Setting
up your own business
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Marketing
Involves selling a product or Service either in a “brick and mortar” environment
or over the internet
A number of factors might have led you to this
point of deciding to start your own business
1. Being made redundant or sacked
2. Burning desire to be your own boss
3. Looking for new challenges
4. Tempted by the desire of potentially unlimited income levels
5. Frustrations eg having plans, proposals rejected by boss
6. Company collapse
7. Reaching a particular age with no sense of achievement
8. Desire to have flexible working hours
The purpose of a business is two fold
• To create customers
• To keep customers
Customers buy products for two reasons
• To solve a problem
• To feel good or better
To have a successful business, you must
have
1. An outstanding product that satisfy a need i.e. solve a problem or improve a
situation
2. a product that will encourage repeat business
3. A packaging system that is cost effective
4. A good marketing strategy
5. A way to collect the sales proceeds
A basic checklist to starting your own business is listed below
1. Get a good business idea
2. Carry out a general research into the product / service, industry etc
3. Define your niche, the narrow the better
4. Write a mission statement that explains your niche for it to be clear in
your thought process
5. research market expectations, competition, customers etc
6. Name your business
7. Decide on a legal structure – sole trader, Partnership, limited company
8. Write out your business plan
9. Establish your market and supplies
10. Decide on your location- home based, locality or internet
11. Get licenses and permits
12. Seek Professional help e.g. Businesslink, Enterprise bureau, chamber of
commerce, small business advisory services etc
13. Explore / Contact your professional team- Banker, solicitor, accountant,
Establish supply lines
14. Source for finance
15. Get equipped – furniture, Computer, telephone/fax/answering machine,
business management software, internet access, business e mail etc
16. Get Professional stationary – letterheads, business cards
17. Network everywhere
18. Access employee needs
19. Develop an employee policy
20. Get “targeted education” – polish sales skills and presentation, marketing
strategy,
21. open for business
Starting up in business
Choosing the right format
When
starting out in business a choice has to be made as to whether to operate as an
individual (sole trader, or if there is more than one person starting the
business then as a partnership) or as a limited company. If you are serious
about your new business then you will almost certainly want to start from day
one as a limited company.
The
following points show why most business will work better in a limited company
format. If very little growth is anticipated then many of the advantages are
small. A very low turnover retail outlet, or a plumber simply selling his or
her own time, might decide to trade as a sole trader.
Advantages of a Limited Liability
Company
The
original defining purpose of a limited company is to limit
the business owner's financial liability. Any amount owed by the limited
company can only be paid from the funds and assets of the company. Thus, if
cash runs out e.g. because a large customer has failed to pay you or a large
legal claim has been paid, then only the assets inside the company are used to
pay the creditors. If there is a shortfall then the company will probably be
wound up.
As
a sole trader, a shortfall in the business is made up from private assets even,
potentially, the equity in your house. It should be noted that banks lending to
a small or start up limited company usually require a directors guarantee, in
which case any debt specifically owed to that bank will have to be found from
personal assets if the company cannot pay.
Taxation and national insurance
Despite
recent changes in the way dividends are treated in the tax computations of very
small companies, there is still a clear saving to be had by trading as a
limited company. Many factors need to be taken into account to calculate the
savings to you. For a business making a profit of £30,000 there is typically a
saving of over £2,000 in total payments made to HM Revenue and Customs when
comparing a single person limited company to a sole trader. As profits
increase, so does the saving gained by trading as a limited company. Most of
the saving is based on a small salary being paid from the company, and
remainder paid in dividends, thus reducing payment of any National Insurance.
However a significant amount of tax is also saved if there is any element of
reinvestment in the business.
Against
this some individuals require a higher salary, for instance for pension needs,
which will reduce the tax and national insurance savings. Accountancy fees
might be in the region of £1,000 more (depending on the business size) for a
limited company compared to the same business trading as a sole trader.
Stand alone business
By
trading as a limited company you have legally and practically separated your
business from your personal affairs. At a personal level this allows clearer
thought processes which can result in better focus and understanding of
business performance. The company will have its own bank account and own
financial records. It also allows the outside world to view and deal with the
business for what it is, rather than feeling that the business is an extension
of an individual with the potential complexities that can bring. Banks,
employees, suppliers and customers will all often prefer to deal with limited
companies. Ultimately if you are building a business that could be sold, this
will be easier as a limited company compared to a sole trader business.
Other factors
Each limited company must have a unique name, this means that by registering
your limited company you have prevented that name from being used in another
limited company.
Ownership and management can be separated in a limited company. This has little
consequence in the early days of a business, but gives far more flexibility
when looking at plans for expansion, investment or retirement.
A limited company will have its name, address,
shareholders, directors and secretary on the public record at Companies House.
It will also have to publish a balance sheet each year. There are no such
requirements for a sole trader; however a business will not usually want to
hide from the public. In fact publicity is one of the driving forces of most
businesses.
Record
keeping, VAT registration and returns, employment and salary records and most
legal requirements are similar for both sole traders and small limited
companies. Some additional rules apply to limited companies in terms of year
end accounts and corporation tax returns however these are no more difficult
than the general requirements applying to all businesses. Such items will be
dealt with by your accountant.
Franchises
A
franchise is a business system, usually with a predefined name, that is
purchased and operated independently. Well known examples include Ikea shops
and McDonald's restaurants. Although the system and name is created and defined
by the original entrepreneur, additional branches are then purchased and
operated by other business owners.
If
you are keen to own your own business but do not want the risks involved in
starting from scratch, then a franchise could be ideal. Many franchise
opportunities are advertised in this magazine. The cost of acquiring a
franchise is two fold. Firstly there may be an upfront payment. The franchisor
(the central owner) may require a payment from the new business owner to grant
the franchise or licence.
Secondly there will often be an ongoing commitment to pay the franchisor. This
could be a percentage of all future profits or a commitment to purchase
supplies only from the franchisor, or both.
Usually
the franchisor will provide a very detailed business system plan which must be
followed. One of the reasons for the success of franchise operations is that
the branches, or franchisees, all operate in a similar way; they will have a
"familiar feel".
Part of the specification will often be that the franchise is operated as a
limited company, although this is not always the case. It will usually be
beneficial to operate as a limited company from day one as the commitment and
profits will generally be higher when starting a franchise compared to start a
business from scratch.
A
word of warning. Business owners, whether highly successful or not, are
attracted to the idea of creating a network of franchisees. As stated above,
the central owner may receive large one off payments up front and a share of
the ongoing profits from the franchisee branches. This leads to some franchise
offerings being highly favourable to the central owner, but of little benefit
to the new business owners. Whenever purchasing a business it is important to
value what you are actually getting compared to simply starting a similar
business yourself.
Incorporation
Having read all of this, you may be thinking that
your sole trader business would really be better of trading as a limited
company. Many thousands of small businesses have gone through the process of
incorporation in recent years. A few years ago the tax savings for even the
smallest businesses were larger than they are now, however savings still exist
and there are still often more advantages than disadvantages to incorporation
for all but the very smallest and simplest businesses.
The actual cut off as to whether a limited company offers tax savings that
outweigh additional accountancy costs depends upon the individual circumstances.
In many cases, where dividends can be paid to the business owners, the cut off
is around £30,000 annual taxable profits.
Micro Business - Sole Trader
If
you are trading with no employees and low profits or a small number of
customers then the sole trader format might suit you. Examples where this apply
might be an odd job man, a home based building services supplier (plumbers
etc), or a single retail shop with small profits. Such businesses, with no
plans for expansion or reinvestment of profits back into the business, may not
be any better off trading as limited company.
One of the main factors cited for not wanting to
trade as a limited company is the additional paperwork and regulations. In
practical terms the paperwork is little different from for any VAT registered
business. With the VAT threshold currently £60,000 all but the very smallest of
businesses will have to VAT register and therefore not be faced by additional
day to day paperwork simply because they have chosen a limited company format.
On a day to day basis I see many successful
businesses. Occasionally I am introduced to a business that turns out to be
unsuccessful. The biggest and most common difference between those that are
successful and those that are not, is having organised finances.
All successful businesses prepare good books and
records, usually with some form of management accounts. A plan or budget will
often be in place, allowing the actual results to be compared. All of this
should be done from day one, and will quickly become second nature.
Such
record keeping and comparison need not be difficult or onerous, certainly not
compared to the other vital business activities of marketing and supplying your
goods or services. A very simple system can be used allowing all of the
financial transactions to be recorded, summarised and compared in one place.
In business there is no requirement for complexity
or to learn endless jargon. There is a requirement to understand you financial
results and position and make better decisions by taking account of these.
Consultants and Contractors
Many
individuals in certain industries such as IT or the oil industry obtain their
workthrough agencies. These agencies often require the contractor or consultant
to operate through a limited company, as opposed to operating as a sole trader.
The usual advantages of a limited company may not be a large factor, but there
will be little disadvantage and therefore this is not a problem. Such
businesses are often the focus of IR35 as outlined below.
IR35
The
IR35 rule is aimed at people who would be employees, except they have created a
"business" by trading as a limited company. If you have only one
customer at a time, and potentially for long periods, then IR35 must be
considered. It can apply to any occupation or profession, the classic example
is the "consultant" who advises just one "client". The
problem is that this relationship may be that of "employee" and
"employer".
By placing a limited company between the individual and the end user it was
possible to treat this relationship as a business, thus obtaining more favourable
tax treatment of expenditure and potentially generating the tax and national
insurance savings of incorporation referred to above. IR35 now prevents such
savings applying if the relationship would have been one of employee and
employer were it not for the limited company. Thus, if no employment
relationship would have existed anyway then IR35 does not apply.
The test of employment as opposed to self employment is based on a number of
criteria which are assed and the relationship reviewed as a whole. The
overriding theme is one of control.
If the worker can control the methods, hours, place, details and who performs
the task and if they are responsible for correcting defective work, taking out
insurance and can take on more than project at once, then they are probably not
an employee. In other words IR35 will not be a problem to them. If you do not
have control of all of these factors, or are unsure if IR35 applies to you then
professional advice should be obtained from specialists.
This article was written by Bibi Bunmi Apampa a Business Mentor at www.MyBusinessClub.biz
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