01270 2600959 Ossmere Close, Sandbach, Cheshire CW11 1FBChartered Accountants in Sandbach, Cheshire

Starting a new business (part 1)

Mar
3
2014
Starting a new business (part 1)

You are thinking about starting your own business but there are a great many questions to be answered such as will your business make money, what business format should you set up, whom do you need to notify about your new business, what do you need to do if you intend to employ staff and many more. This help sheet is the first in a series that will give you information to help you answer some of your questions.

Will my business make money?

You may have decided to turn a hobby or interest into a business or believe you have a particular knowledge or skill that you can market to other businesses or consumers. Regardless of your reasons for wanting to set up your own business you must be sure that it will provide you with a satisfactory income based on the time you will put into it.

Carrying out research about your business idea will give you an understanding of your target market, the demand for your product or service and help you with decisions such as how much start-up finance will be required, will you need business premises or can you start your business from home and how should you price your products and services. Practical research may include running your business idea on a part-time basis to ‘test the market’.

To be as confident as you can be that your business will generate enough profit to provide you with a living you should prepare a business plan. This plan will also provide support to any applications you may make for assistance and finance from others, such as banks, when you are first starting out.

What business format is right for your business?

You can operate your business in one of four ways:

Sole Trader

This format gives you total control of your business and is one of the most popular choices for new businesses. Many people start off as a sole trader but as their business grows they often decide to incorporate (see limited company below). The administrative burden of a sole trader is the least onerous of the four options for your business but there are disadvantages such as difficulties in raising finance and the issue of unlimited liability which could result in personal loss if something were to go seriously wrong.

Partnership

If there are two or more of you wishing to start a business together then a partnership is one option to consider. A partnership deed should be drawn up setting out the rights and responsibilities of the partners including the share of profits and losses, the capital to be introduced, the determination of tax liabilities and the changes required if a partner leaves or joins the partnership once it has been set up and the business has started. It is always best to seek professional advice when drawing up a partnership agreement.

As with a sole trader situation the partners will share unlimited liability unless a Limited Liability Partnership is set up.

Limited Liability Partnership

A limited liability partnership (LLP) is a corporate entity and therefore a partner’s liability is usually limited to the amount of their capital commitment to the partnership. An LLP is registered with Companies House and they are bound by company law in relation to must things except for taxation purposes where they are bound by the same rules as partnerships.

Limited Company

A limited company is a legal entity which is separate from its shareholders, or owners. By forming a company liability is limited however it is normal business practice for banks to require personal guarantees to cover loans to small limited companies.

A limited company has continuity as its owners can change, additional capital can be raised and its structure can change with limited impact on the management of the business.

However, unlike sole traders, the administrative burden can be high as there is a significant amount of company laws and regulations in relation to the operation of a company.

How will I finance my business?

The amount of start-up finance you need for your business will depend on a number of issues such as do you need to buy stock, will you be employing staff, are premises and equipment required. By preparing a business plan you will be able to quantify the amount of start-up finance required and thus determine where this may be available.

Personal funds

If you have capital of your own to use to start your business then you will not need to ask others to invest. However the need for a business plan is still important as you must be sure you will be able to make a return on your investment, pay yourself back and if raising funds by re-mortgaging your home you are not putting this at risk.

Family and friends

Other members of your family and/or personal friends maybe supportive of your business and wish to help you financially but it is advisable to draw up a formal loan agreement setting out any interest that is to be charged and how and when the loan will be repaid.

Bank finance

Bank overdrafts and loans may be a source of finance for your new business. An overdraft could be the best option if the finance is only needed intermittently or temporarily.

Government grants and assistance

The government and the EU provide financial assistance in many ways either as cash grants, tax concessions, rates relief, training and so on. This type of assistance is often targeted at certain industry sectors or geographical regions.

Venture Capital

Venture capital is usually available as funding to early-stage, high-potential, growth companies. It is available from private equity investors and also via the Enterprise Investment Scheme.

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