Starting your own company: 6 steps for making sure your start-up succeeds

The starting point is having that initial ‘eureka moment’ and coming up with your business idea. Then it’s all about crystallising your core goals and doing the groundwork to make sure your new enterprise is roadworthy and ready to start the business journey.

But what happens next? For a start, you’ve got to keep HM Revenue & Customs (HMRC) happy and you’ve got to have the right elements in place to make sure the company runs smoothly and that your fledgling business turns a profit. Over half of UK businesses don’t survive the first five years of trading (a sobering thought) and you don’t want to add to that statistic.

But with some careful thought around how you set up your company you can give yourself the best possible chance of success – and give yourself a competitive edge in the process.

We’ve pulled together six ways for making sure your business is set up right and is built to go the distance.

1. Structure – limited company or sole trader?

Are you going to be a sole trader or a limited company? Choosing the right structure for your new business is important, so you need to understand the pros and cons of each and decide which suits your situation best.

The decision you make has some long-term implications for the future of the business – not to mention the amount of admin you’ll end up doing as a result. So let’s look at the key differences.

• Sole trader (the pros) – becoming a sole trader is the simplest way to become a business. You just tell HMRC that you’re now self-employed and decide what name you’re going to trade under. You pay your tax through self-assessment at the end of the year, and you don’t have to produce any public accounts or returns. If you’re setting up a ‘lifestyle business’ or freelancing, it’s the easiest option.
• Sole trader (the cons) – the downside of being a sole trader is that you and the business are legally seen as the same thing. Your personal and business finances aren’t treated separately and you’re liable for any debts and liabilities in the business. And if you’re looking to grow the business, being a sole trader can be very limiting.
• Limited company (the pros) – setting up a limited company means registering your business with Companies House and HMRC and becoming a director in the company. By doing this, you separate your personal and business finance and limit your liability (that’s why you’re ‘limited’). You pay yourself dividends when there’s profit – saving on tax as you pay corporation tax on your profits, rather than income tax. It’s easier to find funding and scale the business and you’ll have a more ‘professional’ brand to market to customers – in short, it brings some genuine kudos to your company.
• Limited company (the cons) – there’s a lot more reporting and admin needed when you’re the director of a limited company. You’ll have to produce public annual accounts and an annual return. And recent changes to tax mean it’s not as tax-efficient a structure as it once was, so tax planning may be needed to get the most from your income.

2. Setting up a limited company

So, which do you go for? Sole trader or director of a limited company? In a nutshell, it’s down to your ambitions for the business.

If you’re one-person operation creating a ‘lifestyle business’ or a freelancer with no plans to take on employees, being a sole trader makes sense. If you want to grow and scale, then a limited company is the option to go for. It’s more flexible, it’s more tax-efficient and the company can grow along with you.

For most businesses, a limited company is the way to go. And if you decide to take this route, there are some key steps you need to take to set up the company correctly.

• Register with Companies House.
• Choose a company name and check it’s not already registered.
• Register your business address.
• Give the names and addresses of your directors and shareholders.
• Specify their share capital and the percentages of who owns what.
• Put a shareholders’ agreement in place to outline responsibilities.

3. Open a business bank account

It’s important to have your company money and personal banking separate. And the simplest way to do this is to set up a business bank account for your new limited company.

A business account doesn’t just help you distinguish between your own money and the cash in the business. It also brings you the advantages of business facilities on your account, making it easier to agree an overdraft or get a business loan at favourable rates.

Most of the major UK high-street banks will offer business accounts, but it’s worth checking if your bank offers a live Xero bank feed. Barclays, HSBC, Metro Bank, RBS/Nat West, Santander and Silcon Valley Bank all offer live feeds that connect your internet banking directly to your Xero online accounting software.

Having a live link between your business account and your cloud accounting software has some real advantages, namely that you’ve always got a completely up-to-date view of your balances and transactions – a real bonus when you need to know your current cash situation.

4. Register with HMRC

Your Companies House registration will automatically notify HMRC that you’re now trading as a limited company. That generates a ‘Unique Tax Reference (UTI)’ that will be posted out to you. Keep this safe as you’ll need it every time you contact HMRC!

Once you’ve got your UTI, you need to register for all the various taxes your new business is liable to pay.

• First off, you’ll need to register the business for corporation tax.
• If you’re taking on employees, you’ll have to register as an employer for PAYE.
• If you’ll be charging VAT on sales you’ll also need to register for VAT.

Your confirmation letters and tax codes will be sent out in the post (HMRC’s still not quite as digital as it might be), but you can then set up an HMRC portal to view and maintain your tax online (make sure you write down your user name and password somewhere very safe as it’s extremely tricky to reset if you forget your log-in!)

5. Maintaining records – Xero!

Good bookkeeping and record-keeping is the foundation for running your finances smoothly and efficiently. And this is where Xero online accounting software adds real value for your business.

Xero is cloud software that gives you an incredibly solid foundation for your new business’ financial management, reporting and planning.

• Track all your sales and costs in one place.
• Mobile access to your key numbers, from your smartphone, mobile device or laptop.
• Raise sales invoices online and email them directly to your customers.
• Customise your invoices to be ‘on brand’ and to clearly show your payment terms.
• See which customers have outstanding payments (and send them automated reminders).
• A clear view of any suppliers you need to pay and when the bills are due.
• A snapshot of your performance, transactions and bank balances.

6. How to pay yourself

Once you’re a director in your own limited company, the usual way to pay yourself is through dividend payments, possibly alongside a small ‘living wage’ each month to cover your costs and living expenses.

Dividends are paid to shareholders (that’s you) when the business makes profit. And because you pay tax on the profit through your corporation tax (currently 20%), they’re usually a more efficient way to take money out of the business and put it in your pocket.

Changes to the way dividend income is taxed came into force in April 2016, which make dividends a less attractive option for some directors. If you’re earning over the new £5k allowance, you could be taxed as much as 38.1% on that income – and this is on top of the 20% you’ve already had taxed on your profits!

So, what should you do? There are other options outside of dividend payments, including paying into ISAs or pension schemes, but you’ll need to do some quite complex tax planning to make this work efficiently (come and talk to us if you do find yourself in this boat).

We’ll help you set up your new business

So, there you have it. Those are the core steps once you’re ready to take the leap and become the owner of your own limited company.

There’s a lot to think about, but if you need some support along the way, the FD Works team are always here to help you make the process as hassle-free as possible. Run your business idea past us. We’ll advise you on the feasibility of your plan and give you the pointers and guidance you need to improve and enhance your new company.

Who are Fd Works?

We’re a firm of accountants, business advisors and Xero specialists based in Bristol and Bath. Established in 2013 we provide a growing list of clients across the UK with hands-on finance support and FD-level strategic advice.