Business Start-up Guide
I know how exciting setting up our own business can be, as I’ve already been on that journey with TDO Accounting. Along with over 30 years Finance & Accounting experience I understand just what it takes to set up a successful business, including the important steps you need to take right at the very start.
I’ve seen far too many good businesses get into trouble 1-2 years down the line, where they have failed to put in place some of the basic building blocks all new businesses require. This can lead to time diverted from growing the business, unexpected costs, penalties being imposed, sleepless nights and in the more extreme cases companies having to close.
These Top 10 Tips are designed to ensure that you get the basics right from the start, so you can focus on what you do best - growing your business!
1. Write a Business Plan
Once you have chosen and tested your business idea DO put together a business plan to outline in detail the objectives of your business and how you are planning to achieve them. While even the smallest self-employed business should draw up a business plan, if you’re applying for a business grant or a bank loan, it will be a requirement. Great planning from the start can be the difference between a business that is successful and a business that fails.
Writing a business plan can often seem to be a complicated and sometimes overwhelming task, but there is plenty of help available, ranging from on-line templates, to seeking advice from a local Accounting / Bookkeeping firm. Your business plan should follow a clear structure like the format detailed below, but tailored for your particular business:
Summary: use the summary to highlight the key points of your plan.
Business Overview: Introduction – note the purpose of your business: what business you’re in and why you started it. Describe your products and services. Current Position: What have you achieved so far. Outline the current position of your business. Explain what industry you operate in & where it sits in the business lifecycle. Competitive Advantage: What are the strengths & weaknesses of your competition? Explain your competitive advantages & the market niche(s) you’ve identified. What makes you confident your business will continue to grow & endure? Why is your business model effective. Growth plan: Give an overview of your goals & the future you plan for your business.
Business strategy: outline here your business strategy for – the next year, the next 3-5 years. Describe your business objectives & goals (make sure they are specific & measurable). Tactics: Outline the gap between where you are now & where you want to be. What extra resources will you need? Strategic issues: Outline the threats or opportunities that could impact your business during your strategic horizon. Core Values: Describe the core values that underpin your business.
Marketing: outline (SWOT) your marketing strengths, weaknesses, opportunities and threats. What are the critical success factors for your business. Market Research: What target market(s) has your market research established. Distribution channels: Describe the current marketing reach of your business and how you reach customers. Tactical promotion plan: explain how you will promote your business to customers. Marketing budget: detail your marketing budget for the year.
Team and management structure: outline your team, Explain the key staff, their positions and responsibilities. Management systems: describe the business systems you have in place to manage efficiently. What accounting software or systems do you use. Financial budgets and forecasts: attach financial budgets and forecasts to your business plan, including at a minimum P&L, Balance Sheet, Cash Flow. In your forecasts DO provide a number of scenario’s, as everything rarely goes to plan!
2. Select the Right Business Structure
Selecting the right business structure is important, as it will determine how your business will operate, along with the relevant tax implications. While there are a range of options, most businesses register as either a Sole Trader, Limited Company or Partnership. When considering which option to choose, there are a number of important key factors to consider:
A Sole Trader is where one person owns and runs the entire business. By opting for the sole trader route, you and your business are effectively one and the same – from both a tax and legal perspective. You can keep all your business’s profits after you’ve paid tax on them, but you are also personally responsible for any losses your business makes.
It is undoubtedly the easiest, cheapest and simplest method to set-up, out of all of the business structures available, while also providing greater privacy.
However, such a structure does not come without its’ drawbacks, the main one being personal liability. As sole trader businesses are not recognised as a separate legal entity -its liabilities and debts are your liabilities and debts. If the business fails with debts to be paid, not only will you lose your income, but you’d also have to pay the money owed from your assets, whether or not they’re connected to the business. Another perceived disadvantage is that a Sole Trader may not appear to have the prestige of a Limited Company. Even though in many cases it’s completely inaccurate, the public perception of sole traders is often of smaller, less long-standing and less professional business than their limited company counterparts.
A partnership is a type of business structure whereby two or more people pool together their investment and knowledge to create a business. Similar to a Sole Trader, in a partnership you and your partner (or partners) personally share responsibility for your business, including any losses your business makes.
A Private Limited Company is a separate legal entity to its owners (can be run by just one person), which means that personal assets of the owners are not at risk, only their investment in the business. If you form a Limited Company, you will most likely be a director of the company (you run it) and also a shareholder in the company (which means you own all or part of it). In a Private Limited Company, the owners privately hold shares. One of the main attractions in setting up a Limited company is limited liability. Business owners aren’t subject to any personal liability, with the debts of the company being separate from that of the owner(s). If things do go wrong, then the owner’s loss is limited to the investment made in the company.
Trading as a Limited Company can help to portray a more professional image, offer more flexibility when looking to raise finance and be more tax efficient especially as your earnings increase.
A Limited Company comes with more responsibilities than that of a Sole Trader, including legal duties and a much greater level of regulation and administration, which can be costly and time-consuming. There is also a lack of privacy as accounts are published by Companies House, which means details on Directors, and the company’s earnings will be publicly available.
Many new businesses start off as Sole Traders, but as they start to grow and establish themselves, they change their structure to a Limited Company.
3. Choose a Business Name
As a Sole Trader you can trade under your own name, or you can choose another name for your business to potentially help with marketing / branding. While you do not need to register your name, DO check it is not covered by an existing trademark. You must include your name and business name (if you have one) on official paperwork, for example invoices and letters.
When setting up a Limited Company you must choose a name for your business and it cannot be the same as another registered company’s name. If your name is too similar to another company’s name or trademark you may also have to change it if someone makes a complaint.
DO check the Companies House Register before you choose your name, to ensure it is not already in use!
Regardless of business structure, your company name cannot be offensive, contain a ‘sensitive’ word or expression, or suggest a connection with government or local authorities, unless you get permission.
4. Select an Accounting Year
As a Sole Trader you select any Accounting date you like (which would normally cover 12 months of income and expense). Does it matter which date you choose? The short answer is yes, as there can be potential tax implications. The simplest option is therefore to choose an accounting date to match the tax year, which HMRC considers to be the 1 April to 31 March.
For a Limited Company’s, their initial year end date is set as the end of the month in which it was incorporated (plus 12 months). However, you can shorten the accounting period as often as you like or lengthen it once every 5 years. It must be between 6 and 18 months long.
Some of the main factors to consider when choosing your company’s financial year-end, include Cashflow, Tax Planning & Internal Deadlines.
5. When to register with HMRC / Companies House
If you are either a Sole Trader or in a Partnership the process is relatively simple as you only need to register with HMRC:
Sole Trader: you need to tell HMRC that you pay tax through Self- Assessment as you’ll need to file a tax return every year.
Partnership: you must register your partnership for Self-Assessment with HMRC if you’re the ‘nominated partner’. This means you’re responsible for sending the partnership tax return. The other partners need to register separately. It is also important to have a written Partnership Agreement because it sets up all the rules, responsibilities, and financial details of a business partnership.
The process for registering a Limited Company is much more involved as follows:
Choose a Business Name:
Decide on the Shareholders:
Prepare Documents Agreeing how to run your Company: 1) ‘memorandum of association’ - a legal statement signed by all initial shareholders or guarantors agreeing to form the company. 2) ‘articles of association’ - written rules about running the company agreed by the shareholders or guarantors, directors and the company secretary
Check What Records You'll Need to Keep: records about the company itself. financial and accounting records
Register your Company with Companies House: you'll need to register an official address and choose a SIC code - this identifies what your company does. You should also be registered for Corporation Tax at the same time. Once registered you’ll get a ‘certificate of incorporation’, which confirms the company legally exists and shows the company number and date of formation.
6. Set-up a Bank Account
For a Limited Company it is legal requirement to have a separate bank account, as it is a distinct legal entity. This should be one of the first tasks after incorporation.
While it is not a legal requirement for Sole Traders to have a separate bank account, I would strongly recommend that you put one in place as there are definite advantages in keeping your business and personal finances separate. Having a separate business bank account will allow you to easily record business expenses and income, which will make completing your annual accounts and Self-Assessment Tax Return less time consuming.
There are a wide range of options available and choosing the right account for your business will depend on how your business operates and the expected level of turnover. DO take advantage of introductory offers, which can provide fee free banking for up to 18 months for new businesses.
7. Organise Insurance
While you quite rightly have high hopes for your business, on occasions things will go wrong. DO therefore make sure that from day 1, you have the appropriate insurance in place for your business. Some of the more common types of insurance for small businesses include:
Public liability insurance (PLI): protects businesses against losses suffered by people or customers injuring themselves or sustaining property damage due to the activity of business. It is of particular importance if you operate physical premises and regularly interact with customers in a third party or business owned premise.
Professional indemnity insurance (PII): PII is for businesses and professionals that provide advice or services to customers. It protects your business against any claims for damages or legal costs which arise due to act omission or breach of professional duty in the daily course of operations.
Employers’ liability insurance (ELI): ELI protects a business that employs staff from financial losses incurred when a staff member experiences a job-related illness or injury.
In certain business sectors / professions certain types of insurance are a legal requirement.
8. Appoint an Accountant / Bookkeeper
It is important to seek the advice of a good local Accountant/ Bookkeeper from the very start of setting up your new business, as they are likely to save your business substantially more money than they cost to hire, while also taking away the fear that you might not be complying with relevant tax legislation / company law.
They can initially help with drawing up a business plan, assist you on deciding on the best structure for your business, advise on the steps you need to take to ensure compliance with relevant Tax Legislation & Company Law, assist in opening the right business bank account and provide guidance on the financial systems/controls your business is required to put in place to maintain up-to-date, accurate books and records. I cannot stress enough how important it is to keep up to date and accurate financial records from the start. Failure to do this can result in losing significant time, money and in some cases criminal prosecution.
Longer term the Accountant/Bookkeeper, will ensure you meet all the prescribed tax & filing deadlines, your annual accounts are correctly complied and submitted to HMRC.
9. When to Register for VAT
Many new businesses simply ignore VAT as there is no requirement to register from day 1. This could prove to be a mistake for a couple of reasons:
you must register for VAT if your turnover is over £85,000 in a 12-month period and in a fast-growing business this level of turnover could be reached quite quickly. DO therefore monitor your turnover carefully to ensure that you register for VAT when required to do so.
it might also be beneficial to register voluntarily for VAT - for example if you sell to other VAT-registered businesses and want to reclaim the VAT on your expenses .
10. Understand Your Tax Liabilities
As you are looking at running a profitable business, the downside is that you will be required to pay tax! What tax you pay will depend on your business structure and regardless of whether you use an Accountant / Bookkeeper it is important to at least have a basic understanding.
Sole traders / Partners: will both pay Income Tax and National Insurance, with the tax rates and bands being exactly the same. The good news is that for the current tax year (2021/22), you can earn £12,570 before you start paying any Income Tax.
When you’re a Sole Trader, you pay income tax on your profits (or share of profits in a Partnership), not your total income. To work out your profits simply deduct your business expenses from your total income. Your profits along with any other personal income will need to be entered on an annual Self-Assessment Tax Return and submitted to HMRC. For the last tax year (6 April 2020/5 April 2021), paper tax returns must be filed by midnight 31 October 2021 & on-line tax returns by midnight 31 January 2022.
In terms of paying Tax, unless your last self-assessment tax bill was less than £1,000 or you’ve already paid more than 80% of all the tax you owe (for example through your tax code), you will need to pay tax in two instalments. These are called ‘Payments on account’ and are usually due by midnight on 31 January and 31 July.
Many small businesses encounter significant cash flow problems as they simply forget to budget for tax payments. To avoid this DO put money aside every month – ideally in a separate bank account, so you are not tempted to spend it! There are a variety of on-line tools, which can calculate your estimated tax bill for the year based on forecast earnings, while Accounting Software such as QuickBooks similar functionality .
Limited Companies: will pay Corporation Tax on taxable profits, which include doing business (‘trading profits’, investments and selling assets for more than they cost (‘chargeable gains’). The current Corporation Tax Rate is 19% and payment is normally 9 months and 1 day after the end of your ‘accounting period’ unless taxable profits are above £1.5 million.
A Limited Company can make dividend payments to shareholders. While the Company will not pay tax on the dividends, the shareholder may have to pay income tax if they are over the £2,000 allowance. How much tax you pay on dividends above the dividend allowance depends on your Income Tax band.
Fur further information on setting up your own business, take a look at www.gov.uk