What are the key areas you need to consider when starting a business?
Business Start Ups
2020 was an exceptionally good year for new business start-ups. The Guardian reported that the number of new companies incorporated in the third quarter of 2020 increased by 51,269, or 30%, compared with the same period in the previous year – the largest increase since records began.
This may come as a surprise to many, but it is not unusual for recessions to generate new business start-ups, with some of these going on to become household names.
The first lockdown of 2020 saw a mass movement to home working and large numbers of non-key workers on furlough leave. Whilst some filled their time with the perfection of banana bread, PE with Joe and home-schooling, others saw it as an opportunity to give it a go with a new invention, a gap in the market, or the desire to strike out alone and be their own boss.
Acorns to oak trees
You don’t have to immediately jump into the deep end with everything you have. Businesses often start small, sometimes with an initial hobby to pass time and bring in enough money to pay the bills, before it turns into your dream business.
However, a hobby does not have to be professional, but a business does.
Whether you are a complete novice or returning to business, make sure you are ready by reading through our key areas to consider. Even if you have run a business before, getting up to date with current legislation, automatic enrolment, Making Tax Digital and Brexit have all added some new complexities over the last few years.
☑ Write a business plan
Your business plan will be the key to your success. Your plan should provide a thorough examination of the way in which the business will commence and how it will develop. In preparing the plan, you should consider your current personal finance requirements, as well as any goals you want to achieve. It should describe the business, product or service, market, mode of operation, capital requirements and projected financial results.
A business plan will be essential if you are looking to secure investment or a loan as it will demonstrate the viability of your business. Take heed of the Dragon’s Den — things normally go well until the numbers are discussed! If this is not your area of expertise, seek assistance.
Even if you do not require finance, it is a good idea for any business to prepare a business plan. A plan will give the business a strategic direction and a benchmark to monitor actual results against.
☑ Choose a suitable business structure
This will determine the legal status of the business and what taxes you will pay. Options available include:
Sole Trader — sole traders are individual business owners. They are personally liable for all business debts. To operate as a sole trader, you must register as self-employed with HMRC as soon as you start trading and will be required to submit your accounting information annually on a self-assessment tax return. Income tax and National Insurance liabilities are calculated on taxable profits and are paid twice a year in January and July.
Partnership — this structure can be used when two or more business partners set up a business together. All partners will be fully responsible for any business debts. The partnership must be registered with HMRC, and each individual partner must register as self-employed and will be taxed on their share of the partnership’s taxable profits.
Limited Company — a limited company can be owned and operated by one or more people. It is treated as a separate legal entity and is therefore responsible for its own debts. Shareholders are protected by the limited liability of the share capital they have invested in and any personal guarantees that may have been given when taking out finance. A limited company must be incorporated with Companies House and its annual accounts and statutory information is made available on public record.
Limited Liability Partnership — like a partnership, this is formed by two or more partners. However, just like a limited company, the individual partners’ assets are protected, and their liability is limited to the funds they have invested in the business and any personal guarantees.
Each structure has its own pros and cons, and these should be considered carefully in line with the business plan before deciding upon one.
☑ Employing staff
For the business to get off the ground or to enable expansion, it may be necessary to employ staff. To do this, you will need to set up and administer a payroll scheme.
Payroll records should be carefully maintained. It is the employer’s responsibility to advise HMRC of the wages due to employees, 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. 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 and General Data Protection Regulations (GDPR).
You must register for VAT if the value of your taxable sales or services exceeds the registration limit. There could be advantages to registering early on a voluntary basis, for example, to reclaim VAT on business supplies or provide a perception that the business has a turnover above the registration threshold.
If you choose not to register voluntarily, then it is important that you keep track of your turnover levels and are aware of the current registration threshold. We have seen businesses come to us to prepare their first year-end accounts without realising they exceeded the threshold during the year, and it can be an expensive mistake to make.
VAT can be a complex, ever-changing area. Handling it can take up precious time and resources that you don’t have when you are trying to get a business off the ground. VAT can also seem such a dry subject, so you put off dealing with it. This is when it is essential to get expert help, because VAT can prove so intricate that your new business could end up underpaying or overpaying. If you need expert advice, contact Jason Croke at Rayner Essex and he will make sure your new business complies with regulations, while explaining what needs to happen and why.
☑ Bookkeeping and accounting records
All businesses need to keep records of their sales, purchases, assets, and liabilities. The software that you will need will depend on the type of business that you are starting. The availability of cloud accounting software and add-on applications assist in streamlining this process and making it as automated as possible, saving valuable time on weekly admin and allowing information to be accessed from anywhere with an internet connection.
When the accounting system is set up, consideration needs to be given to the key areas to be reported on and the level of detail required in the reports. This could be the ability to report on the profit per project, per location or per income stream.
Having accurate, timely information is essential for monitoring the financial performance of a business, comparing results against the original business plan, highlighting areas where problems could arise and making informed decisions in respect of cash flow, tax obligations, funding and personal requirements.
☑ Personal and business insurance
Insurance for your business is vital. The policies needed will vary for each business and the industry they are in, but could include:
Good in transit
Buildings and contents
Business interruption – (just think about the business interruption during 2020!)
If you have employees, you will be legally required to have employers’ liability insurance.
☑ Online presence
The last year has shown us that it is essential for a business to have an online presence. This could be an e-commerce trading platform, a website, social media or all three. Most research is now carried out online and it is important that potential customers can find you easily. This will give you the opportunity to increase your customer base.
☑ Licences and permits
Some businesses may require licences or permits in order to trade, this will depend on the type of business they are. Gov.uk has an online licence finder where you can find out what may be required for your business or area. For instance, if you are setting up a shop and want to play music in the background, you will need a licence.
Remember — if you are looking to acquire business premises, then check its current use class. These are defined by the local authority and any business carried out in the premises must be in line with its planning use. We’ve seen an expensive mistake before when a client took on a lease and was subsequently unable to change the class and operate their intended business from the premises.
☑ Year-end accounts/filing requirements
Businesses that started trading at the beginning of the first lockdown will now be just past or fast-approaching their first year-end. There may be areas that need to be considered for tax efficiency purposes and deadlines that need to be considered to avoid any late filing penalties. These areas will be covered in more detail in a separate article.
As we begin to transition to the new normal, more businesses are beginning to open back up and are weaning themselves off furlough claims and other government support. During this period, there will inevitably be further redundancies and entrepreneurs seeking to give it a go. You need to have the vision and determination to start a new business and as you can see from the checklist, there are many different areas to be considered.
The financial side can be daunting — you do not need to be an expert in finance, but you may need support from an experienced team so that you have the time needed to grow the business and fulfill that dream.
Register here to join our Webinar, the first in a 4 part series, covering all you need to know about setting up your business. Claire Barringer will be taking questions from the panel.
Please get in touch if you are considering setting up a new business, we will be happy to guide you through the process.