Having decided on your business idea, you need to start to put some structured thoughts together in the form of a Profit & Loss Forecast to see how good an idea it is and then a Cashflow Forecast to see if the idea works initially for 12 months and then for 3 years.
The Profit Forecast needs to take realistic views of how your Sales will grow together with any direct Costs of Sales if you are selling products, your initial costs to start-up, marketing costs, which will need a separate plan, and all the administrative costs such as rent and other office costs as well as salaries. From this point you can decide whether your business idea has merit.
You now need to look at the Cashflow Forecast to see if your cash can support your business idea. What do you have to start with, what and when are costs going to need to be paid even before you can make sales and do you have enough cash to survive? What can you change to improve things and are you able to borrow if need be?
The next step is to decide on the legal format for your business. Do you want to operate as a Sole Trader, Partnership or Limited Liability Company? (These are the broad categories although there are Limited Liability Partnerships and Companies Limited by Guarantee for more specific business formats. Discuss these with an accountant)
There are two main reasons to use a Limited Company; for Tax purposes or for protection against personal liability if you propose to trade. As profits increase, Corporation Tax of Companies usually costs you less than Income Tax of individuals. If you are trading goods and your customer fails to pay you as a Sole Trader, you are still personally liable to pay your supplier. If you trade through a Company, then the liability is limited to the Company.
If you wish to form a Company, choose a name and check that it is unique at Companies House.
If you are going into business with one or more others, decide on the number of Shares that each member of the Company is going to receive as dividends are payable in proportion to your Shareholding. There are also tax reasons for using different classes of shares within your Company. Discuss this point with your Accountant.
A Company needs to have a board of Directors. You can be the sole director or with others and you no longer need a Company Secretary.
It is important to understand the difference between Directors who run the Company and Shareholders who own it.
Each Company must have its Registered office either at your personal address or use your accountant’s office so legal letters come to the accountant’s attention.
You need a Company Register with details of Shareholders, Directors, Share Certificates, Registered office and minutes of meetings for Directors’ decisions and a Register for Persons of Significant Control giving percentage of shares and voting rights
Finally it is necessary to register for :-
- Corporation Tax for the company and Income tax for individuals whether Sole Traders or Company Directors.
- VAT if the business’ turnover will exceed £85,000 currently; you need to register when you can foresee that threshold will be reached within 12 months. We await changes to this threshold if the Treasury needs to increase the tax take for the pandemic.
- PAYE in order to take pay out of company. It is not your money until paid as fees, salary or dividends.
You will also need a separate bank account which differs from a personal bank account and you will need to decide who does the record keeping – Accounts package or simple spreadsheet but start keeping records straightaway – Save costs of accountant sorting out the mess if they are left.