Starting up in business

Initial considerations

 The business plan

Your business 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 the 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. Again the business and personal affairs of the partners are not legally separate. A further possibility is to use 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 considerations of taxation implications, ownership and liability.

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.

 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 requirements as to their format.

A company and a LLP may need to have an audit and will need to make the accounts public 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.
• 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 and services exceeds the registration limit, you will be obliged to register. Expect a visit from HMRC within eighteen months of registration. This inspection of your records ensures VAT is being properly accounted for.

 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 deduct income tax and national insurance. The balance must then be paid over to HMRC. Payroll records should be carefully maintained.

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, bad debts should be considered.

 Pensions

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

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