Introduction -the following page summarises the issues to consider before and during the process of company formation and setting up a small business for the first time...
Before You Start - before you start to set up a company you should consider your own aspirations, skills and experience. Many small businesses fail within the first year because their owners either don't have the necessary skills and motivations, or their fundamental business plan is flawed. Following company formation, business success or failure depends as much about individual as it does about the business concept and idea. Before you consider the practical actions, have you considered whether you should be doing it in the first place? You'll need to consider your motivations, level of skills and experience, quality of your business idea and the risks and rewards involved.
Small Business Advice - there are many well-established company formation agents and support organisations designed to assist small businesses, providing quality advice and guidance. They provide online information services and tools, telephone support and face to face advice in areas such as; raising capital, managing finances, employing people, finding and keeping customers, paying the correct company tax, complying with legislation and regulations, trading internationally and business networking. It is essential that you seek qualified professional advice in all relevant areas related to finance and the law. There are many online company formation agents in the UK, ready to facilitate the paperwork.
Choosing The Company Legal Structure - small businesses can be formed using different legal mechanisms. By setting up as a sole trader you can work for yourself, owning all rewards and risks. Most sole traders have a particular trade which they can capitalise on. As a sole trader, you will be responsible for your own business debts and will be personally liable for them. Sole traders will need to register with the Inland Revenue within three months of starting up. If you work for just one client then the Inland Revenue may not accept that you are self-employed. Instead they may decide that you are an employee of that particular client. Sole traders provide contractual small business services to their clients and do not have a contract of employment with the client. Another form of company formation is a partnership between two or more individuals. Partnerships may be legally formal or informal. Informal partnerships can be established by creating a simple partnership agreement by a solicitor. This could outline the any profit shares, management decision-making capabilities and responsibilities of each partner. It also may define the exit situations in which one partner may wish to sell shares in the business.
In this type of legal arrangement, members of the partnership may be personally liable for the business debts created by other partners. Conversely, a Limited Liability Partnership is a formal business arrangement in which your liability as a partner, is limited to the amount of money you invested at the beginning of the company formation. This may also include any personal guarantees linked to any business loans. Another popular form of business creation is a limited liability formation. A limited company exists as a separate legal entity in that its financial assets and liabilities are entirely separate from those of its shareholder owners. With the exception of a personal guarantee, shareholders are not liable for business debt of the company. It the company fails and can no longer trade, shareholders may lose their investment. Conversely, the profits and cash surpluses of the company, are the property of the company and not the director or shareholder. Profits are provided to shareholders in form of dividends. Directors of the company are also employees of the company and are liable to pay any relevant income tax and national insurance accordingly.
Producing a Business Plan - creating a successful business plan is the most important step in launching a new business. A business plan aims to crystallise your business goals, defines the business strategy, provide descriptions of the products or services you intend to offer and define the market opportunity. It should provide detailed explanations of how you intend to finance your goals and describe your unique selling points of your business idea. Producing a business plan is time-consuming and forces you to test and validate how realistic your assumptions actually are. Producing a business plan helps you look at the strategic aspects and critical success factors of your business idea. By producing a set of goals and targets you will have something to aim for in future. Without any business goals, how will you know when you have succeeded or failed?
Set up a Business Banking Account - all new businesses need to receive monies, pay bills, borrow money, in order to process cash flows in and out of the business. Banks charge for a range of services including overdrafts, direct debits, standing orders, cheque books, visa transactions and so on. You will need to research to understand the types of banking facilities and services offered by banks, the role of the business banking manager, online banking capabilities and the real cost of banking charges. There are a range of number of major high street banks offering business banking. Most of these provide very similar services and so it can appear difficult to choose the most appropriate account for you to set up an account with. All limited liability companies need to open a business bank account in order to establish credibility and trade with suppliers and customers. Sole traders will normally have to use their own personal bank accounts or more likely set up an additional personal account, such as 'Fred Blogs trading as Acme Ltd'.
Raise Business Finance - all new businesses will need to raise capital to pay for the inevitable start-up fixed costs and on going expenses, (as sales take time to ramp up). However, it is becoming increasingly difficult for small firms to access business credit from high street lenders due to the credit crunch. Many entrepreneurs will have to provide a personal guarantee in order to secure a bank loan or overdraft facility. There are many other sources of business finance including, secured loans, commercial property loans, and business grants and offering equity to business angels or venture capitalist firms.
Business Taxation - shareholders and directors of new business start-ups need to educate themselves about the tax implications of running a new business. Nobody likes form filling, calculating or paying tax, yet we all accept that the country needs to fund its spending priorities through the tax system. Tax is inevitable and its impact on profitability must be addressed from the very outset. Failure to take advantage of any allowances and special awards offered from the government is heresy. It is very important that business owners seek professional advice from a regulated tax accountant.
Cashflow Planning - it is vital to produce a cashflow forecast during the start-up phase as well as learn about managing cashflow. Managing cash flow is one of the most important aspects for new business start-ups. Getting paid on time is absolutely critical to ensure that the business stays afloat and you can afford to pay business debts, wages, and tax and so on. It is important that you make yourself aware of the process of invoicing and chasing money that is due to your new company. Customers do not always pay for the supply of products immediately and will rely on efficient credit control process to collect the money. Unfortunately these outstanding unpaid invoices cause a cash flow problem for a company, as they find it difficult to pay their suppliers or internal expenses (such as salaries). To alleviate this problem, it is possible for a company to outsource/ sell or 'factor' the credit of unpaid customer bills to a third party institution (called a Factor), in exchange the majority of the unpaid business debt to be paid immediately to the company. This has the effect of speeding up cash flow as well as potentially reducing debt collection administration costs.
Consider Employment Issues - regardless of the type of the model you choose, you may have to employ people for the first time. This may seem daunting if you are unfamiliar with the rights and employment laws surrounding employees and employers. As an employer, you may face legal action from employees if you limit or break their legal rights in any way. You will also have to lead, manage and delegate their day-to-day tasks, keeping them motivated and satisfied in their work. Finding and retaining the right employees, may also be a challenge. You will have to familiarise yourself with the recruitment, vetting and identity checking processes, to help employ the right people for your new team.