What do you need to have in place BEFORE setting up a company?
Many people think that setting up a company is just a matter of going to a website and signing up to have a Ltd company created. However, that is far from it. That might be the noob way of setting up because it means you have not done enough planning and could end up with suboptimal setup. Many first time founders setup this way, without thinking too much before delving straight into setting up. This is a very common mistake. We have written a guide How to setup your own company but putting in some groundwork will help significantly. So what are the factors to think about?
What are the factors to plan for BEFORE setting up your company?
1. Business addresses
There are differences among the trading address and business address and registered office address. The trading address is physically where the business operates from. This is fairly straight forward if you are running a retail shop, but not so straight forward if you are running an online shop only. Perhaps you live in a dingy little place and the address may put off some customers from choosing your company. What are your options?
- Rent an office space. This could range from a serviced office location for a monthly fee such as WeWork or a local alternative (which is normally cheaper). For example, Flexioffices in London have a range of cheaper options. You could get a long term lease as well and given the effect on home working that Covid has had, many long term commercial places are fairly well priced.
- Use your home address. Many startups begin small, with a couple of students getting together in a dorm room, and then they begin shipping products or coding. This keeps your expenses down, and in fact, some of the space in your dedicated to your business can also be used as tax deductible. It's important to check with an accountant what you can and cannot do in this regard. The downside of this that your personal address becomes associated with your business and it is usually prudent to keep strict boundaries between business and personal life.
- Use a virtual address, such as those offered by FirstFormations. This address can be used for your business address and your registered address, but is usually not allowed as the trading address. This is because HMRC wants to know the address at which the actual work activity is taking place. This can pose challenges if your entire business is remote and all you do is drop-ship products from China. However, is a great solution if you have a plumbing business, and want to register all your business correspondence and publicly available information at a London address and use your home as your trading address as it offers some privacy.
- Registering the Director's Address. You will also need to have a director's contact details so these can be sent to Companies House. This is often an afterthought and many people think you can simply use the company registered address. Often, companies that provide these virtual addresses charge extra to have director's use the address for their correspondence so that is something to think about versus the downside of having your home address public. Most companies pay the extra for the obvious benefit of privacy.
2. Type of company
Most people immediately jump to the conclusion that they need to setup a private limited company. This isn't the case, and whether the need to setup a Ltd company is necessary is something that should be discussed with your business partners. Mike Ashley famously ran his company Sports Direct as a sole trader company even when revenue was in millions of pounds. Once you decide to make a company that is Ltd, there are obvious upsides and downsides. The downsides are the additional reporting, the need to publish annual accounts, use separate bank accounts. The upside is the clear division between work and personal life. Once you are setup, if any cost is a company qualifying cost, for example a train ticket to visit a customer, then that cost should be borne by the company and not your personal accounts. This kind of separation enables business reporting to be much easier to manage.
3. Accounting software
This is mandatory from day 1. You should not start a company and then several months down the line sign up to Xero's accounting software. That kind of laissez-faire attitude to managing your business transactions will cause significant and unnecessary headache when you come to reconciling transactions. Most software on the basic packages can be purchased on a monthly plan for £10-15 a month. Now, if you are a student and you don't want any monthly costs on your startup because you have yet to code the product, import the inventory or make the Shopify site, that is understandable. However, if you open a business bank account, you will need to connect your bank account to your software package to ensure every transaction is captured. A transaction doesn't just mean you spent £19.99 on Shopify for a month, it means that you have a copy of the receipt and have uploaded the PDF to your accounting software to support transaction. Unlike personal transactions on your debit card, a business transaction needs to have a receipt to support what it was.
Companies like Dext, are very useful as they enable you to simply scan or upload the PDF and all the details will be extracted and automatically synched to your accounting software. However, that is another added expense. If you get an accountant, your accountant may have discounts for packages which can help reduce the monthly costs. FreeAgent, for example, is owned by Natwest Bank, and if you have a Natwest Business Account, you can get FreeAgent for free, which will help save money in the beginning. FreeAgent, however, is rudimentary compared even to QuickBooks, so may be nice and easy to setup initially but could become a pain later down the line. Companies like Crunch Accounting , have been picking up customers by appealing to people are not confident in this area. We would encourage people to find their own chartered accountants, if they want to have a bookkeeper, as often the monthly fee is cheaper than buying each of these components separately.
Business insurance is mandatory if you run a business. Simply Business is a great website to search from a range of quotes for business insurance. There are three main insurance policies available. One is employer's liability is a legal requirement if you have employees. Professional indemnity is not required but could be based on certain business lines. Often, these two are purchased together by most businesses, and should be given due consideration before starting. Even if your company doesn't have employees, getting professional indemnity from a reputable insurance company should be given serious consideration.
5. Data protection
Due to GDPR and data protection laws in the UK, if your company processes personally identifiable information, such as customer sale, your company will need to be registered with the ICO. At the time of this article, the cost is £40 a year, and your company will need to specify a data protection officer. Once again, an address will be needed, so back to point 1.
6. Registering taxes with HMRC
As soon as you start operating, your Ltd company (if that's what you have) will need a corporation tax number. This can registered by going on the Government Gateway Account and setting up for the taxes. So, if you haven't sorted out your business address, you will be in a pickle yet again. A little like moving house, if you can avoid updates to your details, your company will have a better sense of stability. Other schemes such as PAYE (if you intend on having employees or even paying yourself), VAT (if your company will do more than £85k) and also useful if you want to be able to make purchases and claim back VAT. When you make a sale, you will charge your customers VAT, and this VAT then needs to be paid to the government quarterly. This will become an on-going requirement so before registering for anything, be doubly sure you need it and can pay for it.
7. Payroll software
Now we would be remiss if we didn't recommend ShiftAI's Payroll software to handle employee administration and HR. This is a must is you operate a PAYE scheme to pay yourself or your employees. Some accounting software enables you to run payroll without getting standalone payroll software, but because of the level of automation in specific payroll software, we recommend getting this. In addition, ShiftAI us free for the first user on the Startup plan. If your company has 5 employees and still can't spend on a payroll software provider, then there is something seriously wrong as the packages are £8 a month and the minimum living wage is £9.50 for an adult (above 23) per hour.
8. Ballpark setup, shutdown costs and basic thinking ahead
Most people get excited about starting a company. You and your colleagues at work may read about the Zuckerbergs and Musks and also think about starting your billion-dollar operation. However, most companies fail, around 90% of them don't last 5 years. There are a variety of issues that cause companies to fail and these pitfalls will be covered in another article. You have just covered points 1 to 7 for what you need to do before setting up a company. Now, what you should do is make business model in Excel or Google Spreadsheets and tally up the costs involved. This can be easily done by getting quotes and adding up the line items. Then, work out the costs of closing down, this includes submitting final accounts, paying the closing down fee to companies house, etc. Once you have these costs added, these costs will be your absolute minimum fixed costs for staying in business before you even spend 5 minutes working inside your company. Do you have enough money to start your project? If the answer is no, then continue to work in your day job and save up until the answer is yes. Starting without the necessary minimum resources will create the need to take shortcuts and shortcuts mean compromises which usually lead to inefficient outcomes, e.g. where you end up spending more long term because of bad trade-offs you need to make to make the budget work. A large number of companies that attempt to 'wing it' on the optimism that revenue will take off immediately fail as runway for basic costs is not available causing problems. There is a reason large multinationals pay hordes of extremely well paid strategy people to devise plans for all kinds of operational outcomes. Even as a sole founder or student in a dorm room, you should plan out possibilities and once you hit certain milestones, have decisions that automatically execute on plans and thinking that you have already decided on. Think Slow Act Fast, by Daniel Kahneman is a great way to start your business planning. Having said this, Eisenhower once said famously, "no plan survives first contact with the enemy".
9. Get started
Now that you know what steps you need to research and some of the on-going tasks that will be needed to keep the company running smoothly, and will be needed to be done monthly for as long as the company is alive, you are in a position to make the decision to start. Good luck and think of signing up to ShiftAI payroll to help you on your way!