STARTING A BUSINESS

It is the ambition of many people to run their own business. This factsheet cannot cater for every possibility and any decisions should be supported by professional advice.

Initial considerations  - In order to make your business a success there are a number of key factors which should be considered:

• commitment - starting a business is demanding and determination and enthusiasm are essential
• skills - you will need managerial, financial, technical and marketing skills
• your product or service should have a proven market

In addition to these general considerations there are a number of more specific matters.

The business plan - this is the key to success and your 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 a 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 and for all partners to be aware of the terms of the partnership. Again the business and personal affairs of the partners are not legally separate.
• 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 consideration of taxation implications, the legal entity, ownership and liability.

Business stationery - there are minimum requirements for the contents of business stationery, both paper and electronic, which will depend on the type of business structure.

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. If you are considering purchasing computer software to maintain your records, obtain professional advice.

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 legal requirements as to their layout. The accounts and company tax return must be submitted electronically to HMRC in a specific format (iXBRL). Presently Companies House do not require annual accounts to be submitted electronically in iXBRL format, however there is software available to cater for electronic filing if preferred.

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. However, the taxable profit will normally differ from the profit shown in the accounts due to certain expenses which are not allowed for tax purposes and the timing of some tax allowances. Payment of corporation tax must be made online.
• 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 or services exceeds the registration limit you will be obliged to register.

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 advise HMRC of the wages due to employees and 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. Payroll records should be carefully maintained.  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. You will also need to be familiar with employment law.

Premises - there are many pitfalls to be avoided in choosing a property. Consideration should be given to the following:

•  suitability for the purpose
• compliance with legal regulations
• local by-laws
• physical restrictions such as access

Insurance - Each business has slightly different needs, and it’s important to make sure that the risks you face are covered. A good business insurance policy will cover your business in case anything goes wrong and can foot the bill for things like compensation payments and legal costs.

• Employers’ liability insurance - The only type of business insurance that’s legally required is employers’ liability insurance. If your business employs anyone then you need at least £5m of cover, and you could be fined a maximum of £2,500 for every day that you don’t have insurance. The legislation makes a few exceptions, for example if you only employ immediate family members. It’s designed to cover any compensation claims made by your employees for injury or damage that’s caused by their work. For instance if a waiter in your restaurant trips on a loose floorboard and breaks his leg, or if an office worker suffers from repetitive strain injury (RSI) caused by computer work.
• Professional indemnity insurance - Another important insurance to consider when you’re starting your business is professional indemnity insurance. This protects you against compensation claims made by a client because they think you’ve made a mistake in your work. This includes things like breaching confidentiality, infringing copyright, or giving advice that causes your client to lose money. This makes it a really important cover for your business if you offer a professional service or provide advice, for example if you’re a graphic designer or a consultant. Some professional bodies and regulators insist that their members have a professional indemnity policy, including in areas like law, financial advice, accountancy, architecture and healthcare. As an example, if you have a marketing agency and you produce a podcast for a client but you use copyrighted music without permission, the copyright holder could sue your client for copyright infringement. If your client demands compensation from you, your professional indemnity policy could cover any legal costs plus compensation payments.
• Public and product liability insurance - Public liability insurance is worth considering if your business comes into contact with the public, either because customers come to your premises or because you visit client premises or work in public. It’s designed to cover compensation claims made by someone who blames injury or damage on your business. For example, if someone’s car is damaged by an object that falls from your scaffolding while you’re doing building work, or if a customer is injured when they slip on a wet floor in your shop. Product liability insurance protects you if a product that you sell causes injury or damage to a member of the public. For example if you sell a toy that has a manufacturing fault that causes injury to a child, your product liability policy could kick in to pay any compensation claims made by the buyer. As with professional indemnity insurance, public and product liability cover can pay out for the legal costs as well as any compensation payments, up to your policy limit.
• Building and contents insurance - If you’ve got a business premises such as a shop or an office, buildings and contents insurance is another consideration. If you rent the space then you’re only responsible for covering your contents (your landlord should cover the building), but if you own your premises then you need to insure the building too. If you’re running your business from your home then you should check your home insurance policy documents carefully, as business activities may not be covered under a standard home insurance policy.

Pensions - putting money into a pension scheme can be a way of saving for retirement because of the favourable tax rules.  The latest reforms, under Pensions Act 2008, have brought about a requirement on UK employers to automatically enrol all employees in a pension scheme and to make contributions to that scheme on their behalf. Enrolment may be either in to an occupational pension scheme or the National Employment Savings Trust (NEST).  Compliance with the new regulations started from 2012 for the largest employers. The deadline for being compliant (an employer’s ‘staging date’) is determined by the number of people in their PAYE scheme and for smaller employers is between 2012 and 2018.

Whilst some generalisation can be made about starting up a business, it is always necessary to tailor the strategy to fit your situation. Any plan must take account of your circumstances and aspirations.  Whilst business success can never be guaranteed, professional advice can help to avoid some of the problems which befall new businesses.

This information provides only an overview and no action should be taken without consulting the detailed legislation or seeking professional advice.