Things to know when setting up a business
Start-ups can happen very quickly. Or at least, that’s how they look from the outside. It can sometimes seem like these things happen overnight. For most entrepreneurs in the UK, setting up a business is a pretty simple thing to do. In fact, many businesses have been started while sitting in pubs for lunch, with as little as £12 invested to produce a fully registered business ready to grow. And, the setting up of the business in physical terms is the easy bit – it’s all the extras around it that take the time. But they are worth it – because, without them, many more start-ups would fail. So, what do you need to know about setting up your own business to make sure it succeeds, and how does it all work?
Choose the legal structure of your business
Choosing the legal structure your business will opt for is one of the most important parts of starting a business – so we thought we would start with this. If you’ve never run a business before, you might be thinking ‘wait, there are different types of company’? And yes, there are! In fact, if we take out corporations (which tend to evolve from other businesses rather than start out in their own right), there are 5 different legal structures your business can take. These are:
1. Sole Trader
A sole tradership is the simplest and most favoured structure for one-man bands. You own the business, and the business is you. As a sole trader, your business is owned by one person, and you are responsible for all the company’s profits and debts. All expenses and income from your business are included on your personal tax return. That means you are responsible for keeping records, filing a self-assessment tax return, paying income tax and national insurance. This structure is perfect for those with few or no employees who can cover their risks with insurance, or have no major assets to protect.
A partnership can be between two or more individuals, all of whom share management and profits in the business personally. This includes any losses the business makes and the bills for anything bought for the business.
3. Limited Liability Partnership (LLP)
A limited liability partnership is a way to ensure members of a partnership are not liable for anything over what you could reasonably afford, should things go south. Each owner is only responsible for the company debts up to the amount of capital they invested. So, if you invested £1000 into an LLP, you would only be liable for up to £1000 of the business debts.
4. Private Ltd
A private limited company has at least one director and at least one shareholder, who can be the same person. One of the bigger benefits of setting up a limited company is that it completely separates your personal finances from the business. In this model, you are not held personally responsible for the business debts if the business should fail. Private limited companies must appoint directors and incorporate their business with Companies House.
5. Public Ltd
A public limited company runs in a very similar way to a private limited company. It is still governed by shareholders, who all receive a share of the company profits known as ‘dividends’ but unlike private limited companies, the shares of a public limited company can be bought by anyone. All they need to do is head down to the London Stock Exchange and hand over some money. Some examples of public limited companies would be businesses like Apple, Waitrose, Sky and Barclays.
How to set up and register your business
Once you have decided on a legal structure for your business, you may be required to register it with the government. This is so that you can be held accountable, and ensures you will be paying taxes and so on. There are 2 ways you can register your business:
The most common route to take is to simply register your business with Companies House yourself. Depending on the structure of your business, this can take a few different forms. For example, if you’re opting to be a sole trader, you just need to register for self-assessment, and you’re done. You just need to remember to fill in your tax return every year. Find out more about that here.
For business partnerships, you simply need two or more people or legal entities to agree to the partnership. We say a legal entity because one of the partners doesn’t have to be a person. For example, a limited company counts as a ‘legal person’, and so can be your business partner. To legally set up your partnership, you will need to choose a name, choose a ‘nominated partner’ to be in charge of managing the partnerships tax returns and keeping business records, and register the partnership with HMRC.
If you’re setting up a limited company, there are a few more hoops to jump through. Here, you will need to incorporate your business with Companies House. This means you will need:
- A name for the company
- An address for the company
- At least 1 director
- At least 1 shareholder
- Details of the company’s shares
- Your SIC code, which identifies what your company does (find yours here)
You will also need:
- The shareholders to agree to create the company and the written rules (known as the memorandum and articles of association)
- Details of any people with significant control over your company (for example, anyone with over 25% shared or voting rights)
Use An Agent
If you don’t want the hassle of registering your business yourself, you can always outsource it. There are hundreds of companies out there who exist simply to register businesses with Companies House. They tend to buy up the domains and register them as dormant with Companies House. When a new business turns up and asks to be registered, they simply take one of these dormant, pre-registered companies and file a series of changes to bring it into line with the customers’ business. The process is very straightforward and not very expensive, but it can take a little bit of time to get everything finalised.
To VAT or Not To VAT?
VAT, or Value Added Tax is one of those things most business owners starting out probably won’t think about until they need it. But even when it’s your first day in business, you need to understand what the VAT threshold is, and if you need to be registered for VAT. Now (2017), the VAT registration threshold is £83,000, meaning that if your business’ annual turnover exceeds this amount you must be registered for VAT. If you don’t, you will face a series of penalties and fines. It’s important to remember that this figure is always subject to change, so you should always keep one eye on the rates. However, very few start-ups expect to hit that threshold within the first year, so they don’t register.
For some businesses though, registering for VAT is less about whether they ‘need’ to, and more about what is practical for them. For example, builders or trades that are buying from wholesalers will be charged VAT on everything they buy. If they aren’t registered for VAT, that’s just an extra cost to the business, but if they are, it means they can claim that money back. This means their spending is lower and they can operate more efficiently. When you’re VAT registered, you can claim back any VAT you’re charged on goods and services, and you will be ready to grow and expand. So, as well as working out whether you will need to register, think about if you want to register voluntarily before you hit the threshold.
To register for VAT, just visit HMRC’s website and follow the instructions.
As a business owner, you are required by law to have insurance. Regardless of what your company does, every business that employs one or more members of staff in the UK (that’s all of them) must have a minimum of employer’s liability insurance. This insurance covers the business if an employee who is injured at work, or became ill because of their work makes a claim for compensation. There are certain exemptions to this rule – mainly government bodies and non-limited family businesses – but they are few and far between. The minimum level of employer’s liability insurance is set at £5 million, though most businesses will usually take out a higher amount.
But that’s not the only kind of insurance you might need. Depending on what your business does, you might want, or need, to opt for other kinds of cover too. Here are just a few of the most common examples of business insurance:
Professional indemnity insurance (sometimes known as business indemnity insurance) protects your business if you are sued for negligently performing your services – even if you haven’t made a mistake. So, for example, if a photographer was hired to take pictures of a graduation, but forgot to take a photo of the graduate with their family, professional indemnity insurance would cover them if the family decided to sue. Similarly, if a consultant gave some advice to a business to grow their sales, but the business didn’t follow it and saw a decline in sales, professional indemnity would also cover any resulting lawsuit – even though it wasn’t the consultant’s fault.
Public liability is another insurance most businesses opt to have in place, even though it isn’t a legal requirement. It covers you for damage against property or persons that you might encounter during your work. Certainly, in the professional world, many businesses won’t or can’t deal with you unless you have this insurance in place, particularly if you’re working in the public sector.
If your business involves a lot of valuable equipment or assets, then equipment insurance is an absolute must. These policies are very varied, but will generally cover you for damage, loss or theft up to an agreed amount.
Drivers know motor insurance is a legal requirement, but many come unstuck when using vehicles for work-related activities. You might think that your current insurance covers you, but unless your policy includes business use then you’re mistaken. If you’re employing someone who’s using their own vehicle for work purposes other than travelling to work, then you have a responsibility to ensure they are fully covered. This could be as innocent as dropping you off at a meeting – it doesn’t matter – they still require business insurance.
Product liability insurance is a type of business insurance that can cover the cost of compensation claims if someone is injured or their property is damaged by a product that you’ve sold. In certain situations, you may be liable even if you haven’t manufactured the product. Of course, this only applies if you are selling physical products and not services.
Cyber insurance is the new kid on the block, but it has quickly become indispensable to businesses who deal with customer data. This specific insurance protects businesses and individual users from internet-based risks, mainly relating to IT infrastructure and activities. If you’re dealing with data of any kind, you should seriously consider this.
If you aren’t sure what kind of insurance you need, there are plenty of people out there who can help you. Your local independent financial advisor, insurance broker or account can point you in the right direction here.
Write Your Business Plan
Business plans are one of those things that seem to be falling a bit out of fashion now, and yet they are one of the most crucial elements of a business there is. Without a business plan, your business has no direction, no clear mission statement and no clear purpose. Sure, businesses can grow without one, but they are few and far between. Most of the successful businesses you see will all have a business plan hidden away somewhere that has provided them with the framework they need to succeed. In short – you need a business plan, and it will do you the most good right at the start. We’ve talked a bit about business plans before, so if you want to read about them in-depth, then just click here. But if you just want an overview, then here are the basics you need to include in your business plan:
1. Executive Summary
This section is short, and simply summarises the essential information for your business. This will include your business name, legal structure, a summary of your business idea, your aims, a financial summary and an elevator pitch. It’s very much a broad overview at this stage – you get into the meat later.
2. Products And Services
Next, you will need to talk about what you will be selling. This could be products, services or a mixture of both. A good way to structure this is a bullet point list. You can then go into detail about what each of your offerings will involve. If you’re planning to launch new products or services after a set amount of time, include them as well, along with a brief explanation of when and why you will launch them then.
3. Target Market
Your third section is all about the market. Identify your target market and describe your typical customer, including where they are based, what prompts them to buy and what helps them choose who to buy from as well as their age, job, background etc.
4. Market Research
Section 4 is all about market research. This shows you have done your due diligence and that there is a sufficient demand for your offering to warrant the opening of the business. You should combine desk-based research with field research to ensure you get a wide and accurate portrayal of the market.
5. Competitor Analysis
Next, you need to include your competitor analysis. Make a table of your competitors including name, location, business size, products or service offerings, price, strengths, weaknesses and USPs.
6. Marketing Strategy
This section should detail your marketing strategy, including what activities you will be doing, why you have chosen those activities and how much they will cost. This, along with the above 3 sections, can be substituted for an individual marketing plan instead, if that’s your preference.
7. Sales Plan
Your sales plan is closely linked to your marketing plan but instead looks at how you will convert the leads you gain from marketing into confirmed sales. Will you be hiring salespeople? What will your after sales process look like? How will deliverables factor into this? Everything from the moment a lead comes into your business to when the work is finished should be included here.
This section goes into detail about the operations and logistics of your business – the real nuts and bolts. Here you need to talk about any production processes, delivery logistics, payment methods, suppliers, premises and equipment needed to make your business work. Make sure you include any legal or insurance requirements, your plans for management, staff and transportation.
This part is all about costs and pricing. Work out and detail the costs of creating and delivering each product or service, how much you are going to charge for each and how much profit you make per sale. If you are reselling, how much markup will you be putting on to your products?
10. Financial Forecasting
The final section of your business plan is a fully developed financial forecast for at least the first year of business, ideally with a 3 and 5-year plan included. This will include your personal survival budget, a detailed cash flow forecast, profit and loss (income statement) and balance sheet. Anything to do with finances needs to be included in this section, as this is the piece lenders are most interested in. If you need investment or finance to start your business, plans for obtaining and paying it back (if relevant) should all be detailed here. These documents show that you have put a lot of thought and planning into your business and that it can make you money. The predictions in these forecasts might not come true or might be underestimated, but if you have them there you have a guideline for your first year of business to keep you on track. You can use software like ours to help you prepare financial forecasts easily.
Write Your Marketing Plan
A marketing plan is your essential guide to promoting and growing your business. While your business plan takes care of the bigger picture, your marketing plan will focus in on how you will be putting your business out into the world. We talked about including a marketing section in your business plan (which covered the target marketing, market research, competitor analysis and marketing strategy)– and that’s where all of this will slot in. So quite often, your marketing plan will form part of your overarching business plan.
From day one, the effectiveness of your marketing activities has a direct impact on your bottom line. It’s the main engine that drives your sales, so to make the most of it you need a solid plan of action. It takes careful planning, research and a comprehensive understanding of the marketplace to develop a strategy that will ensure the success of your business. Without it, your efforts will never be as successful. But writing your marketing plan is more than just an exercise in writing down a whole bunch strategies and choosing one at random. The planning process helps you to understand the different factors that may affect your success and develop your plans in detail. It will help you hone your messaging, define your tactics for selling and help you start building up your online presence from day 1, giving you, a head start on many other businesses. It also helps with the management and control of your day-to-day marketing. When developing your marketing plan, you’ll be able to allocate resources and budget to each marketing stream, plan for growth and track marketing efforts through measurable goals.
Know Your Target Market And Competition
Before you can understand how to sell, you need to identify your target market. This means knowing the age, gender, background, lifestyle, location, spending patterns and so much more about your customers. You can find this out through surveys, interviews or just good old-fashioned Google research (believe me, plenty of people will have done it already and shared their findings). Once you can identify the buying patterns and motivations of your target market, you can then start planning how and where to meet those needs. Understanding these factors will help you focus your marketing approach to suit your customers. And of course, understanding your competition is important too. A marketing plan is not just a document of what your customers look like – it’s a strategic document that helps you to assess the competitive landscape and decide strategies for winning customers over your competition.
What Should Be In A Marketing Plan?
If you’re not sure where to start writing your marketing plan, then performing an audit of any marketing activities you’ve already done is a good place to start. Whether that’s networking, leaflets or just your business cards, write them down and map out their success, relevance, total cost and return they have brought. If you’re just starting out, then it’s best to start with your competitor analysis. This means looking at your competition’s marketing and writing down their strengths, weaknesses and what you like/don’t like. This helps you to understand areas you can compete in, and will help you understand the direction you want to take. Also, to be included in your marketing plan should be a section on your target demographic and how you plan to target them, along with a positioning statement outlining any plans based on your research and an overall strategic plan.
The main benefit of a marketing plan is arguably not the finished plan itself. It’s going through the planning process, engaging invaluable research and asking yourself important and sometimes difficult questions about your business. Overall, it helps you be clear about what you need to do to succeed and gives you a roadmap to get there. Sure, you could launch and run a business without a marketing plan, but why would you want to?
How To Keep Track Of Your Finances
Now, if you’ve written your business plan, you will have a fairly good idea of your financial state for at least the first year. But that’s not what we mean here. As well as understanding what your estimated future looks like, you will need to keep on top of things in the present and do a fair amount of ongoing filing with Companies House. To keep your finances in check going forward, you will need to undertake bookkeeping and accounting work. While these might sound similar, they are responsible for different things and undertake different roles. These are:
· Record financial transactions
· Post debits and credits
· Produce invoices
· Maintain and balance subsidiaries, general ledgers and historical accounts
· Complete payroll
· Preparing adjusting entries (recording expenses that have occurred but aren’t yet recorded in the bookkeeping process)
· Preparing company financial statements
· Analysing cost of operations
· Completing income tax returns
· Aiding the business owner in understanding the impact of financial decisions
Now, there are plenty of business owners who do all of this themselves and do it very well. However, once you start to become busy, these tasks can quickly become overwhelming. That’s why many businesses opt to hire accountants and bookkeepers instead, either internally or outsourced. By doing this, you are freeing up your own time and ensuring that everything is done correctly. It also means you have another set of eyes on your numbers, making sure you are covering your costs and not driving the business into debt. You may even find some firms that can carry out both functions for you, leaving you free to run your business efficiently.
Organise Your Workspace
Finally, you need to organise a workspace for yourself. Depending on the type of business you are running, this will vary quite a lot. For example, if your business is very computer based and it’s just you, you may choose to work from home to save on overheads. This would mean you need to have meetings in coffee shops or at client locations, but it could save you a small fortune in bills early on. If you’re hiring employees right away, you will need to rent an office space. Make sure you choose a location that is convenient for you (and easy to find), as well as competitive on price. If you’re a retailer, you may need to find some premises, which will involve speaking to commercial estate agents, negotiating business rates and signing contracts. If you’re a builder or tradesperson, you may be moving from site to site all the time, so only need a permanent address to store your equipment. In this case, storage units or even garages are cost-effective and convenient solutions. No matter what you choose, the important thing to remember is that the space needs to suit your needs, be affordable and give you room to grow. If you fail to factor that in, you could find yourself in trouble a few months down the line.
At Brixx, we work with startups in all spaces and industries to help them turn their business ideas into numbers. That means we work with aspiring entrepreneurs who have the creativity and the ideas but aren’t sure where the numbers all fit in. We believe that creating great business plans needs no special qualifications and you don’t have to be an accountant to get a good grasp of the financials of your business. Our software provides start-ups and established businesses with a way to forecast and stress test their cash flow in one simple, easy way, without needing to be a whizz at numbers. It also allows you to test changes to your business before you make them through simulations, helping create strong and secure businesses across the board.
Take a tour of our financial forecasting software to see how we can help you get your business off on the right foot.