Since the turn of the millennium, the number of private-sector businesses in the UK has increased by 2 million to 5.5 million* as more people have taken the plunge and started up on their own. But it takes a lot of careful planning to launch a business that will have staying power, so how do you go about creating the right foundations for your new enterprise?
Making a plan
Research and business planning, supported by realistic financial projections, will help when approaching investors for funding and proving that it is a viable commercial idea. You should also show that you understand the market and your competitors. Plenty of supporting evidence will be needed of potential backers and customers to prove the viability of the company.
A robust legal structure and accounting systems are also vital, as well as research into potential tax reliefs. Insurance policies, operational budgeting and contingency planning should also be factored in. And on a personal level, entrepreneurs should consider the potential impact on their short-term finances, family and work–life balance before embarking on starting a new business.
The legal structures of a small business can vary. For many businesses, a limited company may be the best, but advice should be sought to fully understand your circumstances.
Sole traders are self-employed for tax purposes, and so don’t need any formal constitution but do have to prepare an annual self-assessment tax return. This structure can have fewer formalities, be more flexible and quicker to get off the ground. However it means personal liability for debts is unlimited, state benefit entitlement is limited etc.
Partnerships are a similar structure to sole traders, in that the business is managed by its owners, the partners, with the risks shared between partners. However, that also means the profits and control are shared (these can be equal or unequal shares). A partnership that borrows is effectively borrowing in the name of the individual partners, who are personally liable for the debts.
Limited companies are incorporated under the Companies Act 2006 and require a shareholder and director. These don’t normally mean personal liability for the company’s debts (unless a personal guarantee is given by the owner). They can also issue shares to third parties, in a tax-efficient manner, as the business grows. However, they are more complex and formal to set up, and require statutory formatted accounts to be prepared and filed with Companies House, along with an annual return and periodic filings over the company’s director and shareholder changes. Accounts must be audited if the statutory audit threshold is exceeded.
Limited liability partnerships are broadly a cross between a partnership and a limited company, however personal liability is limited. Companies House also needs to be notified of a business address and the names of partners. Public accounts must also be recorded annually and audited if the relevant threshold is exceeded.
Tax and record-keeping
HMRC requires new businesses to be registered shortly after commencement, failure to do so can result in penalties. Tax needs to be considered, including income tax, national insurance, corporation tax, PAYE compliance and VAT.
Income tax – payable by individuals and the partners of partnerships / LLPs on the profits of the business, normally twice a year on 31January and 31July. Current rates are 20%, 40% and 45%.
National Insurance – broadly payable in the same way as income tax on business profits, at 9% up to a certain level and then drops to 2% on all further profits.
Corporation tax – payable by limited companies on company profits, normally once a year for small businesses. The current rate is 20% falling to 19% in April 2017 and 17% in April 2020.
PAYE income tax – payable by employees of all businesses and directors of limited companies, on salaries and bonuses. Responsibility for compliance rests with the business. Calculations must be completed and returns and payments made to HMRC for every payroll cycle (normally weekly or monthly). Employees’ and employers’ national insurance (NI) is also calculated and paid to HMRC as part of the same process. Employers’ NI is a 13.8% charge payable by the business.
VAT – chargeable at 20% on sales by most businesses whose sales exceed £83,000 a year. Registered businesses can reclaim VAT on their expenses. Voluntary registration is also possible for certain business that don’t exceed the threshold.
It is crucial that records are maintained from the outset of any business, to maintain accurate records of income and expenditure. HMRC also requires records to be kept for the last six years.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Your St. James’s Place Partner will be able to advise you on which of our panel providers you would need to be referred to, given your particular circumstances for further advice in this area.
Views expressed in this article are those of the contributor and for general advice purposes only. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained here in can be accepted by the LLP or any of its associated concerns. Kingston Smith LLP is registered to carry out audit work and regulated for a range of investment business activities by the Institute of Charted Accountants in England & Wales.
*Source: Federation of Small Businesses (figure as of the start of 2016) www.fsb.org.uk/media-centre/small-business-statistics