Starting a Business
There are three principal ways of forming a business:
It is usually advisable for a new business to start as a sole trader or partnership, where there is a cash flow advantage in the arrangements for paying tax and the lower professional fees. The limited liability given by a company is usually illusory; your main creditors are likely to be the bank and your landlord, and both will insist on personal guarantees from the directors of a company which make the directors fully liable for all bank borrowings and rent. There may be an advantage in trading through a company is where you are trading in high risk goods or services; that is those where there is a possibility that your customers will sue you for very large sums of money if something goes wrong. In this case the advantage of limited liability to protect you and your family outweighs the cash flow disadvantages of a company. If your product is in the field of medicine or high technology, you should consider this carefully.
You will need an accountant to prepare your accounts in a way that is acceptable to the tax man, and to ensure that you are charged the right amount of tax. But don't wait until the end of your first year of trading before finding one. An accountant can give you valuable help in setting up your bookkeeping system; if you keep your records in the form suggested by your accountant it will make his job in preparing your accounts easier and therefore cheaper. He will also be able to help you to prepare budgets and cash flow forecasts, which your bank manager will want to see.
If you do not already have an accountant we can introduce you to a suitable local accountant.
You are legally required to notify HM Revenue & Customs within three months of starting your business. If you do not, a £100 penalty will be imposed. If you have previously been employed, the tax man will want to know why you have dropped out of the PAYE system. Remember you are legally obliged to tell the Inland Revenue about any new source of income - you can't avoid tax just because the tax man hasn't sent to you a tax return form.
If you are a sole trader or a partnership you will pay income tax on a self-employed basis. Your accountant will advise you about what business expenses you can claim for tax purposes.
If you trade through a company, the company will pay corporation tax on its net profits. But remember that you will be an employee of that company and will continue to pay PAYE tax. This does not mean that you pay tax twice; to work out the net profits on which the company pays corporation tax, you must deduct, amongst other things, the salaries paid to directors and the PAYE tax and national insurance contributions on those salaries.
If you expect the turnover of your business to be more than the current levels at which VAT registration is compulsory, then you must register. Penalties for failing to register are severe. In particular, you can be required to pay all the VAT which you should have charged, even if you have not collected it from your customers. Note that VAT is determined by your turnover, i.e., your total sales, not by your net profits.
You have to run your business from somewhere. Many small businesses start at home. This can save on overheads, but you should consider carefully:
In most cases however you will want business premises away from home; if you are going into retailing you need a shop in a shopping area, or if you are going into manufacturing you may need a purpose built factory on an industrial estate. Remember that if you work away from home you can get away from work at the end of the day.
Leasehold or freehold premises?
In general terms it is probably better to take leasehold premises, at least to begin with. They cost less to acquire - if you take a new lease then no capital payment is required and if you buy an existing lease a relatively small capital payment may be required by the present owner. Normally you will have a right to renew the lease when it expires.
By contrast, a freehold property is considerably more expensive to buy, and you will almost certainly require a mortgage, but you do then own a valuable asset. This may not be appreciated by a prospective purchaser of the business if you decide to sell; he may not wish to make the large capital investment and might prefer to buy a business trading from leasehold premises.
If you trade through a company, you should almost never buy a freehold property in the company's name - if you do and then try to realise the capital appreciation of the property you will be taxed twice; the company pays tax on the profit it makes on selling the property, and you pay tax if you then try to extract the profit from the company.
If your business is to grow you will almost certainly have to take on staff. There are a great many rules and regulations affecting employees and their rights; these range from mundane matters such as how many toilets you need for a given number of staff, to whether or not you can dismiss an employee without compensation. Probably the most important thing to get right is the contract of employment for your staff, together with your grievance and disciplinary procedures. Getting these right now can save you money in the Employment Tribunal later. We can advise you on these matters and draft suitable contracts of employment for your staff.
Whether you are providing a service or selling goods it is sensible to have written terms of trading; it can save arguments with your customer later on. The only exception is if you are selling by retail in a shop - but even so you should know what your legal obligations are to your customers.
Terms of trading usually appear as small print on the back of order forms or invoices - like most people you probably ignore them on any invoices you receive. Don't ignore the small print on your own invoices - it is vitally important.
We can draft standard terms of trading which are tailored to your requirements. Tell us about what you are selling or the service that you are offering, any problems which arise in that particular trade, and we will prepare the small print to protect your interests.
Firm credit control is essential from the start. You will only make a profit if your customers pay you for the goods and services provided. If it is possible in your trade, collect a deposit from the customer when he places the order. In the case of goods, insist on payment on delivery, if not before. Consider accepting credit cards - although you pay commission to the credit card company, you are guaranteed payment, and can usually verify the customer's credit worthiness before completing the sale.
However you may have decided to go into a wholesale business when it is usual to give your customers 30 days to pay. If that is the case, do not allow them to over-run the time limit - refer the unpaid invoice to our debt collecting department. In most cases a solicitor's letter produces immediate payment. We will be pleased to discuss credit control with you in more detail, and let you know our requirements to collect your unpaid bills quickly and efficiently.