Considerations when starting a business

It is the ambi­tion of many peo­ple to run their own busi­ness. Some may have been made redun­dant and find them­selves with free time and finan­cial resources. Oth­ers make the deci­sion to start up in busi­ness to be more inde­pen­dent and obtain the full finan­cial reward for their efforts.

What­ev­er the rea­son, a num­ber of dan­gers exist. Prob­a­bly the great­est con­cern is the pos­si­bil­i­ty of busi­ness fail­ure.

Read on for guid­ance on some of the fac­tors which need to be con­sid­ered before trad­ing begins.

This fact­sheet can­not cater for every pos­si­bil­i­ty and any deci­sions should be sup­port­ed by pro­fes­sion­al advice.

Initial considerations

In addi­tion to these gen­er­al con­sid­er­a­tions there are a num­ber of more spe­cif­ic mat­ters.

The business plan

The busi­ness plan is the key to suc­cess. If you need finance, no bank man­ag­er will lend mon­ey with­out a sen­si­ble plan.

Your plan should pro­vide a thor­ough exam­i­na­tion of the way in which the busi­ness will com­mence and devel­op. It should describe the busi­ness, prod­uct or ser­vice, mar­ket, mode of oper­a­tion, cap­i­tal require­ments and pro­ject­ed finan­cial results.

Business structure

There are three com­mon types of busi­ness struc­ture:

Sole trad­er

This is the sim­plest form of busi­ness since it can be estab­lished with­out legal for­mal­i­ty. How­ev­er, the busi­ness of a sole trad­er is not dis­tin­guished from the pro­pri­etor’s per­son­al affairs.

Part­ner­ship

A part­ner­ship is sim­i­lar in nature to a sole trad­er but because more peo­ple are involved it is advis­able to draw up a writ­ten agree­ment and for all part­ners to be aware of the terms of the part­ner­ship. Again the busi­ness and per­son­al affairs of the part­ners are not legal­ly sep­a­rate. A fur­ther pos­si­bil­i­ty is to use what is known as a Lim­it­ed Lia­bil­i­ty Part­ner­ship (LLP).

Com­pa­ny

The busi­ness affairs are sep­a­rate from the per­son­al affairs of the own­ers, but there are legal reg­u­la­tions to com­ply with.

The appro­pri­ate struc­ture will depend on a num­ber of fac­tors, includ­ing con­sid­er­a­tion of tax­a­tion impli­ca­tions, the legal enti­ty, own­er­ship and lia­bil­i­ty.

Business stationery

There are min­i­mum require­ments for the con­tents of busi­ness sta­tionery, both paper and elec­tron­ic, which will depend on the type of busi­ness struc­ture.

Books and records

All busi­ness­es need to keep records. They can be main­tained by hand or may be com­put­erised but should con­tain details of pay­ments, receipts, cred­it pur­chas­es and sales, assets and lia­bil­i­ties. If you are con­sid­er­ing pur­chas­ing com­put­er soft­ware to main­tain your records, obtain pro­fes­sion­al advice.

Accounts

The books and records are used to pro­duce the accounts. If the records are well kept it will be eas­i­er to put togeth­er the accounts. Accounts must be pre­pared for HMRC and if a com­pa­ny is formed there are strict legal require­ments as to their lay­out. The accounts and com­pa­ny tax return must be sub­mit­ted elec­tron­i­cal­ly to HMRC in a spe­cif­ic for­mat (iXBRL).

A com­pa­ny and a LLP may need to have an audit and will need to make the accounts pub­licly avail­able by fil­ing them at Com­pa­nies House with­in a strict time lim­it.

Taxation

When start­ing in busi­ness, tax­a­tion aspects must be con­sid­ered.

Tax­a­tion on prof­its

The type and rate of tax­a­tion will depend on the form of busi­ness struc­ture. How­ev­er, the tax­able prof­it will nor­mal­ly dif­fer from the prof­it shown in the accounts due to cer­tain expens­es which are not allowed for tax pur­pos­es and the tim­ing of some tax allowances.

Nation­al Insur­ance (NI)

The rates of NI con­tri­bu­tions are gen­er­al­ly low­er for a sole trad­er or part­ner­ship than for a direc­tor of a com­pa­ny but the enti­tle­ments can also dif­fer. In a com­pa­ny, it may be pos­si­ble to avoid NI by pay­ing div­i­dends rather than salary.

Val­ue Added Tax (VAT)

Cor­rect­ly account­ing for VAT is an essen­tial part of any busi­ness and neglect may result in a sig­nif­i­cant loss.

When start­ing a busi­ness you should con­sid­er the need to reg­is­ter for VAT. If the val­ue of your tax­able sales or ser­vices exceeds the reg­is­tra­tion lim­it you will be oblig­ed to reg­is­ter. If you are sub­mit­ting VAT returns you will also need to con­sid­er appro­pri­ate soft­ware to ensure that you com­ply with the Mak­ing Tax Dig­i­tal require­ments.

Employing others

For the busi­ness to get off the ground or to enable expan­sion, it may be nec­es­sary to employ staff.

It is the employ­er’s respon­si­bil­i­ty to advise HMRC of the wages due to employ­ees and to deduct income tax and nation­al insur­ance and to account for stu­dent loan deduc­tions under PAYE. The deduc­tions must then be paid over to HMRC. Pay­roll records should be care­ful­ly main­tained.

Under Real Time Infor­ma­tion an employ­er must advise HMRC of wages and deduc­tions ‘on or before’ the time they are paid over to the employ­ee.

Employ­ers are also required to auto­mat­i­cal­ly enrol all eli­gi­ble employ­ees in a pen­sion scheme and to make con­tri­bu­tions to that scheme on their behalf. Enrol­ment may be either into an occu­pa­tion­al pen­sion scheme or the Nation­al Employ­ment Sav­ings Trust (NEST).

You will also need to be famil­iar with employ­ment law.

Premises

Insurance

Com­pre­hen­sive insur­ance for busi­ness motor vehi­cles and employ­er’s lia­bil­i­ty insur­ance are a legal require­ment. Oth­er types of insur­ance such as pub­lic lia­bil­i­ty, con­se­quen­tial loss, busi­ness assets, Key­man and bad debts should be con­sid­ered.

Pensions

Putting mon­ey into a pen­sion scheme can be a way of sav­ing for retire­ment because of the favourable tax rules.