There are a number of reasons why you might be considering working for yourself. Ambition, having a great idea or a lack of employment opportunities are a few of them. But, whatever the reason, budding entrepreneurs need to give themselves the best opportunity to succeed.
If you have a really new and innovative idea you may consider taking out a patent to protect your idea.
The first step to running a successful business is getting the initial set-up right.
Writing a business plan
Should you need a loan to start up your business you will need a formal business plan to convince a lender to fund your idea, but even if you do not need finance you should still jot down your ideas in a logical manner to see if they work.
What are you selling, why would potential customers buy from you instead of existing suppliers, how much can you sell your unit for, how many can you sell each month and how much would it cost to make each one? What would be the profit on each unit sold? Would you need to carry stock, how much money would be tied up in stock?
Are there any other costs involved? Would you need to buy a vehicle, tools, advertising, signage, mobile phone, broadband, stationery & postage, fuel, training, insurance, professional fees etc?
Should you require a loan do not forget to include the repayments in your monthly cash flow.
Finally, when you have worked out how much money you will have remaining each month, compare that with how much money you need each month to live.
When starting out in business only spend what you have to spend to get sales and generate more income coming into your business than costs going out as soon as possible. Ensure your business is legal, but after that only buy essentials and look for bargains. For example buy second hand tools and equipment to get you started, look at inexpensive ways to get your business known such as social media or do some leaflet drops yourself. But always remember you need the tools and materials to do a good job. The best form of advertising is word of mouth, do a good job, provide a good value for money service and word will soon get around.
Jot it all down on a piece of paper in a logical manner – make sure your sums add up. When you are satisfied with the plan, show it to your partner, don’t forget you will need their support. Things do not always go to plan and the support and help from close family and friends may be crucial. Show it to friends whose opinion you trust, listen to their feedback even if they are not the same as yours, do not be over optimistic, be realistic and if the plan still works look at taking it to the next phase.
Do some market research, sample test your product out on the general public, see what the reaction is. Meet with your business bank manager, ask their opinion, see an accountant and ask their advice. Accountants will often give a free initial consultation in the hope of gaining a future client. Most importantly listen to the feedback and react accordingly.
Next consideration should be given to the best formation for your business, Sole Trader, Partnership or Limited company. There are pro’s and con’s with all of them.
The simplest business structure to set up, you just need to inform HMRC you are trading and they will set you up with a Unique Tax Reference (UTR) and a tax record which will require you to complete a tax return each year.
The tax year runs from 6 April one year to 5 April the following year with the tax return and any tax liability due the following 31 January. For example –
For the 6 April 2016 to 5 April 2017 tax year you would need to maintain adequate books and records to support your tax return for the period.
The tax return and any payment of tax and National Insurance would be due by 31 January 2018
You would need to retain those records for a minimum of five years after the 31 January due date, longer in some instances.
Sole traders pay –
Income Tax of 20% on profits over their personal allowance £11,000 (2016/17)
Class 2 National Insurance £148.20 p.a providing over small profits threshold (2016/17)
Class 4 National Insurance of 9% on profits between £8,060 to £43,000 (2016/17) and 2% over £43,000.
- Easy to set up
- Although not a legal requirement to have a separate bank account, it is always a good idea to have one.
- Should you make a loss, that loss is usually available to offset against other income tax suffered.
- Less administration which usually results in lower admin costs.
- You and your business are considered one entity, if your business goes bust owing people money you can be personally liable for those debts.
- May not be as tax efficient as other business structures at certain profit levels
- May negatively impact cash flow in opening year. If the tax liability is over £1,000 you have to pay payments on account towards the following year’s estimated tax liability (50% 31 January and 50% 31 July).
A partnership is two or more sole traders coming together to form a business. A partnership tax return will need to be filed as well as each partner filing their own individual tax returns, with their share of the partnership profit on their individual tax returns. Partnership profits are taxed in line with how a sole trader profits are taxed discussed above.
It is always a good idea to draft a partnership deed (agreement) at the very beginning of the relationship. We all go into business really positive and “overlook” potential problems but with a partnership it is really important to decide –
- Who makes the decisions? What happens on disagreements between partners?
- Who is contributing what?
- Who is responsible for what?
- Who works in the business?
- Who gets a salary / bonus?
- What is the profit sharing ratio?
- What happens when the partnership finishes?
These are just some of the questions, it is also a good idea to get professional advice before entering into a business partnership.
As partnerships are really two or more sole traders coming together then the partners and the business are considered as one entity. Again this means that the partners can be held accountable for the partnership debts should the business fail owing money. This is often referred to as “joint and several” liability which means the person owed money by the business can go after the first partner’s assets for the whole debt, then if there is still some debt still owing they can go after the next partners assets and so on until the full partnership debt is satisfied. To combat this Limited Liability Partnerships (LLP) formed, these LLP businesses are registered at Companies House as a Limited Liability Partnership (i.e. should the partnership go bust then the partners are only liable to the extent of their original investment), but they are still classed as partnerships for tax purposes.
Pro’s and Con’s are similar to sole traders but in addition –
The business potentially has more access to resources and know-how than a sole trader
Partnerships require additional administration
Limited (Ltd) Companies
A limited company is formally incorporated at Companies House.
- Own the business through their investment in shares
- Their liability for that business’ debts is limited to the amount of shares they have taken
- They appoint director(s) to manage the company for them
- As the shareholders are considered “separate legal entities” to the business, in law the Ltd company is considered a separate person, then legally a Ltd company must have its own bank account and is capable of entering into contracts in its own name.
Directors are appointed by the shareholders to run the company on their behalf.
Because of the trust the shareholders have placed in the directors there are “directors’ fiduciary duties” which are legal requirements placed upon a director to act in a professional manner.
Directors work in the business and are salaried through the company’s payroll.
A company does not need a company secretary and the same person can be its only shareholder and only director.
The administration of a Ltd company is greater than other business formations and the larger the company the greater the reporting requirements. Here we will consider smaller sized local Ltd companies.
Annually each Ltd company must file –
- Annual confirmation statement at Companies House
- Annual registrar accounts with Companies House
- Annual corporation tax return with HMRC
- Annual statutory accounts accompanying the corporation tax return
- In addition, each company director must file their own personal tax return annually
Should the company have its own payroll there are monthly and annual reports that must be filed with HMRC
A company’s accounting and tax period is different to a sole trader, a company will have its own year-end, for example –
A Company incorporated 1 January 2016
Their first year-end would be 12 months to 31 December 2016
**The corporation tax liability is due nine months after the year-end – 30 September 2017
The Registrar Accounts are due nine months after the company year-end – 30 September 2017
**Technically nine months and one day
Also, a Ltd company must retain its accounting and tax records for a period of six years after its year end. Longer in some instances.
A company pays 20% corporation tax on its net profit.
A company pays dividends out of post-tax profits and can’t pay more than its “distributable reserves”, ie the company must have more assets than liabilities after it has paid out the dividend.
Due to the limited liability status of LLP and Limited companies lenders often insist on a Directors (or Partners) personal guarantee. This puts the business owner in a similar position as a sole trader i.e. if the business goes bust they are personally liable.
If you are running your business from home it is always a good idea to run it past your local council first. Councils want local businesses to succeed but have to take into account the impact on your neighbours. For this reason, the council will be more interested in the activity of your business not whether it is Limited. The council will consider will there be a significant increase in traffic, will the business operate noisy machinery etc.
Whilst talking to your council about your business it may be a good idea to mention grants and help for start-up businesses, these forms of help change regularly and it is always worth asking the question.
Health & Safety
If you have business premises it is a legal requirement to display either the Health & Safety Law Poster or you can download the equivalent leaflets for free from www.healthandsafety.gov.uk There is also a lot of good advice for new start-up businesses on this website under “Health & Safety made simple”.
There are less legal restrictions on smaller businesses (less than five employees) with the emphasis on slips and trips and obvious work hazards.
It is a legal requirement for businesses with five or more employees to have a written Health and Safety policy.
It is a legal requirement for businesses with more than one director, or businesses with employees to have Employer Liability Insurance. Although in reality it usually comes as a package of Employer and Public Liability Insurance. The other legal insurance requirement is to ensure your motor vehicles that you use in the business are covered for that type of business use. Non legal insurance considerations include –
- Professional Indemnity insurance – especially if you are offering professional advice
- Keyman insurance – A good level of Keyman insurance is wise to keep your business going if you can’t work
- Assets cover
- Cyber liability (should your computer get hacked and clients’ data lost)
Business formations are complicated, this article is intended to highlight some of the considerations when starting up your own business, not provide a comprehensive check list. Please seek professional advice before starting up your new business. Accountants for example very often offer a free consultation to discuss your idea with a view to you becoming a future client.
Burton Mail – Wednesday 11 October 2017. Next month we will look at IR35 and deemed employment.