There are few more exciting experiences than starting your own business. Having an idea and then seeing it through to becoming a reality is deeply satisfying and it is a great feeling to know your income is all a result of your own ingenuity and hard work.
Any business owner will tell you how much sweat and dedication is involved in getting things off the ground to start with, but there are also a few key things to consider which can make the process a bit easier.
robinson+co have many years’ experience helping ventures in their early days. We’re very proud to be able to say that many of these businesses have remained our clients as they have grown to become highly successful over the years.
In this blog, robinson+co managing director Peter Ellwood discusses some of the important questions you should ask when setting up a new business.
Sole trader, partnership or limited?
The vast majority of businesses begin with an idea formed by either one or two people. In their early days they will be the driving force behind it and its sole member/s of staff.
There are primarily three legal structures for a business; sole trader, partnership or limited company.
A sole trader is the most simple structure, with the individual behind the business responsible for all the earnings and losses it makes. They are personally liable for any debt the business incurs.
A partnership operates in a similar way, except two or more people enter into an agreement to run the business and they are equally responsible for any debt.
In the case of both sole trader and partnership arrangements it is the individuals who own any assets or stock – not the business itself.
A third option is to form a limited company. The company exists as a separate entity to the individuals involved. This means if the company goes into debt then the owners’ assets are protected. However, a limited company involves many more rules and complexities than being a sole trader or partnership. This includes filing annual accounts with Companies House.
“If it’s a brand new business, being a sole trader or partnership is probably the best starting point in many cases,” says Peter.
“It’s a big enough step when you go into business yourself and so there’s a lot to be said for keeping it simple. If you go right into being a limited company, which is a bit more structured and a bit more regimented, there are a lot more rules and regulations and it involves a lot more cost in terms of people’s time.”
Of course, in time, it may make sense for a sole trader or partnership to ‘go limited’ as the business evolves.
“There is no right or wrong answer on when or how to do it,” says Peter.
“It’s just a matter of monitoring the business itself and how it’s trading. You need to get good advice from an accountant and make a judgment based on your individual circumstances.”
Limited companies also pay 19 per cent corporation tax, as opposed to sole traders or partnerships which usually pay between 20 per cent and 45 per cent income tax depending on what they earn.
“Say you start work as a sole trader and you immediately get some big contracts and begin making £60,000 a year. As a sole trader you will be charged 40 per cent income tax whereas if you went limited you would pay corporation tax,” says Peter.
“However, there are many more implications beyond just the question of tax. I strongly advise talking to an accountant who will help you make the right decision when you set up and give you advice on any changes which could be beneficial to make throughout the lifetime of the business.”
Should I charge VAT?
Value added tax (VAT) is a tax that is ultimately paid by individual customers rather than businesses.
Businesses that are registered for VAT pay it to Her Majesty’s Revenue and Customs, but also charge it for their goods and services. They can also claim VAT back on anything they have purchased for their business.
Any business that has a turnover of £85,000 or more annually must register for VAT. VAT registered businesses complete a VAT return for HMRC, usually every three months, outlining how much VAT they have paid and charged.
“If you’re starting a business from scratch it’s something that needs to be considered,” says Peter.
“A lot of it depends on who you’re working for. If you mainly work for VAT registered businesses, there’s probably a suggestion that getting VAT registered from day one is a benefit.
“Let’s say you’re a painter decorator, but you are mainly working for bigger companies. You would claim the VAT back on your van or any materials. There wouldn’t be an additional cost to your customers because they claim the VAT back but the benefit is you claim the VAT back on all materials, services and capital items.
“If your business is capital intensive and you’re going to buy a lot of assets at the start, it might be beneficial to get all the VAT back on the assets from day one.”
Employees or contractors?
In the early days you may well need to call on the help of others to run your business.
However, there are strict rules in place defining who counts as an employee and who counts as a subcontractor.
Peter says it is important to be aware of these distinctions and clear about which category the people you are working with fall into. Whether they are an employee or contractor has tax implications for your business and the worker themselves and also determines what level of responsibility you have to them.
“You’ve got to look at the rules and regulations around subcontractors. You need to be clear on this and honest with yourself about it before you start paying anyone,” says Peter.
“We sometimes come across businesses where they say they are using subcontractors but you find out that person works nine to five every day and gets paid holidays and things like that. That’s actually an employee relationship.
“If people are looking to take on subcontractors, they’ve got to be careful to make sure that the subcontractor is not going to be classed as an employee. This can be a very complex area to understand and advice from a tax or HR professional is often essential.”
How can I keep on top of cash flow?
‘Cash flow is king’ is an old cliche but it really is true when it comes to keeping any business healthy.
“In the early days of the business, when money might be tight and finance isn’t easy to come by, the importance of monitoring cash flow cannot be overstated,” says Peter.
“It doesn’t matter how good an idea you have or how solid your business plan is, if you can’t keep making purchases, paying creditors and covering your own costs then you will soon run into trouble.”
Accounting software can help businesses keep track of their finances by automatically sending invoices and prompting people for payments, as well as keeping track of expenses.
“Using a piece of accounting software like Sage can help you keep a handle on cash flow from day one,” says Peter.
“It can take some of the hard work and time out of monitoring cash flow and it will also help make things easier when it comes to filing accounts or filling in tax returns.
“It also pays dividends to get advice from a professional accountant. An accountant will be able to give you a clear indication of the state your business is in financially and what actions you need to take to maintain healthy cash flow. This really can make the difference between success and failure in those crucial early days.
“Banks are increasingly circumspect about lending money to businesses if they don’t have a clear history and so accurate record-keeping with an accountant can also help put you in a better position to apply for finance in the future.”
Get in touch with robinson+co for help
At robinson+co we help businesses to prosper and manage their finances at every stage of their development. Get in touch today for advice on financial management and planning. We’ll be only too happy to help.