Whether you are focused on starting a business so that you can be your own boss, you’ve spotted a gap in the market, or have an innovative idea that’s never been tried before, there are lots of reasons for starting your own business. However, besides just passion and enthusiasm, making your business a success requires some careful thought and planning. Here is a brief guide to get you started.
The four options for starting a business – trading structures
One of the key decisions that you need to make when starting a business is what type of business structure you would like to have. There are a number of different options and they all have their own advantages and disadvantages as we will explain.
A sole trader describes a business that is owned and controlled by just one person. These types of businesses are easy to set up and normally only a small amount of capital is required to start up. You are able to maintain control over key decisions and your wage bill is normally low as there are very few or even no other employees. However, there are also downsides to operating as a sole trader. First of all, as you are the only employee you may struggle to work sociable hours and take holiday or time off when you are ill. You may also be unable to develop the business as you are limited by the money you personally own. You are also personally liable for any business debts.
Partnerships describe a business that is owned by two people or more. With this type of business, a ‘deed’ contract is drawn up by a solicitor that details exactly how much each party has contributed to the business and how exactly profits and losses will be divided along the way. One of the main advantages of setting up a business as a partnership is the opportunity to diversify and allow each partner to focus on their strengths. So, if for instance, one partner was particularly talented at marketing or business development then that could be their prime focus. Another benefit of working in partnership is that it allows you to bounce ideas off each other. However, there are downsides to working as a partnership also. Working as a partnership is not for everyone and you might find that disputes can arise over business decisions and over time partners may become dissatisfied with the way the terms are set out in their original deed. Partners are responsible for any business debts owed.
A Limited Liability Partnership (LLP) is similar to a standard partnership structure in that it is a structure set up by two or more people with each partner taxed as self-employed rather than the business as a whole being taxed and directors being paid a salary. LLP’s are seen as an individual person in the eyes of the law. However, they have limited liability which means that they are only liable for the amount that they have invested or agreed to contribute towards the company’s debts. Any person made a partner is allowed to manage the business, but it is important to have a formal agreement drawn up by a solicitor to outline any necessary conditions.
Another type of business structure that you could choose to operate as is a limited company. A limited company is a separate entity under the eyes of the law which means that the firm’s finances are separate from the owner’s finances. This means that personal possessions cannot be taken to pay off company debts like they can as a sole trader or partnership. With a limited company, directors run the business, and shareholders fund it, which allows for more capital to be raised and less risk to the owner. However, quite often a limited company begins with just one person who acts as both a shareholder and a director. Within this type of business structure, there are private limited companies and public limited companies. Private limited companies do not trade their shares on the stock exchange and may be of a smaller nature than public limited companies that do trade shares on the stock exchange.
As your business begins to take shape you will need to register your company and consider protecting your brand, name, or idea. Initially, you will need to inform HM Revenue & Customs (HMRC) and if you are starting a limited company or limited liability partnership then you will also need to inform Companies House.
At this point, it is also worth considering whether you will operate your business from home, or instead rent or purchase a business address, both of which will have their own implications. If you operate from home then you may need to seek permission from your landlord or mortgage provider, local planning office, or local council. Alternatively, if you wish to operate from a separate address then you may be required to pay business rates and follow health and safety regulations.
By law, you are required to register with HMRC as soon as you begin earning from your business activity. This does not mean when you begin making a profit, rather as soon as you begin receiving income from your activities.
Sole traders need to register as self-employed with the HMRC. If you are registering as self-employed then your tax and National Insurance will be calculated through a self-assessment form. To get started you should complete a CWF1 form which can be found here or alternatively you can call the HMRC’s specialist helpline for newly self-employed people on 0845 915 4515.
For other more complex types of business structures like partnerships, LLP’s, and limited companies you should seek advice from a professional service such as a company formation agent, solicitor, or accountant who will be able to act as an agent for you when registering with HMRC.
There are lots of benefits and reliefs that are made available to new businesses in the UK which are worth researching. These include stamp duty relief, research and development relief, and capital gains allowance.
Depending on the size and nature of your business it may be worth seeking further advice from a professional accountant to help your new business understand and complete their tax obligations, as well as make the most of any available relief that is out there.
Companies House incorporates, dissolves, and registers limited companies in the UK. You only need to register with Companies House if you are setting up your business as a limited company or LLP. You do not need to register with Companies House if you are a sole trader. The process of registering with Companies House officially incorporates you as a company, detailing your company name, office address, and the nature of your business. You can either complete this process yourself online or have it carried out by a qualified solicitor, accountant, or company formation agent.
Articles of Association act as a form of constitution for a business and any business that is registering as a limited company in the UK will need to have them drafted with a memorandum.
The simplest way to understand these two documents is that one sets up the company and the other says how it will be operated and owned. The memorandum lists the names of members and details their wishes to form a company and must be submitted to Companies House with the Articles of Association. The Articles of Association act as a form of constitution for the business. Articles are normally drafted to include information such as the liabilities, powers and responsibilities, meetings of directors, delegations and roles, how to appoint and remove directors, communication and records, indemnities and insurances, and shares and dividends. Articles of Association act as a handbook for any disputes and disruptions that happen to a limited company and are therefore incredibly important, which is why you should always seek the advice of a qualified and experienced solicitor to help you in drafting your articles to your specific scenario.
Whether working with colleagues, other businesses, or suppliers there will be times where you need to work with external or internal partners. However, it is important that when doing so you have some protection in place for if things go wrong – which is where Partnership Agreements come into play. A Partnership Agreement is a signed document that covers the various aspects of your business partnership, such as the purpose of the partnership, contributions, types of partners and duties, how to admit new partners, decision making, distributions of profits and losses, restrictive covenants and other areas too. Having a well-drafted Partnership Agreement in place that plans for every possible scenario can protect you should conflicts arise.
As your business develops there may come a time where you decide it is necessary to hire employees. While employees can help your business to grow they also need careful management in order to stay on the right side of the law. Here are some areas that you need to consider.
In the UK workers are entitled to receive the National Minimum Wage or National Living Wage if a worker is aged over 25. There are also reduced minimum wages for workers who are employed as apprentices.
In the UK there are penalties for employing illegal workers and employers are obligated to check an employee’s ‘right to work’ documents. Failing to do so can lead to a prison sentence of up to five years and an unlimited fine. Depending on the nature of your business, you may also need to request a DBS (Disclosure & Barring Service) check for your employees to check their criminal records before you can safely employ them.
Employer’s liability insurance protects against any injuries or illnesses that your employers develop as a result of working for your business. For most businesses there is a legal requirement to have employer’s liability insurance at a level of at least £5 million and failing to do so can result in fines of up to £2500 for every day that you remain uninsured. If you operate as a sole trader and have no employees then you do not need to get this type of insurance, however, there may be other insurances such as public liability insurance which it could be beneficial to have in place.
Failing to outline terms of employment for any workers that you take on can prove costly for a business. If no contract is in place then statutory employment laws will apply, with the outcome often favoured in the weight of the employee rather than the employer. A statement of employment should cover key information of employment including details of things like the personal details of both parties, dates of employment, payment/salary information (including how it is calculated and paid), hours of work or shift patterns, overtime details, holiday entitlement, pension schemes, required notice upon termination of employment, descriptions of job roles and where work will take place, disciplinary and complaints processes, etc. However, a solicitor can draft a more exhaustive employment contract that takes on board the particular needs of the business.
Almost every type of business will require some form of networking with suppliers and partners, who will help your business to operate, improve and generate new business. Do your research on your particular industry and try and discover where and when the leaders in your market get together. You may find that exhibiting at a trade show or joining associations and organisations related to your industry can be particularly helpful in terms of sourcing suppliers and partners. When it comes to sourcing suppliers always be sure to get the very best deal by speaking to different suppliers, sourcing competitive quotes, and developing relationships based on mutual respect and trust.
Setting up a business can be a tricky and complicated affair. Here at Payroll Heaven, we have extensive experience in helping businesses to move forward through their formation, as well as providing them with support and protection every step of the way to set them up for a successful future. We pride ourselves on building long-term relationships with our business clients, so if you require help with forming your business, protecting your assets, have an ongoing dispute, or any other query then please contact us on 0843 289 2227 to arrange an initial consultation.