Setting up your business
There are three ways to set up a business.
- Start from scratch
- Buy a business
- Buy a franchise
Here’s a bit more info on each route, and the pros and cons associated with it.
Start from scratch
This is the scariest route but the one that will give you the most freedom to do things your way. It’s your original idea so you need to do loads of research and be prepared to work very hard. To take some of the pressure off, you could start a business from scratch with someone else. However, that’s a big commitment so think carefully about it and make sure you have the same goals in mind.
Some start-up businesses are versions of other businesses that have been successful in similar areas. Using another business as a template for your own can cut down risk. However, copying someone else’s business entirely could infringe on that entrepreneur’s legal rights, so watch your step.
Buy a business
When you buy a business you don’t just get the premises and the equipment – you get the customer base. That’s what makes buying an established enterprise a safer option than starting from scratch. It’s also more expensive but at least you know the business works. In time, you can add your own special sparkle to how the business operates.
Buy a franchise
When you buy a franchise you become part of a much larger, familiar brand. With that comes support and the reassurance that potential customers know what your business stands for before you even open your doors. A franchise can work if you don’t have a clear business idea of your own. However, this type of business gives you less independence and fewer opportunities to follow your own route.
Which Franchise is a great resource if you’re looking for franchise opportunities and more info on franchising.
Which form of business is right for me?
The form of business is the way it’s recognised by the law. The form you choose your business to take will have an impact on the taxes you have to pay, as well as other legal matters. The type of business you plan on running and its size need to be considered when you choose your form.
To help you decide which form is right for you, here’s quick overview of the advantages and disadvantages of each option.
Sole trader
Self-employed, individual people working alone, like mobile hairdressers or electricians, are usually registered as sole traders. Registering as a sole trader is the simplest and easiest way to get started in business. However, as a sole trader you don’t make the savings of those who register as limited companies. Limited companies by comparison, save on National Insurance and tax.
The good news
• It’s so easy! Just tell HMRC that you’re setting up and register for VAT if you’ve a high enough turnover (unlikely at first)
• You’re the owner, you stay independent and you are the business – there’s no separate legal entity
• All the profits, after tax, are yours to keep. Plus, unless you earn a lot, your total tax bill could be lower than if you formed a limited company
• The financial records are easy to keep and the opportunity to become a limited company later is always there
• It’s easy to wind up as a sole trader if you need to
The bad news
• If debts mount you’re personally responsible for them so your personal assets (like your house and car) are at risk
• You have to pay income tax on business profit and the money you draw from the business to live on
• Everything is down to you, which can leave you feeling alone and all the losses fall on your shoulders
• You’ve fewer social security benefits
• Getting investment and raising capital is more challenging
• It’s much harder to sell a sole trader business
Partnership
Two or more people running a business together can form a business partnership recognised in law. It’s a bit like being a sole trader, except that risk, profits and cost are all shared.
The good news
• Teaming up may mean you’ve access to more capital
• You’ll also have more skills, knowhow and experience
• Introducing extra partners could bring extra investment
The bad news
• Each individual has personal liability for business debt, whoever caused it
• Making big, important decisions can be tricky if you disagree
• Partnerships can be challenging on a day-to-day basis
• You may find it costs money to set up the initial legal agreement
Limited Company
Limited Companies are separate from the people who own them. That means that owners, and their assets, are protected should debt mount up. This legal protection can mean it’s worthwhile to pay the costs associated with setting up and running a limited company. A limited company can have a few co-directors, or just one. They can choose to raise capital by selling shares in the company. Sometimes, people who began as sole traders set up limited companies a little later to let he world know they’re grown or to save money on tax and National Insurance.
The good news
• When you trade as a limited company people take you more seriously
• The company is a separate legal entity so your personal assets are protected
• Raising investment is easier
• Money can be kept in the business because of tax advantages
• Money can be taken from the business as dividends connected to profit
• If owners sell or retire, a limited company simply carries on as usual
• It’s easier to sell a limited company
The bad news
• Annual accounts are much more complicated
• Setting up a limited company costs money and there’s a lot of form filling to do too
• National Insurance payments are higher
• When your turnover hits £5.6 million you gave to pay for an audit to be done
• It’s is more difficult to stop trading
• Accounts are harder to stay on top of and you must file them every year with Companies House
Limited Liability Partnership (LLP)
Don’t get confused – this isn’t a partnership, despite its name. A Limited Liability Partnership is a corporate body with its own legal identity. It’s a bit like a limited company and a partnership combined. If you choose a Limited Liability Partnership, you’ll need a legal agreement in place that sets out what is expected of each individual involved.
The good news
• As with limited companies, LLP members’ responsibilities for debt are limited
• An LLP gives you the flexibility of a partnership and is taxed like a partnership too, with the money charged on profits, rather than being taken from the business
The bad news
• Annual accounts need to be prepared and filed
• There are other filing requirements too, with strict deadlines
• You must register a LLP at Companies House, which costs money
• A members’ agreement is absolutely essential