How to start your own company or business?
On this page, we describe some of the considerations and steps involved in starting a new company. The quick and practical step by step guide is below.
How to start your business
On this page, we describe some of the considerations and steps involved in starting a new company. The quick and practical step by step guide is below.
The quick practical step-by-step guide
2- Open a business bank account at bank at any bank. Pay attention to the fee schedule
4- Setup yourself up on the appropriateVAT scheme(if relevant).
5Register for PAYEand sign up toShiftAI (on the free plan if you want). Be sure to also register at The Pensions Regulator and set up autoenrolment if it applies.
6- Look for funding and benefits online.
8 - Understand how to get customers and start making people know that you exist.
9- Keep motivated, keep working hard, be inspired. Ignore the naysayers.
Starting out for the first time on your own
Starting out on your own is a daunting prospect and requires a thorough self evaluation of your own motivation, the business rationale of the company you want to create and a little bit of luck and timing on your side to help you be successful.
Once you have resolved with steel determination that you have a concrete business proposition and you have examined the factors that will test your resolve, you can start planning the practical aspect of starting a business. Given the brevity with which the following topics are covered, the paragraphs are intended to provoke thought but are in no means intended to act as advice or cover all the complexities you will face.
Choosing a Legal Entity Type
Choosing the type of legal entity you want to do business as — there are a range of legal entities you can use for running a business. We look at only the most common ones here.
This type of company is usually where the individual is a contractor or sole owner and typically does not have any employees. However, in some cases you may have employees as well. FamouslyMike Ashley, founder of Sports Direct, kept his company under sole trader status for many years, even when he his company was generating millions of pounds in revenue. The key distinction here is that there is unlimited liability for the business. This means that as someone in business, if the business takes debts or is sued, you will personally be liable for all the costs for the business. A bankruptcy would mean both business and personal bankruptcy. This is because HMRC classifies you as both an owner and employee of your company. It might be sensible to refer back to HMRC’s guidance and go through step by step tutorial.
To register as a sole trader, you will need to apply on the HMRC’s websitehere. The conditions state that if you meet the following conditions:
- Earned more than £1000 from your business activity
- You want to qualify for tax free childcare
- You want to make voluntary class 2 national insurance contributions
When you register, HMRC will treat your income tax under the self-assessment, meaning that you will need to declare earnings, expenses, sales revenue.
Private Limited Company
Private limited companies are the typical setup for a range of businesses. The key difference from being a sole trader is that there is limited liability. This means that if the company fails or accumulates debts, you as an owner are not liable for the company’s commitments. Hence limited liability. In practice, what this means is that many customers or debtors such as banks will ask for a personal guarantee.
Essentially a private limited company has three defining characteristics:
- It is a separate legal entity from the person who runs it
- It has separate finances from your personal finances
- Is able to retain earnings after taxes
HMRC's site goes through the basics of what is needed to set up a limited company in the UK. These are a physical address for the registered office, at least one director, a shareholder, and a defined SIC code. The SIC code is the code used to identify what the trading activity of the company is based on the ‘Standard Industrial Code of economic activities’. Finally, you’ll need a name for your business.
A partnership is usually in the form of an LLP, limited liability partnership. This means that the partners in the company share liability personally in the business even though the legal entity is treated separately from the actual partners in the company. Partners share profits, but each pays tax on the income separately but are also liable for purchases made by the company. An interesting side point is that partners need not be people but can be a limited company. Quite often, to align incentives, professional services firms tend to be partnerships such as law firms, investment firms, even Goldman Sachs was a partnership until 1999.
The steps are relatively straightforward and similar to setting up a limited company. You can register your partnership here with HMRC, pick a name, check for a trademark.
A note on public companies
There are other forms such as a ‘the public limited company’, which is listed on a public exchange such as the FTSE 100, or AIM. This means that the shares in the company are publicly traded on open markets rather than through direct transactions, making them more liquid and the pricing more opaque. Generally most of us will not be starting public companies immediately, though some of you might get there in the end if you choose to do so. Successful entrepreneurs like Jim Ratcliffe and Evans Williamskept their companies private for a long time. Twitter has since had a public offering but Ineos is still very much private, with Jim Ratcliffe saying he disliked public markets. Mike Ashleyhas also lamented that his shareholders prevent him from being able to make decisions quickly and act on them. Philip Green’s company, Arcadia is still private, and so the pros/cons of being private versus public deserve a full discussion that this paragraph cannot do justice.
What will you name your company?
Picking a name for a company is no small feat and should involve some basic tests. See entrepreneur Jude Gomila’s blog on how to name your company. If you’re naming your company, you might want to think about the connotations that word has or what it sounds like or perhaps even what your chosen company name might mean in another language. It might be a good idea to check if there is an existing trademarkagainst that name.
There are companies like Firstformationsthat handle the legal setup and make the whole process very simple (which actually it is itself) for as little as £12.99. Another such competitor that provides this service is IncorporateOnline. There are many others that you can find from Googling. For a full list of HMRC formation agents, click here. Of course, all you get for that is the standard model articles of association and a standard shareholders agreement. These are important documents and hence should be perused in depth as the implications can be wide ranging depending on the context in which your company operates. If you need to add a foreign domiciled shareholder, then you’ll find that these websites may try and charge you for simple customisation. An alternative and if you have experience, and maybe you are relatively motivated to learn, then you can start the process on your own directly here on the HMRC website without these formation agents.
Registering for VAT
Do you need a VAT number?— If your company makes more than £85,000 in turnover per year, it should be registered with HMRC for VAT. There are a range of VAT schemes available to it is best to consider which would suit your company better.
For example— there is a flat rate VAT scheme which allows you to charge your customers 20% VAT(unless otherwise specified) but pay HMRC a flat rate. For example, this can be as low as 8% (see flat rate) if you opt to join the Flat rate VAT scheme. The eligibility criteria for different VAT schemes must be looked at closely to understand the pros and cons for your business.
Here are a few examples (both examples assume you are a small business and do not constitute advice):
Regular VAT— your business buys from China and pays VAT and customs duty on computer parts. You then sell the computer parts via your online store. You buy £10,000 of computer chips. You sell these for £20,000 via your online store. Here, you pay 20% VAT on the import, hence £2000. You will then charge your customers 20% on the £20,000 of sales and hence receive £4000 in VAT. You will have to pay HMRC £4000, but be able to claim back the £2000 you paid when importing as VAT paid (note this example excludes customs duty which is probably also applicable).
Flat rate— using the same as the above example, except you pay pay the 12% flat rate. You will still charge £4000 on your £20000 of sales. However, in this case you will only pay HMRC 12% of £20000, so £2400. Unlike in regular VAT, you cannot claim back the VAT you already paid in the import, hence your total HMRC bill is £2400 + £2000 (on your import) = £4400. In this example, you’ve paid more VAT than on the regular scheme except the timing of cash flows of the business are slightly different. For example this may work better if your raw import supplies are very cheap and your selling price is high.
Here is another example
Regular VAT— you pay £20 on the import, 20% of £100. You charge customers 20% on your £4000 of coffee bean sales. Hence, you receive £800 of VAT from your sales, deduct the £20 you already paid on the import and then send the rest to HMRC, £780.
Flat Rate— you pay 20% on the import of £100, so £20. You charge customers 20% on your £4000 of coffee sales. You collect £800 from of VAT from your sales. You cannot deduct the VAT you have already paid, and you pay HMRC 12% of your £4000 in sales, which is £360. Hence, you’ve paid a total of £360+£20 = £380 VAT but you have collected £800 from customers. You are better off by (£800 - £380 = £420) paying flat rate in this example.
These implications can impact the cash flows and profitability of your business and extend to all types of businesses, not just the import transactions used in this example. A rational business mind will help.
Before you can do this, you need to register and get setup with HMRC. Read more about how to do this here. Of course, there are a number of ways to set up payroll, the old fashioned way is to set up a spreadsheet in Excel and manually put every employees’ details into the spreadsheet and enter the inputs each payroll. Store all your information on your employees on your hard drive and then manually update every change, record each PAYE payment, remember the pension contribution, set up the plan administrator, ensure compliance documentation, get the P45/P60/P11D forms set up. Setup benefits e.g. health insurance or gym benefit for employees. All of this thankfully, can now be done using ShiftAI. Even setting up payroll just for yourself at the beginning can be useful to use a payroll software system as it means you won’t need to learn the ins and outs of employee income tax.
Needless to say, keeping your books in order is very important to the smooth operations of your company. If you don’t you might end up not knowing if you are making money and simple analysis will take hours instead of seconds. That’s why accounting is so important, and for the layman it is also very simple to use software packages such as such as Xero or Sage or even accounting as a service like Crunch Accounting. You might find that is too difficult for you in the beginning, and there are accountants who will manage your books for you using your own software account. For example, finding a freelance accountant on an hourly basis can help, and it is best to test the field until you’ve found one that meets your requirements. ShiftAI Managed Services has a managed services product that if you are an accountant you can sign up to help provide accountancy services to companies that use ShiftAI's Payroll HR.
Finding a bank account
The main high street banks have competitive packages for new companies and are all relatively similar. For example Barclays Business Banking offers an e-payments account that is free for the first 12 months of trading and doesn’t charge per transaction Lloydsfor example, has many different accounts for businesses also. Mettle on the other hand has great a mobile app for sole traders and people just getting started and give you perks like free access to FreeAgent accounting. One thing to bear in mind is that unlike a consumer bank account, there are charges often related to the frequency of transactions. For example, if you withdraw cash from your business bank account at an ATM, you are likely to pay a transaction charge. If you use your business debit or credit card to pay for a non-sterling transaction, you will likely have to pay a fee. EvenRevolut for business charges quite prohibitive monthly rates for new companies. Again, a thorough evaluation of the fees and your likely usage should provide you with the best decision.
Funding and benefits
There are a range of business support services offering products such as Startup Loans, business loans,grants, free office spaceand accelerator programmes to angel investors. Whilst many of these services will not be applicable, some of them might be useful. For example Entrepreneur First helps recent graduates who are business minded partner up with technical minded graduates to start businesses. As a business owner you ought to understand the incentives of the other participants in this ecosystem and attribute that to the behaviour patterns that you would expect or not expect as in business, the age old adage, ‘it’s not personal, just business’ will ring true.
Whilst this topic can be cover many pages and thousands more words, one should not gloss over the SEIS and EIS schemes available to UK companies. A quick Google search will reveal the extent of the charlatans operating in this space, so caveat emptor, when looking for services to help. This scheme enables UK taxpayers to receive a rebate against investments made in early stage companies, thereby encouraging angel investments from regular people in addition to the traditional angels who are often more demanding in their investment terms.
Running your own business requires a lot of hard work. At every stage of your company from inception to expansion you will face challenges. Continue to re-evaluate where you are and why you are doing what you are doing. Read business literature such as Ben Horowitz’s The Hard thing about Hard Things. Keep looking for inspiration, learn from your own mistakes and observe the mistakes of others. Whether you are running a one man import e-commerce business to manufacturing electric cars components or selling professional services, every path you take will be hard and fraught with its own challenges.
On a final thought, do bear in mind, finishing projects is a hell of a lot harder than starting a project. Be careful to pick the right people to work with and finish the projects that you start. All the effort used until you complete the task is worth zero, right until the task is complete when all of a sudden it is worth one. In Peter Thiel's famous book, Zero to One, he discusses how to achieve this.
Good luck and tell us how it goes. And sign up to ShiftAI, at least the employee and HR for your business will be as hassle free and streamlined with software as possible!