Setting up a business is exciting but can also be daunting if this is the first time. Most people would not have had any exposure to accounting before they start their business, so this is a new thing to learn about.
This is a must before you start your business. This will allow you to get an idea of how you will market the business, fund it, and what you want to sell. The business plan can give you focus during the initial weeks and months of your business as a strategic tool.
There are several places where you can get guides on how to prepare a business plan. We have attached our template and some instructions on how to prepare your business plan.
It is worthwhile revisiting your business plan monthly so you can make sure you are still following the path you set out for yourself. Do not be afraid if you move away from something you have laid out in the plan if you feel it is not working. This could be changing your marketing strategy or who your suppliers are.
When setting up your business, you need to consider whether you create an unincorporated or incorporated entity. Each of the structures have different reporting, legal and tax implications which you need to consider.
An unincorporated business is commonly referred to as a Sole Trader if you are setting up a business as an individual, or a Partnership if you are going into business with someone else (or several people).
Low cost to create and get trading. This means you can start trading straight away and start making money. A partnership may require some initial costs to develop the partnership agreement and legal fee relating to this.
You have a lot more privacy of your financial performance, as your accounts are not published on the public record. This can limit the opportunities your competitors have to view your accounts.
If the business is loss-making in the first financial period, you can carry back these losses to your employment income (if you have some) to get a tax refund from HMRC. Here is our blog about this.
The owners are responsible for all of the business debts personally, so your creditors could come after your personal assets to repay the business debts if the business fails. This is known as unlimited liability.
The owners may have high taxes if the business has a good year. This is because all earnings in the year are taxed in that year, resulting in a high tax bill to HMRC.
Limited Companies are an incorporated business structure. There are also Limited Liability Partnerships (LLP), which is a partnership but the partners have limited liabilities. The below points refer to Limited Companies.
The shareholder and directors are not liable for the business debts if the business fails. This means that your assets cannot be used to pay off the business debts. However, if the directors are found to have misled creditors, they may be personally liable. This is called lifting the veil.
When the company is created on Companies House, no one else can use your company name. This can allow you to create a brand around your company without someone else using your business name.
Companies can enable the shareholders to be more tax-efficient than an unincorporated business. This is because companies are taxed at one rate whether their taxable profit is £1,000 or £1,000,000. The shareholders can then use dividends to withdraw the company's profit at a lower rate than if this was taken as a salary.
Company accounts have to be sent to Companies House annually. This means that anyone with access to the internet can view your financial statements. Your accounts have slightly fewer disclosures when sent to Companies House than full accounts prepared for internal use, but people can still get a lot of information from them.
The initial set-up costs will be higher than a sole trader, and there are higher administrative costs. Although you can set a company for £12 from the Companies House website, you may want to create the company in a certain way with the unique article of association, which will incur a cost to produce. You also have an annual fee that has to be paid to Companies House. Generally, accountancy fees are higher as company accounts require more time to prepare than unincorporated accounts.
Set-up a business bank account. As a company, you cannot use a personal account as a company bank account. It is not necessary to create a new bank account as a sole trader, but we would recommend it. This can allow you to get income into this account and pay your business expenses from this. It will also be easier for an accountant to prepare accounts for you and see how much money the business has at a given time.
Do not be afraid to spend money. When creating a business, you will come across some areas that you have not come across before. This could be the business's accounting requirements, what marketing strategies you will use, or what IT equipment you will need. You could investigate these areas and do them yourself, but spending time on these areas is time you are not using to make money, which is what you are good at.
Know your situation. We would recommend working out how much money you need to live your life to a standard that you are happy with. This may mean that you are using savings before the business can be self-efficient or limiting your business drawings to ensure you have enough cash to meet your obligation to HMRC or creditors. Everyone's situation is different, so work out what is best for you.
Register with HMRC. This is something that is sometimes overlooked when you start your business. You should register yourself as self-employed with HMRC when you start your business. Companies will be registered with HMRC when created, so you do not need to do this. We would also recommend that you create your government gateway account as you do not know when you will need to check something with HMRC.
We have just set up our business, so we have just undertaken the points above. The points are just guides, so we would recommend speaking to other people who have set up their business to see what they have done and if they have any tips for you. We have found that people have been very positive and given us some useful pointers.