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Starting a Business
Planning and setup
What type of company is best
for you?
The first important choice you will face when starting a business is
the legal status of your company. From Limited Company to sole trader,
how you set up your structure at the start can have legal and financial
implications in the future.
Below are some of the different types of company status.
Sole Trader
A person in business on his or her own account is known as a sole trader.
If you choose to be a sole trader you will be self-employed and personally
liable for any business debts, but the profits are yours to do
with as you wish. Some of the essential requirements of being a sole
trader are:
- You must register as self-employed with HM Revenue and Customs (HMRC)
within the first 3 months of trading. This should be your first action
as there is a penalty of £100 if you fail to register in time.
- You will have to complete a self-assessment tax return each year
and pay income tax, detailing your income and expenditure, for which
you should keep records.
- If your turnover will be more than £60,000 a year you will
have to be VAT registered. This means you’ll charge VAT on all
your goods or services, and will have to complete and submit a VAT
return each year. Depending on the nature of your business, your customers
or clients may prefer you to be VAT registered even if your turnover
is below the minimum.
- You will need to pay National Insurance Contributions (NICs). You
can usually pay these in instalments by Direct Debit if required. The
HMRC website has more information at www.hmrc.gov.uk.
Partnership
A partnership is where two or more people go into business together.
Each partner is equally responsible for the debts and costs of the business,
and receive an equal share of the profits. The essential requirements
for a partnership are the same as for a sole trader, but apply to each
member of the partnership.
Limited Liability Partnership (LLP)
A limited liability partnership is similar to an ordinary partnership
but has the benefits of limited liability for the business owners, giving
them some protection if the business gets into difficulties. The essential
requirements are:
- You may have any number of members in your partnership with a minimum
of two ‘designated’ members who carry extra responsibility
for the business.
- You must register with Companies House and file annual accounts.
- An
annual 363s form must be checked and returned to Companies House with
a fee. Any changes to members, officers or registered address should
be communicated to Companies House.
- Each partner will have to complete a self-assessment tax return
each year detailing income and expenditure, for which they should keep
records, and pay income tax based on their share of profits.
Limited Liability Company (LLC)
A limited company is a legal entity in its own right, and its finances
are separate from those of its owners. It continues to exist even if
the owners die or resign, unless it is wound up or struck off the Companies
House register. The owners have restricted liability to the value of
the shares that they own or any loan or other financial guarantee.
Because of the reduced liability to owners, limited companies are governed
by tighter rules and regulations than partnerships or sole traders. Some
of the essential requirements of starting an LLC are:
- You must register with Companies House and file annual accounts.
- A private company can now have just a sole director provided, from
1st October 2008, that the director is a natural person. It is no longer
compulsory to employ a company secretary.
- You must file an annual tax return with HMRC and pay corporation
tax at a minimum of 21%. In addition, employees and directors will
have to pay income tax and as Class 1 National Insurance Contributions
(NICs).
- An annual 363s form must be checked and returned to Companies House
with a fee. Any changes to structure or management should be communicated
to Companies House by a director or the company secretary.
Choosing a business name
Your business name is a reflection of the quality goods or services
you will provide, and can say a lot about your company. However, choosing
the wrong name could be a costly mistake as changing it at a later date
will affect every aspect of your business.
- Check your chosen name with the National Business Register, the Patent
Office, Companies House and Trade Marks Register to make sure it’s
unique within your chosen business sector. If you infringe on another
business’ name, they could take legal action to protect themselves.
- Check other meanings of the name you intend to use, particularly
if you will be trading overseas. An embarrassing translation could
cost you international business.
For more information or to check a business name, visit www.start.biz or www.companieshouse.gov.uk.
Your responsibility to your staff
If you are planning to take on employees, you will need to set up a
PAYE system to ensure they are paying tax and national insurance. You
will also need adequate insurance and processes and procedures to guarantee
their health and safety in the workplace.
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Buying a franchise
A popular way of getting into business is to purchase a franchise. A
franchise will give you all the benefits of an existing brand and infrastructure,
training and support but you retain most of the profits and run the business
as your own.
A franchise is a legal arrangement where the franchisor allows the franchisee
(the buyer of the franchise) to open a business in its name in return
for payment.
The advantages
- You are buying into an existing brand and market, so will cut out
much of the initial market research and brand-building that a new company
usually requires.
- The franchisor has vast experience of the market and the products
or services, so you can avoid costly experiments or potential mistakes
by taking advantage of the franchisor knowledge base. This can be particularly
important when looking for a potential branch location or new market
segment.
- Franchisors will provide comprehensive start-up training and support,
and most will provide an ongoing training facility for the franchisee
and staff to expand their skills. There can be a significant
cost saving as outsourced training is usually very expensive.
- You will have access to a tried and tested business formula, a roadmap
to success which will show you each step you need to take to achieve
your business goals. This will be based on the franchise history and
experience, so it’s worthwhile looking for an established name
rather than a new brand, although there can be advantages to a new
name in a tired market.
- You will have the support of other franchise owners, as you will
have exclusive territory rights and will not therefore be in competition
with each other. This means you can share experiences and tips in confidence,
and is also useful when researching which franchise to purchase. Existing
franchisees will be able to tell you how good the franchiser is at
the things you find important, so make a list of questions and approach
them for references before you commit.
- Your franchisor will undertake market research and intelligence to
keep you informed of the latest developments in the marketplace. This
will help you to grow your business and stay one pace ahead. This is
particularly important in a competitive industry.
- An established franchise is a safer business proposition than a brand-new
business, so you may find it easier to raise the required finance from
your bank or other lending institution.
The disadvantages
- You will have little flexibility for things like brand or products,
as those are chosen by the franchisor based on their business formula.
You might find this inflexibility frustrating, so if you are the independent
type, a franchise might not be for you.
- Strategic business decisions are out of your control, which could
lead to financial risks. If the franchisor decides to take the business
model in a different direction to the market, or take a risk on a new
product or service, you could end up losing out.
- Franchises can be expensive. You will have to pay a fixed fee for
the franchise plus a regular fee or percentage of profits. You may
even be forced to purchase your stock from a specific supplier at a
greater cost than elsewhere. You will also need to pay your everyday
costs like wages. Consult an account and find out exactly what your
business expenses will be before committing.
- There is always the possibility that a franchisor won’t live
up to their promises. This is the risk every business owner takes with
suppliers, but you can minimise your risk. Ensure you do your homework
and research every aspect of your potential franchise thoroughly, including
talking to existing franchise owners.
Owning a franchise can be a rewarding, profitable way of getting into
business for yourself. If you want to be your own boss without the headache
of establishing a new face in the market, then a franchise could be the
ideal solution.
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Testing your business idea
All great businesses start with a great idea. But how do you know if
yours is one of the winners? Before you’ve even started writing
your business plan, you should undertake a simple marketing exercise
to ascertain if your idea is viable. This is called a SWOT analysis,
a snapshot of what you want to do and whether anyone will buy it.
SWOTting up
The SWOT analysis is an extremely useful tool for understanding all
sorts of situations in business and organizations. SWOT is an acronym
for Strengths, Weaknesses, Opportunities, Threats. The SWOT analysis
headings provide a good framework for reviewing strategy, position and
direction of a company or business proposition, or any other idea.
Draw a large square divided into quarters and label the top-left square
Strengths. Write in all the strengths of your idea. You can also include
your own personal strengths and your business partners’. Be as
honest as possible. Some things to consider include:
Advantages of proposition? Capabilities? Competitive advantages? USP's
(unique selling points)? Resources, Assets, People? Experience, knowledge,
data? Financial reserves, likely returns? Marketing - reach, distribution,
awareness? Innovative aspects? Location and geographical? Price, value,
quality? Accreditations, qualifications, certifications? Processes, systems,
IT, communications? Culture, attitudes, behaviours? Philosophy and values?
Any that don’t apply, or are not a strength, should be moved to
the Weaknesses section in the top-right hand box, plus any other weaknesses
you identify. Examples of criteria you could include are:
Disadvantages of proposition? Gaps in capabilities? Lack of competitive
strength? Reputation, presence and reach? Financials? Own known vulnerabilities?
Timescales, deadlines and pressures? Cashflow, start-up cash-drain? Continuity,
supply chain robustness? Effects on core activities, distraction? Reliability
of data, plan predictability? Morale, commitment, leadership? Accreditations,
etc? Processes and systems, etc?
Move on to opportunities in the bottom-left hand corner. Opportunities
are environmental issues that surround and affect your company,
product and position. These can include:
Market developments? Competitors' vulnerabilities? Industry or lifestyle
trends? Technology development and innovation? Global influences? New
markets, vertical, horizontal? Niche target markets? Geographical, export,
import? New USP's? Tactics: eg, surprise, major contracts? Business and
product development? Information and research? Partnerships, agencies,
distribution? Volumes, production, economies? Seasonal, weather, fashion
influences?
In the last square, list the things that may threaten your business.
These can include:
Political effects? Legislative effects? Environmental effects? IT developments?
Competitor intentions - various? Market demand? New technologies, services,
ideas? Vital contracts and partners? Sustaining internal capabilities?
Obstacles faced? Insurmountable weaknesses? Loss of key staff? Sustainable
financial backing? Economy - home, abroad? Seasonality, weather effects?
Analyse your results
Take a good long look at what the results tell you. Is it possible that
your business idea is not so viable after all? Examine the facts and
make an objective decision. A failed business can be heartbreaking and
financially devastating, so be completely honest before you dive in.
If the SWOT analysis shows a strong proposition, go for it!
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What does it take to run
a business?
If you are thinking of starting your own business, you will need to
take a good long look at your skills to ensure you have what it takes.
Working for yourself can be very rewarding but the demands are much higher
than being in employment and not everyone is cut out for the life of
an entrepreneur.
If you are prepared to take risks, work long and sometimes lonely hours,
be ruthless but take criticism, learn from your mistakes and motivate
yourself and others when things are tough, then owning your own business
might be the right step for you.
Start by assessing your own skills to determine what you can and can’t
do. Some things to look out for are:
- What you can do for yourself
- What you can do for minimal or no cost
- What you need to outsource
This will give you a good idea of the bigger picture and help you predict
where your money should go and any potential skills gaps.
There are many aspects of running a business, but some of the basics
are:
Sales and marketing
You will need to research your market, build a brand, secure new customers
and retain them. Investing in professional marketing services is one
way to go about this, or you can learn the basics yourself and just dive
in. Be careful though, as badly-planned or sloppy marketing can be a
costly mistake.
Alongside your business plan you should create a marketing plan to plot
how you will grow and promote your business.
Finance
You will need the services of a good accountant, but there are many
aspects of finance that you will inevitably end up doing yourself, particularly
when your business is new. This includes budgeting and forecasting, basic
bookkeeping including wages and VAT, managing debt and lines of credit,
and stock control. You may require training for these, or you can learn
the basics online or through specialist books. There are many inexpensive
software packages that can help manage your finances.
Human resources
If you have staff, you will have to comply with Health & Safety
legislation as well as managing payroll, personnel issues like sickness
and holidays, and the myriad other requirements that go hand-in-hand
with people management. Most important of all, make sure you and your
staff are complying with relevant legislation, have proper contracts
and are adequately insured and safe at work. A happy, motivated workforce
is the key to successful business.
Information technology
If you are planning to utilise computer equipment, set up a network
or build and maintain a website, you will need adequate IT skills. Outsourcing
IT support can be expensive, so it’s worthwhile learning the basics
so you can keep your facilities ticking over in the event of a problem.
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Writing a business plan
Banks and other sources of funding will want to see a business plan
before they lend you money to start a business, but a good business plan
will also help you shape and grow your business.
Your business plan is your goal, your mission statement and your vision.
It defines where you are going in the next few years and how you are
going to get there. If you don’t set out your plans on paper, it’s
very easy to get sidetracked in the day-to-day running of your operation.
A business plan will help you check progress against objectives to ensure
you are moving forward as you intended at the start.
Regularly check your resources (staff, equipment, premises, skills)
against your business plan to identify any shortfall that may stop you
achieving your goals. If you can see your priorities and objectives,
you can make business decisions based on the bigger picture. Remember
that today’s priorities are not necessarily tomorrow’s.
Added benefits of a business plan
It’s your business, so it’s easy to be blasé and
avoid committing what’s in your head to paper. But by writing about
your business as if you were describing it to an outsider you are forced
to ask questions you might otherwise easily avoid, or you may not have
thought to ask yourself in the first place. It will also help any potential
buyers if you decide to sell your business at a later date.
A business plan instantly lends credibility to any business and can
be the key difference between focused success and distractions leading
to failure.
Making changes
Your business objectives and priorities may change, or your marketplace
could take an unexpected turn. In that event, you will need to revisit
your business plan to adjust for the new circumstances.
As your business grows and you acquire more resources such as employees,
ensure you incorporate them into your business plan so everyone can see
their shared objectives and common goals.
However, you should be wary of any new project or contract that takes
you too far away from your original business plan. While there is room
for some flexibility, you should not see a business plan as something
to be changed lightly. Rather, you should assess the new opportunity
in light of the business plan to decide whether or not it will really
help you achieve your long-term business objectives. If you move the
goalposts halfway through the game, then you might not get what you started
out to win.
For information of users: This material is published
for the information of clients. It provides only an overview of the regulations
in force at the date of publication, and no action should be taken without
consulting the detailed legislation or seeking professional advice. Therefore
no responsibility for loss occasioned by any person acting or refraining
from action as a result of the material can be accepted by the authors
or the firm.
© Copyright JE Consulting 2008. All
rights reserved.
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