Key financial considerations when starting your own business.
What issues should you consider when setting up in business? If you are starting, or have recently started a business, Swindells can help you with appropriate and professional advice.
It is the ambition of many people to run their own business. Some may have been made redundant and find themselves with free time and financial resources. Others make the decision to start up in business so that they can be more independent and obtain the full financial reward for their efforts.
There are a number of key factors which should be considered to make your business more likely to succeed:
- commitment - starting a business is demanding. Determination, resilience and enthusiasm are essential
- skills - you will need managerial, financial, technical and marketing skills. If you do not have these skills personally, they can be found in a partner or employee, or acquired through training
- your product or service should have a proven or tested market but must not conflict with the patent or rights of an existing business.
Your business plan
A business plan is the key to success. If you need finance, no bank manager will lend money without a sensible plan.
Your plan should provide a thorough examination of the way in which the business will start and develop. It should describe the business, product or service, market, mode of operation, capital requirements and projected financial results.
Use our handy business plan guide here for some tips on how to tighten up your business plan in 2022:
There are three common types of business structure:
This is the simplest form of business since it can be established without legal formality. The sole trader will be taxed on the business profits, rather than how much money they draw from the business. The owner’s liability for business debts is unlimited so care should be taken when borrowing money or taking credit from suppliers.
A partnership is similar in nature to a sole trader but because more people are involved it is advisable to draw up a written agreement and for all partners to be aware of the terms of the partnership. Again, the partners are taxed on their share of the profits, rather than the amount they they take from the business as ‘wages’. Liability is unlimited unless the partnership incorporates itself as an LLP or a Limited Liability Partnership.
A company’s business affairs are separate from the personal affairs of the owners, but there are legal regulations to comply with and various additional costs associated with running a company.
The appropriate structure will depend on a number of factors, including consideration of taxation implications, the legal entity, ownership and liability.
Books and records
All businesses need to keep records. They should contain details of payments, receipts, credit purchases and sales, assets and liabilities. If you are considering purchasing computer software to maintain your records, obtain professional advice as you will need to comply with the rules around Making Tax Digital or MTD.
The books and records are used to produce the accounts. If the records are well kept it will be easier to put together the accounts. Accounts must be prepared for HMRC and if a company is formed there are strict legal requirements as to their layout. The accounts and company tax return must be submitted electronically to HMRC in a specific format.
A company and an LLP may need to have an audit and will need to make the accounts publicly available by filing them at Companies House within certain time limits.
When starting in business, taxation aspects must be considered.
Taxation on profits
The type and rate of tax will depend on the business structure. However, the taxable profit will normally differ from the profit shown in the accounts because of certain expenses which are not allowed for tax purposes and the timing of some tax allowances.
National Insurance (NI)
Everyone will need to pay NI, but the amount and type of NI will differ depending on the structure, the profits that the business makes, the salary that goes through the payroll and whether any benefits are provided, such as a company car.
Value Added Tax (VAT)
When starting a business you will need to consider registering for VAT. If your taxable sales exceeds the registration limit which is currently £85,000 in a 12 month period or if you believe that you will make sales of over £85,000 in the next 12 months, you will be obliged to register. You will also need to consider appropriate software to ensure that you comply with the Making Tax Digital requirements.
- Employing others - If you intend to employ others in business, it is the employer’s responsibility to manage wages, deduct income tax, National Insurance and student loans etc. You may also need to make pension contributions for your employees – if you need more information on this please get in touch.
- Insurance - Comprehensive insurance for motor vehicles and employer's liability insurance are a legal requirement. Other types of insurance such as public liability, consequential loss, business assets, Keyman and bad debts should be considered.
- Pensions - Putting money into a pension scheme can be a way of saving for retirement because of the favourable tax rules.
For up to date information in detail on the above considerations please visit our start-up factsheet page on our website:
If you are starting a business and would benefit from an initial conversation, please get in touch with Robert Willison who will be able to advise you further.
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