smallbusiness.co.uk: Helping your business think big

As the economy improves, this could be the perfect year to start your own company. Read part one of our guide on how to make your dream business come true.

Legal structure

Choose the legal structure of your business carefully, as each one has different tax and legal obligations. Read our list below for an overview of your options. For the majority of structures, the first thing you will need to do is register as self-employed with HMRC. This applies to being a sole trader, a partner, or as a member of a limited liability partnership as an individual rather than a company. If you want to set up a limited liability company you will need to register with companies house.

Sole trader

This is the most popular business structure for SMEs, with around two-thirds registered as sole traders. Being a sole trader is the simplest way to run a business: it does not involve paying any registration fees and keeping records and accounts are straightforward. You also get to keep all the profits. However, you are personally liable for any debts that your business runs up, which make this a risky option for businesses that need a lot of investment.

For more information read our guide: How to succeed as a sole trader.

Limited liability companies

Limited companies exist in their own right. This means the company's finances are separate from the personal finances of their owners.

Shareholders may be individuals or other companies. They are not responsible for the company's debts unless they have given guarantees (of a bank loan, for example). However, they may lose the money they have invested in the company if it fails.

Partnership

In a partnership, two or more people share the risks, costs and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.

Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved - although the business can still continue.
A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.

Limited liability partnership (LLP)

An LLP is similar to an ordinary partnership, in that a number of individuals or limited companies share in the risks, costs, responsibilities and profits of the business. The LLP structure incorporates
The difference is that liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. This means that members have some protection if the business runs into trouble.

Franchise

Buying a franchise is a way of taking advantage of the success of an established business. As the ‘franchisee’, you buy a licence to use the name, products, services and management support systems of the 'franchisor' company. This licence normally covers a particular region and runs for a limited time, after which it should be renewable as long as you meet the terms of the franchise agreement. But this may not be a suitable option if you like to retain control over the way you run everything.

For more information read our guide: Open a franchise.

The Business Link website has a useful interactive tool on choosing the right legal structure.

Get your tax right

Payroll

If you are starting up a business, you will need to pay employees' income tax and National Insurance Contributions by setting up a Pay As You Earn (PAYE) system. 

The first thing you will need to do is register as an employer with HMRC. Once you have completed this process, you will need your employee’s P45 (from the previous employer) in order to add them to your books. If they don’t have one, then the employee will need to complete a P46 to get a tax code from HMRC.

Keep a record of all salary deductions made, including National Insurance contributions (NICs) and tax deductions. HM Revenue & Customs (HMRC) provides a P11 for you to record these details. PAYE and NICs will vary, but you can check the HMRC’s website for the current tax tables. 

There are software package that will help you with this. For example, the Inland Revenue provides a CD and there are number of other software providers on the market.

See How to pay staff for more advice.

Self-assesment

All small business owners have to a make a tax return at the end of the year. This can be very time-consuming, so it is a good idea to keep your accounts in order throughout the year. Paper returns need to be submitted before 31 October, while you have until 31 January to submit forms online. Failure to meet the deadline will result in a late penalty of £100.

For more information read our Guide to online tax returns.

Setting up shop

For many, working from home is becoming an increasingly popular option. The costs are minimal (all you need is a laptop and an internet connection) and it means you can stick to the security of having a part- or full-time job while you’re waiting for your business to get off the ground.

Read our guide Working from home for more advice.

However, if you do decide that you want your own premises, here are some tips.

The right kit

Don’t rush in to buying equipment. It may be better from a cash flow point of view to start by leasing. Danny Kinny, owner of a Norwich-based coffee shop did just this. ‘We initially leased [our coffee machine] for a couple of hundred pounds a month, but then later bought it when we made some more money. I did a deal with the company and we got it for around £4,000,’ he says.

Choosing your spot

Conduct research to find out how much footfall you are likely to get, this could simply involve counting how many people walk past the sites you are looking at. If it’s low, then be aware that you will have to do a lot more work to get people to come to you, instead of relying on the passer-by.

However, while the centre of the town may be the busiest spot, the rents might be prohibitively expensive. Antony Petrou founded his fair trade coffee shop Fair Grounds over a year ago believes there can be an advantage to setting up out of the centre in the early days. He says: ‘You can afford to make mistakes because the rent is cheaper. If you mess up, or it's quiet for a couple of months in the centre, you could go bust.’

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