Starting a business

Starting a business is exciting. However, there are many practical decisions to make before a new business can get off the ground. In fact, setting a business up correctly from inception is vital as it can help avoid many pitfalls later. It is therefore a good idea to have a realistic vision of where the business is going.

While few things beat the buzz of waking up in the morning and knowing that you are your own boss, running your own business comes with a host of practical considerations and legal responsibilities that you may not have thought about.

Are you going to open a shop, set up a website to trade goods from abroad, manufacture your own product, or sell your professional services? Do you have a brilliant idea that has never been tried before and you're itching to put into action, or are you sticking with what you already do? Whichever avenue you take, make sure you thoroughly research your chosen market.

Once you've settled on the type of business you want to run, the next thing to think about is how you want to legally structure that business. The structure that you choose will have a big impact on the type and amount of taxes you pay; the cost of running your business; the administrative burden including the records you need to keep; your filing requirements; the level of red tape you face; your exposure in the event that your business fails or is legally pursued; and your legal responsibilities.

You will need to think about how you are going to finance your business. Does your idea involve substantial set-up costs or will you be able to work out of your spare room on your laptop? Do you have enough money of your own to finance the business, perhaps because of a redundancy payment, or will you need to approach banks or other finance providers? If you want to convince lenders that you are a safe bet, you must have a good idea of how much money you want and what you intend to use it for.

It is important that you do as much research and planning as possible in the early stages of your business so that you don't waste time and money on an unprofitable venture.

Structuring your business

There are a number of factors to consider when choosing a structure for your business. So it helps to get an accountant's advice.

Deciding on the structure of your business is one of the most important decisions you make when you first start out as it affects your legal responsibilities, how the general public and the market view your business, administrative burden, liabilities and the tax you pay, both direct tax (ie income tax, corporation tax etc) and indirect tax (ie VAT, stamp duty etc).

But, although all types of business structure have advantages and disadvantages, the good news is that you can switch to a different structure at a later date if the one you pick at the outset no longer meets your requirements. It is essential that you discuss this with your business adviser/accountant.

When structuring your business, the main options are:

  • Sole trader
  • Partnership
  • Limited company

Sole trader

This is the simplest way to run your own business as you don't have to pay registration fees and it is relatively easy to set up. Red tape is kept to a minimum since you just need to record your income and expenses, register for self-assessment with HM Revenue & Customs (HMRC) and complete an annual self-assessment tax return. A business needs to inform HMRC within three months of starting business.

However, you are personally liable for any debts that your business runs up and this structure will probably not be the most tax-efficient one for businesses with a turnover of over £50,000.

Partnership

In a partnership, two or more people (the partners or members) share the risks, costs and responsibilities of being in business with the profits normally distributed among them.

Limited liability partnerships offer greater legal protection to partners than an ordinary partnership. This is because a partner's liability is limited to the amount of money they have invested in the business. But, unlike ordinary partnerships, limited liability partnerships have to send an annual return to, and file accounts with, Companies House.

Partnerships, both incorporated and unincorporated, are transparent entities for tax. Though the partnership has to submit a tax return, tax is only paid individually through the partners' own tax returns.

Limited company

Private limited companies have the letters ‘ltd' after their name. They offer greater legal protection to their owners than either sole trader businesses or partnerships since they are legal entities that exist in their own right.

Companies must take responsibility for their own finances and shareholders are not responsible for a company's debts unless they have provided guarantees - for example, against a bank loan.

Companies must be registered (incorporated) at Companies House and they must file annual accounts and annual returns with Companies House. In addition, the accounts may require to be audited if the audit threshold is breeched.

There are also public companies that have the letters ‘plc' after their name. These companies can be listed on stock exchanges such as the London Stock Exchange or the Alternative Investment Market and their shares can be bought and sold by the general public.

There are further restrictions such as a shorter filing deadline, minimum share capital. Careful consideration must be given before incorporating as a plc.

Registering a company

Registering a company is straightforward and inexpensive.

Registering a company is usually a straightforward process. It can be registered online using the Companies House web incorporation service for a fee of £15.

If you choose to register your company online, you will need to have the following to hand before you start:

  • name and address of the company
  • details of the director(s) and the company secretary if you plan to have one
  • a breakdown of shareholder capital (ie how many shares are being allocated to different individuals and the value of those shares) and the details of each shareholder
  • method of payment.

Before you choose a name for your company, you should check the Companies House WebCheck service to make sure that name is not already being used by another company. You should also review the UK Intellectual Property Office's Trade Marks Register to establish that the proposed name does not infringe on an existing trademark.

Your company will need to have a memorandum of association that details the limited company's name, registered office and nature of business. It must also have articles of association that set out the rules for running the company.

If you use the Companies House web incorporation service, the memorandum will be sent to you electronically in PDF format – along with your certificate of incorporation. You can download model articles of association from the Companies House website. If these documents are used without amendment, you do not need to send a copy of them back to Companies House.

Forms for the memorandum and articles of association can be purchased from a legal stationer or company formation agent, or drafted by a solicitor specialising in this area.

Start-up costs

It is important to draw up a budget for your start-up costs at the outset so that you don't overspend in some areas and fall short in others. This is normal business practice and is important at the start and throughout the business's life.

Starting a business does not have to be expensive; nevertheless there will be a number of costs that you will have to factor into your initial budget.

No two businesses are the same and the costs that you will incur will largely depend on the type of industry that you are in and the scale of your business. Your costs may include:

  • company formation and filing costs
  • market research
  • branding
  • advertising
  • IT equipment and software, including accounting software
  • internet domain name registration
  • stock
  • raw materials
  • business premises, rates and utility bills
  • insurance
  • internet and phone rental
  • staff salaries
  • business cards and stationery
  • vehicle leasing
  • equipment and machinery
  • finance and banking costs
  • accountancy fees
  • legal fees

It is a good idea to draw up a budget for your business's set-up costs and allocate a sum of money to each cost. That way, you are less likely to overspend on a laptop with all the latest features and then find that you can't afford to pay the phone bill.

You may already have a good understanding of what some of your costs will be, but others could come as a big surprise to you. Advertising, for example, can be very expensive if you want to buy space in a glossy magazine. Forewarned is forearmed so thoroughly research all your start-up costs – and make sure you have sufficient budget for them – before you start trading.

In the early days, when you probably won't have much money coming in, it is particularly important that you keep a tight grip on your costs and resist the urge to splash out unnecessarily.

Record keeping is very important in business and it is essential that you keep an accurate log of your income and expenses to prepare your business accounts at the end of the financial year.

You should record all the expenses you incur to start the business, even if these were before you registered your business with HMRC or Companies House. You can usually claim back expenses made in the six-month period prior to the date the business started. Expenses are usually allowable as long as they were made wholly and exclusively for business purposes.

If you have a simple business, or you are a freelancer, you can use Excel spreadsheets or the online accounting software FreeAgent for your accounts. More complicated businesses will probably need to use software packages from providers such as Sage, Iris, QuickBooks, CCH or KashFlow (for further providers, search online).

Business plans and cashflow management

For finance providers a good business plan is essential, particularly for start-ups and new businesses where little other information is available.

Established businesses will also benefit from a good plan and it is often used as a benchmark to make sure the business is going in the right direction. There are a vast number of business plan formats from the very simple to the hugely complex with several attached appendices. It is therefore important to establish the business plan's requirements and choose the most appropriate format.

See more information, example business plans and how to write a good plan

In addition to maintaining a business plan, a good grasp on cashflow management is critical to running a successful business. You must be able to pay your bills while you await payment from your customers. There are many well-documented cases of businesses failing not because they weren't profitable but due to poor cashflow management.

There will probably be a time lag between your business providing its goods or services and getting paid. This means you have to make sure there is sufficient cash in your company's bank account for it to pay all its bills in the meantime – whether these relate to invoices from suppliers, employees' wages, rent, rates, tax, VAT or anything else.

The general principle of cashflow management is that you should speed up your cash inflows (customer payments, interest from bank accounts etc.) and slow down your cash outflows within reason (purchase of stock and equipment, loan repayments and tax charges etc.) as much as possible. Also, as businesses naturally have peaks and troughs, it is important that you put money away during the peaks so that you can dip into it during the troughs.

See more information, a template cashflow forecast and how to use it