Starting A Business - Part 1

Starting a Business – Part 1

Table of Contents

Introduction

You’ve pondered, perused and prevaricated and now you’re ready to strike out on your own; to make your own path and work for yourself… you’re going to be starting a business!

Make yourself a cuppa and spend some useful time learning from those that have been there before. This article is the first in a series that will help explain and demystify the process of starting a business, in plain English… Let’s go!

First things, first

Before doing anything, you need to consider the long-term, which means defining the format of your business.

Essentially, will your business be something you may want to sell in the future?
Will your business need considerable investment in capital equipment?
Will you cover all risks yourself, or do you need to limit your risks?
Are you starting your business alone or with one or more partners?

Do I need to tell anyone that I’m starting my business?

The short answer is ‘Yes’. Whether starting your own gardening service, or an import/export business you will need to tell HMRC for tax and employment purposes and you may need to register your business with Companies House. If you think your taxable turnover is going to exceed the VAT threshold you will need to register for VAT, regardless of the format of your business.

The UK VAT threshold is currently £85,000 (October 2022) but is subject to changes so keep an eye on the level on the government website here.

Business Structure

In the UK there are four main types of recognised business structures:

Sole Trader
Partnership
Limited Liability Partnership
Limited Liability Company

Structure Options

Structure	Main Features	Tax	Responsibilities
Sole Trader Trading As (T/A)	Truly independent and working for yourself. There is no business that can be sold or sued.	You submit an annual tax Self-Assessment to HMRC	You must notify HMRC if going self-employed
Partnership	You and your business partner(s) are equally liable for the business’s debts or claims made against it	Each partner is responsible for their own Self-Assessment	Each partner must notify HMRC if going self-employed
Limited Liability Partnership (LLP)	Minimum of two partners. You are protected from the business’s debts (or claims) and your partner’s debts (or claims) above your limited liability. You remain, generally, a self-employed contractor to the LLP	The LLP pays Corporation Tax and each partner deals with their own Self-Assessment	Registered with Companies House. File annual returns with HMRC and Companies House. Have an LLP agreement that describes how the business will be run.
Limited Liability Company (LTD)	Your business has its own legal identity and its own legal responsibilities. You are protected from the business’s debts (or claims) above your limited liability. You, generally, become an Office Holder of your business for employment law purposes but may come under PAYE for salary / HMRC purposes for the non-Office Holder element of your job.	Corporation Tax for the LTD and PAYE for each director (generally) that is an employee and Self-Assessment for the role of Office Holder	Registered with Companies House. File annual returns with HMRC and Companies House.

Nice and Simple

Essentially, as a Sole Trader, you can just start working and begin billing for your work, something suited to someone that is providing a service that doesn’t require a large investment in equipment or stock. Just set aside enough of your earnings to pay your taxes, print some business cards and you’re in business. The same goes for a partnership but you should have some kind of written agreement about who does what and how money is split, etc.

Everything is nice and simple… but.

A local engineering firm began as a Sole Trader over 30 years ago, investing in more and more CNC equipment etc., but, when it came to retirement for the founder there was no business to sell or even to pass on to his son, just a collection of machines that were personal property. Throughout the decades, the founder had been exposed to 100% of the risks when financing equipment and potential bad debts that could lead to him losing his home etc.

Starting a business - electrician's tools

Formal structuring

The alternative to ‘nice and simple’ structures are the LLP and LTD routes. Here you will need to form and register your business with Companies House. You will be required to formally declare the names and roles of each person (partner or director/company secretary). You will also need to confirm these people annually and record any additions/removals, and, of course, submit annual financial returns.

The upside of the formal structure is that you are separated from the liabilities the business may develop. Any supplier providing credit is doing so to the business entity, not to you. Any claims will be against the business entity, not you, provided that you execute your role as Office Holder correctly, legally, and ethically. And, because the business is an entity in its own right, it can be sold/transferred.