Deciding to start a business can be a big step. The volume of things you need to consider may seem overwhelming.
That’s why we’ve put together this simple guide. It aims to provide all of the basic information required, to make setting up a business seem less daunting. Exactly what you have to do will differ from one company to the next. The following, however, is general advice that should prove useful to all.
For further information on starting a business in Wales visit Business Wales.
How to choose a business structure
When you set up a business, you first have to decide what type of business it’s going to be.
Most new businesses adopt one of three main types of legal structure:
Sole traders
This is the simplest business structure. It is how most individuals run their own business if they have no other partners. You keep any after-tax profits but are also responsible for all business debts. In fact, personal and business assets are not considered to be separate if you set up as a sole trader.
Setting up as a sole trader is the obvious choice for most people who will work alone. That might mean providing freelance services from your home, or setting up as a self-employed builder or taxi driver.
Partnerships
Partnerships are companies set up by more than one person. Despite the name, it doesn’t have to be two people. They can contain far more than two people if desired. All partners have shared responsibilities for the business.
The exact nature of partners’ individual responsibilities can differ. They'll often be enshrined in a partnership agreement. In general, all partners will share a company’s debts. Partnerships also have more accounting responsibilities than sole traders.
Limited companies
Limited companies are their own legal entities. Their finances are entirely separate from those of the individuals who set them up. Most limited companies are ‘limited by shares’, which means they’re owned by shareholders. Unlike other business structures, limited companies also must pay corporation tax.
After-tax profits made by limited companies are shared between the shareholders. These businesses have by far the most accounting and management responsibilities. We’ll cover those in a bit more depth below.
Register with HMRC
Once you’ve chosen your business structure, it’s time to register with HMRC and other relevant bodies. Exactly what you have to do depends on your chosen structure:
Sole traders
As a sole trader, you’ll pay income tax on your profits and also National Insurance contributions based on the level of your profits. To set up as a sole trader, you will need to register for Self Assessment and file a tax return for each year. In order to keep those returns accurate, you must keep records of your business’s sales and income and expenses (you can find out more here about what business records to keep). You can trade under your own name or choose a different name for your business.
Though unlikely for a newly set up business, you must also register for VAT if your turnover is over £85,000. HMRC provide comprehensive details on how to set up a business as a sole trader.
Partnerships
When setting up a partnership you must select a partnership name and a ‘nominated partner’. The nominated partner is responsible for managing the partnership's tax returns and keeping business records. You must also then register the partnership with HMRC.
All partners must also send their own individual tax returns annually. Partnerships must also register for VAT if they have a turnover of more than £85,000. You can find more details on setting up a partnership here.
Limited companies
To set up as a limited company, you’ll need to register with Companies House. The easiest way to do this is online. It costs £12 and, in most cases, you can register for Corporation Tax at the same time.
To register, you’ll need:
- an official company address
- to choose a company name and check if it’s available
- the details of at least one director (company secretaries are optional)
- the details of at least one shareholder or guarantor, who can be a director
- to identify your People with Significant Control – for instance, anyone with voting rights or more than 25% of company shares.
You’ll also need to prepare documents that set out how you’re going to run your company i.e. your written rules. These are known as the ‘memorandum of association’ and ‘articles of association’. If you register online, your memorandum will automatically be created as part of your registration. For your articles of association, you can either use standard articles (known as ‘model articles’) or write your own and upload or send them when you register your company.
The final step is to check what company and accounting records you’ll need to keep and file with Companies House. You can hire other people to manage day-to-day running of your company, but as a company director, you’re legally responsible for company records, accounts and performance.
Once registered, you’ll get a certificate of incorporation which confirms the company legally exists.
Use this handy step-by-step guide to find out more about registering as limited company.
Create a budget or a business plan
Getting a new business off the ground isn’t easy. One of the most important tips when it comes to setting up a business is to be prepared. That means drawing up a comprehensive and accurate budget at the very beginning.
You need to think about and work out all of the costs you’ll incur when setting up and running the business. Exactly what those will include will differ from one business to another. The following are examples of costs many new businesses have to budget for:
- Equipment – Everything from computers and stationery to specialist plant and machinery.
- Communications – Costs related to setting up a commercial telephone line, web hosting and setting up professional email accounts.
- Vehicles – Hiring or buying vehicles for deliveries or other key business practices.
- Premises – Buying or renting office space or a shop front. Paying the rates and utilities for any premises.
- Marketing – Printing marketing materials, running advertising campaigns, or contracting a professional marketing agency, for example.
- Staff – Employee wages or paying for the services of freelancers.
Once you’ve drawn up a budget, you’ll have a better idea of whether your business would benefit from external finance. If you do need to get a business loan or other financing, you’ll need to produce a business plan. Even if you don’t intend to get finance, a business plan is still a useful tool for your business.
A business plan isn't just for helping to persuade potential lenders or investors. It can also help you to grow your own business and keep your objectives in focus. More importantly, it provides a road map to achieving those objectives.
It’s imperative if you want the business plan to be truly useful, that you keep it honest and realistic. What’s also helpful is to keep in mind the idea that your business plan is never complete. It should be an ever-evolving document that keeps up with your business’s development.
Get ahead of business bookkeeping and admin
When you set up a business, you have to quickly get used to bookkeeping and accounting. Even if your company takes a while to get going, you need to start keeping your books from day one. It’s crucial not only for filing tax returns but also for keeping proper track of how your business is doing.
Keeping your books means maintaining accurate, up-to-date records of company income and expenses. You’ll need to save and file things like invoices, receipts, and bank statements. You’ll also want to keep regular tabs on overall profits or losses. This can be done by using a simple programme like Microsoft Excel. Alternatively, you may be better served by investing in bookkeeping software.
There are also other financial and administrative considerations to get on top of as soon as you set up a business. For instance, you may need or wish to set up a business bank account. If you registered as a limited company, this is a necessity. If you’re a partnership or sole trader, it can still help you to keep better track of business finances.
Depending on your new business, you may need to take certain measures to ensure your compliance. Many companies need licenses or permits to operate legally. You may also need to think about things like data protection or cybersecurity, if you’re going to operate online.
Many businesses will also require some form of insurance cover. Business cover, like public liability and equipment insurance, is often a good choice. There are, however, lots of products available. Some form of personal insurance may also be helpful. You now have no employer to rely on for sick pay and other benefits.
Build on those foundations
The above advice and guidance should provide good foundations on which to build a business. The rest is up to you. Once you’re registered, compliant and budgeted, it’s time to really get your business moving.
What that means in practice will be different for every business. It might mean taking the plunge and buying that shop premises. It might mean hitting the email or the phones to drum up those first clients. Whatever it does entail, if you’ve followed our simple guide to how to set up a business, you’ll be best placed to make a success of it.
If you need funding to start up your business, learn more about the flexible finance the Development Bank of Wales can offer businesses based in Wales.
