So you've decided to start a small business and you're ready to get started but how do you start trading your new business?
Here are some things that you will need to consider to get your new business idea off the ground.
Sole Trader or Limited Company?
The first thing to consider is whether you are going to trade as a sole trader or a limited company. The type of small business that you are going to start will greatly determine which option you choose.
A sole trader is a business that is owned by one person (with no staff) who is solely liable for the company's debts and fulfillment of contracts. This type of business tend to be favored by traditional skilled tradesmen like gardeners, plumbers, decorators, plasterers etc.
The advantages of being a sole trader are:
Having full control over the business.
It is easy to set up as there are fewer regulations to comply with. You will just need to ensure that you contact the Inland Revenue to advise them that you are self employed within 3 months of starting the business.
You will not have to complete a lot of forms like limited companies, but you will neglect, need to have accounts prepared ready for your annual self assessment tax return to declare annual profits and tax liabilities.
As there are no staff you will keep all of the profits yourself, which can remain private as you will not have to declare them to Companies house.
You will not have to register the company and therefore can be known as anything since so many many traders refer to themselves as "trading as …"
You can build up a more personal rapport with the customer.
It will be cheaper for you as accountants will charge you less as they will only need to complete a profit and loss account for you.
The main disadvantages to this type of company are:
You will be solely liable for any failures or liabilities such as your business failing or property being damaged.
It can be harder to compete with larger companies who have more staff and can therefore complete work quicker.
If you become sick you will have no income. Even though you can take out critical illness insurance, some will not pay out until after 1 month.
If your business fails you could have forced to sell your personal assets, such as your house, to fulfill your liabilities.
However, as your business becomes more successful you can minimize the risks by forming a corporation or limited liability company instead.
Unlike being a sole trader, when you form a private limited company your are registered in such a way as to ensure that you have limited liability, with your company and personal finances being kept separate. A limited company is owned by shareholders and operated by directors. By registering your company as a limited company you will need to consider the following:
You will be subject to corporation tax.
If you anticipate turning over £ 77k or more per annual you must register for VAT.
As a director you will have more legal, financial and administrative responsibilities.
You will have less control over the overall running of your business as you will be answerable to the shareholders.
You will need to register with Companies House and will be required to submit an annual return along with annual accounts to them each year.
NBThe difference between a private limited company and a public limited company is that in a private limited company all of the company shares are in private hands whereas in a limited limited company the shares are owned by the public.
The main advantage of registering a business as a limited company is that directors and shareholders only have "limited liability" and therefore their personal assets can not be touched, unlike being a sole trader.
When you start a small business you are in effect becoming self employed and will therefore need to inform the Inland Revenue that your income may change. Even if you keep an existing job you must still inform the Inland Revenue.
The same applies if you are going to employ staff. You have an obligation to collect and pay their PAYE contributions to the Inland Revenue. The Inland Revenue will provide them your new business with a PAYE number and an account office reference number.
You can either do this yourself or you can appoint an accountant to all of this for you and to pay the wages and salaries on your behalf, which is what I do with one of my larger businesses.
Choosing a small business name
Creating a good name for your business is important. When choosing a name for a business, it is important to make sure that the name is not already in use, otherwise you could be sued.
You can either check with Companies House wherever the name you have chosen is available or if you are considering an online business or having a website for your business you can go online using sites such as go daddy to check wherever the domain name that you want is available.
I personally used to think that when naming a company you should make sure that the name reflects what your business is about, but many people argue that the name should be something that is easy to remember or one that is unusual and leaves a lasting impression like "confused.com" or "funkypigeon.com". After all who would have imagined that these types on names would turn into multi million pound enterprises?
If you plan to start a limited company, then you will need to register a company name with Companies House. They in turn will issue you with a company registration number that will be unique to your new company.
Companies House will then keep details of your new business including account and address details, for third parties to be able to view.
Small Business insurance
Regardless of what small business you start, you will need to take out a small business insurance to protect your business and your customers. There are many specialist insurance brokers who can put a package together to suit your company's requirements.
Make sure that you have your insurance cover already set up before you start your small business venture to ensure that your equipment and your promises are secured while you are setting up your business.
Once you have implemented the above points, you will be ready to start trading your new business.