So you have a great idea or skill and you want to start a business to make money from it? We give you the important first steps to set off on the right foot.
If you’ve never set up a business before, it’s understandable that you might wonder where on earth to start. But the important thing is just that you start! It takes courage to make a change as big as starting a business, but once you do, you’ll quickly discover how rewarding it can be. Don’t let nerves be the thing that stops you. You’ll learn everything you need to know as you go. But here’s a good kickstarter to get you ahead.
1. Consider your legal business structure
For tax purposes, you have to define what category of structure your business fits in: sole trader, limited company (Ltd) or (if you’re really big) public limited company (PLC), but that tends to come much later as your business grows.
There is very little to define a sole trader other than that a sole trader generally has no employees, working alone or only employing the services of others on a contract or project basis. In this category you might also be considered to be a ‘freelancer’. Sole traders typically, but not always, generate less income than most Ltd companies but have fewer overheads. As a sole trader you as an individual retain all liability for third-party damages or losses in the event that these occur.
Pros: Simple structure, less complex paperwork, less expensive to report
Cons: Individual liability
Limited Company (Ltd)
If you have employees you will likely register as a Ltd company, but you can also become a Ltd company if you don’t have any employees. You might want to do this as a limited company structure provides some confidence to clients that you may be more ‘established’ or ‘legitimate’. Within this structure there are greater obligations to HMRC in terms of reporting, but the burden of liability is no longer on the individual but the business, which can be reassuring to the business owner.
Pros: Protection from liability, Reputational benefits
Cons: More complex reporting, more expensive to report
Note: Picking a business structure is not permanent. As your business evolves, so can your business structure. You will need to register the change with HMRC and fulfil obligations within the new category.
2. Register with HMRC
Once you’ve decided on a structure, you’ll need to register with HMRC. If you’re a sole trader this will be before, or as soon as you’ve made gross sales of over £1,000. This is a legal requirement, but it is not as complex a process as you may fear. You simply need to fill in a form on the HMRC website. Ltd Companies are registered with HMRC as part of the company set up process.
Note that both sole traders and Ltd companies can register for VAT at any time. Some clients may only work with businesses that are registered for VAT but this will become clear in you market as you grow and seek new business. However, once your business exceeds £85k turnover in any rolling 12 month period the choice is no longer yours – you are required by law to register for VAT.
3. Register for self-assessment
At the same time, you’ll need to register for self-assessment, which is separate to registering with HMRC. It’s necessary, because HMRC needs to know if you have any other income aside from your business, for example a part-time job, shares or a rental property.
4. Get insurance
Whichever business structure you have chosen, you will need to get business insurance to protect yourself in the event of any mishaps or legal challenges. Without insurance, you or your business could bear the complete liability to pay damages, court fees and legal representation in the unlikely, but possible event of a claim against you. Costs can run into the thousands, or even millions.
5. Get a business bank account
Having a separate business bank account means that you can keep your business and personal expenses separate and makes bookkeeping much simpler. If you set up as a Ltd, this is mandatory, as a sole trader it’s advisable. While business bank accounts do tend to charge fees, the cost is minimal, but it’s worth shopping around for the best deals.
6. Get a bookkeeper (and maybe an accountant too)
You may start out thinking that you don’t need a bookkeeper, but typically it becomes clear that having a bookkeeper makes maintaining your financial records much easier. A bookkeeper will be able to advise and assist you with record keeping, ensuring that your financial records get off to the best start and stay in order going forward. This makes submitting your annual returns to HMRC much simpler and gives you the confidence that everything is correct.
If your start-up has employees or you have more complex finances, an accountant is advisable, to provide trusted analysis and advice to make the best financial decisions.
Got more questions? Give us a call and we’ll be happy to help you get off to the best start. The first consultation is free, no strings attached.