You have decided to start your own business, you have agreed the legal format your business will take (see our Starting up in Business (part 1) help sheet), and you are ready to go! But what do you need to do next?
Do I need to tell anyone?
No matter what type of business entity you have decided upon – sole trader, partnership or limited company – there are organisations you must tell about your business:
H M Revenue & Customs
As a sole trader you must notify HMRC that you are ‘self-employed’ as soon as you start your business. You will also need to register for self-assessment (if you are not already). More information about registering as self-employed can be found on our ‘So you think you are self-employed’ help sheet.
A partnership must register with HMRC and one partner must be nominated to deal with the partnership tax return. However each of the other partners must also register individually as a partner of a business for self-assessment.
If you have decided to set up your business as a limited company then you must notify Companies House who will then notify HMRC of the new company. HMRC will then send you a form that you must complete and return within three months of issue.
As a new business you may need to employ staff or if you have set up a limited company you may intend to pay yourself a salary. If this is the case you must register as an Employer with HMRC. You will be issued with an Employer PAYE reference and you will have to operate a payroll system that enables you to carry out Real Time Information reporting to HMRC for every period you pay your staff.
Businesses which reach the VAT threshold for compulsory registration must notify HMRC. The threshold for registration is revised every year. You may decide it is advantageous for your business to be registered for VAT even if it is below the compulsory threshold.
You may need to notify other organisations about your new business depending on where you are operating from and what type of business you are carrying out. For example if you buy or rent a business premise such as an office or storage yard you may need to notify your local authority as business rates could be due by your business.
What records do I need to keep?
Limited companies are required by the Companies Act to keep proper accounting records of money received and paid, of all sales and purchases, and of assets and liabilities.
If your business is registered for VAT then you must maintain financial records in accordance with guidelines set out by HMRC.
As an employer proper records for Pay As You Earn and for the calculation of tax liabilities must be maintained. Also your employer payroll must be capable of sending Real Time Information to HMRC.
How do I know how my business is performing?
Annual accounts are not enough to control a business. You will need to know how your business is performing financially on a more regular basis. Quarterly profit and loss and cashflow reports should be produced as a minimum but monthly reports would be better.
It is also important to know which products or services are generating a profit or, more importantly, a loss so the business can grow. You will also need to know the costs of different areas of administration so that overheads are not allowed to exceed gross margins.
A business should plan ahead and setting a budget may be appropriate so that actual results can be compared to expected performance. Business ratios and break-even analysis may also appropriate methods to set realistic financial targets.
The use of an accounting software package can make a big difference when it comes to providing fast and detailed information about how your business is performing. However, there is a wide selection of products to choose from so it is important to obtain independent professional advice on the suitability of a system for your business needs.