How to start a business
Perhaps you have taken early retirement or redundancy and are looking for a fresh challenge? Or, you want to start a business on the side of your current employment? With the New Year just around the corner, you might even have it as a resolution to create your own business in 2021.
If so, sadly, it isn’t just a case of getting on with your idea - you will need to think about the more practical matters in setting up a business first. Doing this will give your concept a solid foundation from which you can build your business.
The Money Advice Service usefully summarises the principal headings under which you need to move forward – deciding on your business structure, preparing your budget, and arranging the tax affairs of your new business:
In terms of its structure, setting up a business can mean many different things – you might be a sole trader, form a partnership, set up a limited liability company, or even a limited partnership;
- this is likely to prove your most flexible option and is undoubtedly the simplest business structure;
- you remain in control and keep any profits made by the business, paying only the tax on the income you earn, of course, after registering with HM Revenue & Customs that you are self-employed;
- the biggest drawback is the absence of any demarcation between you and your business. While the profits of the business are yours, so too are any losses, for which you remain personally liable;
- you may be able to spread some of that business risk by creating a partnership with one or more others;
- under such an arrangement, partners bear joint liability for the debts of the business – which means that each partner may need to pay the whole debt or share payment with the other partner or partners;
Limited liability company
- when you set up a limited liability company (formally, a private limited company), it takes on a completely separate identity – there is a clear distinction between you and your company, which are two separate entities in law;
- the company needs a director, who may be yourself, and at least one shareholder, who might also be yourself;
- shareholders’ liabilities for the debts of the company are limited to the value of their shares – hence the title limited liability company;
- your company is incorporated at Companies House, where you must also submit the company’s annual accounts;
As the title suggests, a limited partnership is something of a hybrid – of unlimited and limited liabilities. A general partner is responsible for running the business and assumes unlimited liability for its debts – the limited partner’s liability is limited to the sum they originally invested in the company.
Preparing your budget
Whatever your business idea and whatever kind of operation you aim to be running, any enterprise is almost certain to involve start-up and running costs. You need to know these costs since the initial funding is likely to come from your own pocket – or savings – and subsequent expenses covered by the income generated by your trading.
The operating costs you incur will depend on the nature and scale of the business you intend to be running, of course, but common examples include:
- unless you will be working from home, you may need to rent office space, a workshop or retail outlet suitable for your business;
- building a website or e-commerce site;
- the cost of marketing and advertising materials;
- investing in certain tools of your trade or office equipment such as computers, printers, and communications systems;
- insurance – for your premises, stock and personal indemnity.
You’ll also need to factor in your personal living costs for while your business is starting up and you build profits in the company. You don’t want to be in the position where you are trying to grow your enterprise but are unable to support yourself financially, as you will lose focus on your business.
As a sole trader, you might have run your business using your personal bank account, but it makes sense to set up a separate business account to keep the respective finances distinct from one another.
If you have incorporated your business as a private limited company, a business bank account is essential.
Many banks offer free banking or limited monthly services charges to businesses that are starting up. Take some time to shop around to see which bank offers the most suitable solution for you.
Arranging your tax affairs
The rules are relatively simple. If you are a sole trader or in a partnership, you must register as self-employed and submit a self-assessment tax return for the payment of income tax. If you incorporated a private limited company, you pay a standard rate of corporation tax – currently, 19%.
Starting your own business can be a mixture of exciting, daunting and everything in between. Getting the foundations right, as discussed in the points above, will help set you on the road to success.
This data is correct as at the time of writing.