If you're thinking of a new beginning this New Year and going it alone, there are lots of factors to consider. In this introductory guide, Jason Alderson from Burgess Hodgson, a specialist firm working with small businesses, provides a brief summary of what you need to review when starting a business.
Running your own business can be hugely rewarding but there will be a lot of hard work to come. New business owners will need to make some key decisions – and some of these choices could decide if the business survives or fails.
Structure
One of the first decisions a company needs to take is what structure the business should take. Essentially the choice comes down to two options and these are:
- Sole trader/partnership
- Limited company
A sole trade/partnership structure is the simplest form of structure and is often the most appropriate for start-up businesses. However it is important to remember that these structures do not offer limited liability, meaning that the owner’s personal assets may be at risk.
Limited companies are more complex and there are more administrative requirements – however they do provide limited liability. Limited companies can also offer taxation advantages but this should not be the over-riding concern when deciding on a structure for a new business. The overall decision on the structure will depend very much on what the business will do and how the owners wish to develop the business in the future.
Certainly the traditional model would be for a new business to start as a sole trade/partnership and then look to convert into a limited company when the business becomes successful – however with the taxation benefits of limited companies this is changing somewhat.
Taxation
Taxation has been in the headlines in recent years and, given the perilous state of the public finances, it looks as though we will be in a relatively high tax economy over the next few years. This makes it more important than ever to manage your tax affairs effectively. As discussed above the structure that the business takes will have a big impact on how a profitable business is taxed.
If the business is set up as a sole trade/partnership then the owner(s) will become self employed and will need to complete Self Assessment tax returns each year. The owner(s) will be taxed on their share of the profits from the business each year – with tax payments normally due in January and July.
If the new business is a limited company then the taxation of profits is somewhat different. Limited companies are separate entities for both taxation and legal purposes. If the company makes profits then these will be subject to corporation tax in the company itself.
The owners will also be subject to personal taxation on any funds they withdraw from the business. Generally there are two options for taking funds from a limited company, salary or dividends – but dividends are often the most tax efficient way of extracting funds.
Payroll and PAYE
If a new business is to take on employees then they will need to start dealing with payroll and PAYE on a monthly basis. This will mean preparing payslips for the employees each month and paying PAYE over to HMRC each month. New companies will need to set up a PAYE scheme and obtain the appropriate PAYE references.
VAT
If your business will be making sales of more than £73,000 in a year then you will need to register your business for VAT – and then add VAT to your invoices. Whether this means that your prices will go up will depend on whether your customers are other businesses who can recover VAT or individuals who can’t. The standard rate of VAT is currently 20%.
Small businesses should certainly consider the flat rate VAT scheme which simplifies the process of completing a VAT return by applying a flat rate to your gross sales (usually between 9% and 14%) and paying this amount to HMRC rather than calculating the VAT at 20% on all of your sales invoices and deducting the VAT on any purchase invoices.
Registering for VAT will mean that you will need to complete and submit quarterly VAT returns and pay any VAT due to HMRC. VAT returns are now required to be filed online and are due to be filed and paid by the 7th of the second month following the end of your VAT quarter. HMRC offer a small cashflow advantage if you set up a Direct Debit which is due on the 10th rather than the 7th.
Administration
If you chose to create a new limited company then there are various administrative matters that need to be dealt with. A limited company is a separate legal entity and various documents relating to the company are public records and are available on the Companies House website.
The first decision to be taken will be the name of the company. The company name can’t be the same or very similar to an existing company – if you want to check your prospective company name this can be done using the
WebCheck service on the Companies House website.
Once the company has been set up there will be various matters to be dealt with on an annual basis. The key requirements are that the company must submit an annual return each year summarising the legal information about the company and that annual accounts must be submitted to Companies House each year.
Other points to consider
Location will obviously vary depending on your type of business but there are significant tax breaks for businesses set up in the Enterprise Zones announced in the 2011 budget. Further details on these tax breaks and locations of the sites can be found
here.Over the first year or so of trading budgeting and good bookkeeping will be pivotal in the success of your business, enabling you to keep an eye on cashflow (and whether you could benefit from services such as debt factoring), help identify if any jobs are loss making and set you on the best possible path going forward. There are a number of very good accounting software packages available which your accountant will be able to recommend.
For more background on all of these aspects of setting up a business, follow the links below:
Expert guides
Other Start-up resources
Jason Alderson is a senior manager at Burgess Hodgson, a company that has helped set up thousands of businesses and deals with payroll and PAYE for local firms. Are you thinking of starting a new business this year? Are there any challenges you need help overcoming or do you have any advice to give to others in the same position?