I am regularly asked to give people advice ahead of them commencing with the launch of a new business. It is something that I, myself, have done successfully on a number of occasions, and as such I have learnt, along the way, many important things to consider. This blog summarises the main considerations, and should help as a useful reference point to those who seek my thoughts in the future.
The first things to think about very seriously are as follows. (i) Are you ready to give this new venture everything you’ve got?, and (ii) Do you have a good product or service that people will want to purchase at a level that makes the whole idea worth it? You need to be totally committed and prepared, at least initially, to be living, breathing, thinking and sleeping this idea. But before all that, will it actually give you, in terms of income, job satisfaction or whatever other measure that defines success, the results you are looking for?
What’s in a name? Well absolutely everything. You really need to work hard at coming up with a good business name (and the associated brand identity) that will stand the test of time. Your name and accompanying tag line needs to reflect the kind of business you see yourself being, not just today, but years down the line. Do you want to put your own name within the title of the business? This may, or may not, be a good idea. If we take the name ‘A Smith Ltd’, what is that actually saying to customers? Should the name not reflect what we do? I would always go with a big YES on that front. So, ‘A Smith Plumbers Ltd’ would be far stronger in my opinion. What about reflecting the marketplace in which you trade, either geographically or by sector? So, we could end up with ‘A Smith Household Plumbers Scotland Ltd’. OK now things are getting a bit bonkers and we have possibly gone too far. That is where the importance of a tag line comes in (something that should be included in all marketing material, from the signature on your emails through to the words on the side of the van). Now, we may end up with ‘Plumbers Scotland Ltd’ as the name, supported by the tag line, ‘Delivering Quality Service To Householders’. Other things to consider in your name choice are as follows. Is anyone else using the same name, and is there web domain names available for that name? For the former, you can check Companies House for Ltd company names in the UK, as well as resources such as National Business Register. And don’t forget the easiest of checks, using internet search engines. And here is the point. If anyone trading in your sector and/or your trading area geographically has a name similar to yours, you would be well advised to steer well clear and come up with something different. To not do this would be an open invitation to being forced to, later down the line, having to totally re-brand your business (sounds expensive and risky). And to finally close off this paragraph, the web domain name? For goodness sake do not go all the way down the line of getting the business name checked and registered, to then find you can’t have a web domain that reflects your business name. So check this out early on.
Should I go for Limited (Ltd) Company Status, or should I be self-employed (or a partnership)? First of all, becoming Ltd isn’t that complicated. In fact it can be done in a matter of days, as opposed to setting up a business bank account which can take, relatively speaking, far longer. Being Ltd has certain requirements, but comes with it the protection from risking your personal assets. Also a Ltd company has its own separate legal identity to its owner(s). This means that when you work for your own Ltd company, you are actually an employee of the business you own as a shareholder. Being self-employed also has benefits and risks attached in that respect. Get good advice on these options, but in my opinion do not do one or the other purely based on a perceived cost, as in reality it’s not really a decision that needs to be driven by price.
Do I need an accountant? If you are Ltd company, then definitely yes. If you are a sole trader, you may be able to muddle through tax returns etc., yourself. But for the sake of a few hundred pounds per year (which can be written off as a business expense), if you can at least keep up-to-date with the books, is it worth your time doing all this yourself, and potentially making errors along the way? Now if you are not that busy (which may mean that every pound is a prisoner!), and you are up to date with your books, then it could be worth the effort saving on accountants fees. But, if you are busy, I would argue that you should focus on what you are there to do; deliver quality service for your customers. I have had direct experience of a small business not being able to deliver in a particular week because the boss was pulling together, at the last minute, the books and the tax return. What a shambles! I took my business elsewhere.
Do I need to be VAT registered? Well if your turnover is going to exceed the threshold set, then yes, you have no choice in this matter. On the other hand, there is nothing preventing you becoming VAT registered if you are below the threshold. There could be advantages to being VAT registered (e.g. allows you to reclaim the VAT on purchases), but, if many of your customers aren’t VAT registered (e.g. private individuals who can’t reclaim VAT themselves), then not being registered could give you a pricing edge over a competitor who is. So think about it in these terms, if you have the choice (i.e. below the threshold). Don’t, however, let anyone give you the impression that being VAT registered is complex or involves lots of extra work. The reality is, that this is not the case.
If I am a Ltd company, how much share capital do I need to invest? In short, as little as possible. Bear in mind that the shares you purchase in the business need to be paid for at the start. If you value the shares for 100% ownership at £10k, that’s what you need to put into the business bank account on day one. You aint getting that money back until you either wind up or sell the business (or some of your shares) in the future. If the business fails, again you are probably not getting your invested income back (or at least not all of it). The next question may therefore be, but the business needs £10k for start-up costs etc.? The answer to that would usually be along the lines of the following. Set the business up with minimal share capital (e.g. £100.00), and then give your business a personal directors loan of £9,900.00. You will be able to start taking this loan money back (not an option if it’s tied up as share capital) once the business can afford to pay it to you, either as a lump sum or over a number of smaller payments. I have seen some terrible errors on this front whereby people just haven’t realised the consequences of decisions such as this early enough in the process.
How much can I pay myself? Well in short, if it’s your own business (i.e. no other shareholders or partners), as much as the business can afford to pay you, but with always one eye firmly fixed on your cash flow projections. There are, however, a number of things to consider, even more so if the business is Ltd status. If you are a shareholder in a Ltd company you are also allowed to receive dividends (assuming profit has been made and the business can afford to pay), as well as taking a salary. It is wise to look at the best mix of these two methods of paying yourself from a tax and national insurance perspective. Tax rules etc. change every year. The best advice is to ask your accountant the most tax efficient combination of the two, for your personal circumstances. BUT you also need to allow for the fact that you will almost certainly want to ensure you are paying enough to cover national insurance contributions etc. which govern matters such as, are you contributing enough over the whole of any given tax year to ensure your state pension entitlement is being fully funded. If you are the only shareholder in the business then decisions in matters such as these are relatively easy, whereas with more than one shareholder you may need to allow for other persons circumstances, which leads me on nicely to the final point.
Should I own the business myself, or ask someone to be a co-owner? If there is no good reason to have a co-owner, other than ‘it would be nice’, then I would suggest, if at all possible, you go it alone. If you own it all outright, then you can make all of the decisions without anyone else getting in the way, or arguments occurring. Now that doesn’t mean, off course, that you can’t go to other people for advice or to bounce ideas around with. It just means once you have decided to do something, on a daily basis, you can move quickly and get on with it. On the other hand, when there has to be more than one owner (especially when it’s a 50/50 arrangement) you need to agree upfront, ahead of any potential disputes, how you are going to resolve differences in opinion. The time to agree all of this, is at the outset, not during your first heated debate! Many businesses can only succeed with the effort and true commitment of more than one person. If you are in this situation you need to prepare well, so that if there are disagreements the business doesn’t suffer and you remain together working effectively as a strong unit.
Health Warning: All of the above thoughts are of a generalised nature. Each business set-up has its own particular circumstances, and as such, in making any decisions relating to the above points you must seek specific professional guidance reflecting your own situation.