, this is the right time to explore the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). Seed Enterprise Investment Schemes (SEIS) are government-backed and provide tax-efficient investment opportunities for early-stage startups. These schemes offer generous tax reliefs to investors, which can make your business more appealing. To qualify, you’ll need to meet specific conditions around your business activity, trading history, and investment limits. Work with an advisor to assess eligibility and begin compiling the documents needed for advance assurance. Having SEIS or EIS approval in place can significantly speed up early-stage fundraising conversations.
Submit all statutory filings
Tax returns, annual accounts, and Companies House filings must be submitted by their respective deadlines. Missing these triggers automatic penalties and may raise flags with HMRC or potential funders. Make sure your accounting software reflects your financial year-end accurately, and schedule internal deadlines well ahead of the statutory ones. If this is your first year as a limited company, expect to file your first set of statutory accounts within nine months of your year-end, and your first Corporation Tax return within 12 months of starting to trade.
Evaluate financial reporting standards
Before year-end, take the opportunity to evaluate whether your reporting processes meet current standards. This includes ensuring your financial statement preparation is consistent with generally accepted accounting principles (GAAP), your tax documentation is current, and your audit trail is complete. Review your internal control processes, double-check reconciliation workflows, and ensure all year-end adjusting entries (like accruals and depreciation) are in place. A strong reporting structure reduces risk and builds confidence with stakeholders—from your board to your backers.
Final thought: Building long-term stability
Getting your first 12 months right builds the foundation for a business that doesn’t just survive, but scales. By establishing clear systems, using the right accounting software, and working with reliable accounting services early, you reduce risk, stay compliant, and improve visibility across your finances. These early habits save time later and make it easier to adapt as the business grows.
If you're aiming to turn your side hustle into a stable, investor-ready company, your financial setup needs to reflect that goal. This includes a well-structured chart of accounts, accurate and timely financial statements, and proactive tax planning. These aren’t just compliance tasks—they are core components of decision-making infrastructure. When set up properly, they help you spot opportunities earlier, make confident hires, and present a compelling case to investors and lenders.
Why Ysobelle Edwards are the accountants startups choose
At Ysobelle Edwards, we specialise in accounting for startups. As online accountants, we offer virtual meetings and remote support, making it easy and convenient for startups to access expert advice and compliance support from anywhere. Whether you’re navigating your first tax return, preparing for investment, or setting up robust systems from day one, we help you build a finance function that grows with your business. From bookkeeping and tax credits to forecasting and investment preparation, we focus on giving founders the tools, clarity, and confidence they need to stay compliant and grow strategically.
We support:
Accounting software setup, integration, and ongoing support
Startup accountancy services tailored to early-stage companies
Cash flow management, budgeting, and scenario planning
Management accounts service delivery for consistent reporting and performance tracking
Advisory services for SEIS and EIS applications
Business structure evaluation and limited company formation
Expertise embedded into your team
Whether you need startup accountants to get the basics right or long-term support for scaling your small business, we’re here to keep you informed, prepared, and in control. We offer a specialist accounting-for-startups model that blends day-to-day support with strategic input. This means you’re not just staying compliant—you’re building the kind of financial foundation that attracts investors and fuels smart growth.
Book your discovery call today to take control of your startup’s financial journey.
Frequently Asked Questions
What’s the difference between a bookkeeper and an accountant for startups?
Bookkeepers focus on recording daily transactions. Accountants provide strategic insights, prepare tax returns, and ensure compliance. A startup business benefits from having both—bookkeepers for accurate records and accountants for planning and growth support.
Do I need a limited company or can I operate as a sole trader?
This depends on your goals, risk appetite, and growth plans. A limited company offers legal separation and potential tax benefits. Sole traders have simpler admin but take on personal liability. For many startup businesses, the decision also hinges on how they plan to raise funding or scale operations.
What is the Seed Enterprise Investment Scheme (SEIS)?
SEIS is a government-backed scheme offering tax relief to investors in early-stage businesses. It’s especially useful if your startup business is preparing to raise capital. To qualify, you must meet HMRC’s criteria on company size, activity, and use of funds.
How soon should I invest in accounting software?
Ideally, from day one. Cloud-based accounting software helps track income, automate financial transactions, and generate statements. It supports early decision-making and keeps your startup business organised from the start.
What tax returns do startups need to file in their first year?
Most startups must file a corporation tax return, annual accounts with Companies House, and potentially a VAT return. Depending on your business structure, self-assessment may also apply for directors or founders receiving untaxed income.
How do I forecast cash flow as a new business?
Start by mapping expected income and fixed costs over the next 6 to 12 months. Use conservative estimates and update monthly. Many accounting software platforms include built-in cash flow management tools, or a startup accountant can guide you through forecasting for your startup business.
What qualifies as a financial transaction?
Any exchange of money related to the business—sales income, payroll, tax payments, supplier invoices—counts as a financial transaction and should be recorded properly. Categorising these transactions consistently supports cleaner reporting and tax prep.
Can accounting services help with investor readiness?
Absolutely. Financial expertise becomes critical when preparing for investment. Accountants help clean up records, prepare statements, and assist with SEIS/EIS applications. These services show that your startup business is financially organised and investment-ready.
What happens if I miss my Companies House filing deadline?
Late submissions can result in penalties and damage your credibility with lenders and investors. An accountant can help you stay on top of statutory filing deadlines and ensure your filings meet Companies House standards. Regular phone calls with your accountant are an effective way to stay updated on upcoming deadlines and avoid missing important submissions.
When should I start preparing for my corporation tax bill?
Begin forecasting your tax position by month 6–9. This gives you time to plan ahead, set aside funds, and explore allowable deductions and tax relief opportunities that may reduce your final bill.