Thanks to the internet, the opportunities for going out on your own and starting a business are endless. Sectors tipped for big growth in 2018 include advertising and marketing, construction, and technology.
According to the latest figures from the Office of National Statistics, in the first quarter of 2016, almost 4.7 million people in the UK were self-employed. In the past two years, that figure is likely to have increased. So, what’s the attraction of going it alone? Despite gloom and doom reports of people being exploited in the rising ‘gig economy, self-employed people earn on average £5,000 more than employed workers, clock in fewer hours and are happy to get to the office in the morning.
If you have decided that this will be the year that you are going to go for it, this article is for you. It contains all the information you need to work out which type of structure is best for your business, how to set up a company, get funding and prepare terms & conditions.
But before we begin, let’s check that you have covered off the basics of starting your own business (you would be surprised how many people skip this step).
Starting a Business 101: The essentials before you ‘open shop’
You have likely heard this statistic time and time again – around 50% of small businesses fail in the first five years. If you are going to be successful, you need to look at the glass half-full, i.e. 50% of small businesses that probably started from scratch at the owner’s kitchen table or garage, generate enough turnover, and hopefully profit, are still going after five years.
So how do they do it? From the hundreds of start-up clients we have helped over the years, we can list several things that all the successful ones have in common.
One – They have done their research
Most people who launch a start-up do so in a sector they have either worked in for years or have at least been involved with on a hobby basis. Therefore, they know the market, potential competitors, and usually have several contacts in the industry. If you are planning to enter a new field, you must spend time doing your research. Volunteer or work in the industry, read everything you can and know exactly who your customers are, and what they want.
Two – They have invested heavily in their business plan
We all know that you should have a business plan, but how much time have you spent on yours? The best business plans are comprehensive and the result of weeks, if not months of work. If you need funding from investors or a bank, your business plan needs to be professional enough to establish credibility and trust. It needs to provide a realistic forecast of where your business will be in the next 3 – 5 years, and the steps you will take to get there. Take your time, understand your market and set realistic, achievable goals.
Three – Successful start-ups know how to manage cash-flow
The biggest sinker of new businesses is running out of cash. The saying “cash is king” is true. One of the biggest reasons for cash-flow problems is your customers or clients not paying their invoices on time (or not at all). Make sure you get credit checks on new clients, ask for an up-front deposit and be meticulous in chasing up late payments. Also, consider using direct-debit payment arrangements to automate the process of receiving what you are owed – whether B2B or B2C.
Common UK business structures
Whether you are a freelancer or plan to have staff, you will need to decide what kind of structure you wish to utilise for your business. The four most common structures are:
- Sole trader
- Traditional partnership
- Limited Liability Partnership
- Limited Liability Company
Each one has advantages and disadvantages, which are examined in more detail below.
The simplest form of business structure is that of a sole trader. For freelancers and those who do not plan to employ anyone, this can be a good option. Very little is required to set up as a sole trader; you are only required to notify HMRC, register for self-assessment and file a tax return every year. You will be taxed on your profits at the same rate as someone who is employed. You will need to register for VAT if your turnover exceeds £85,000.
The biggest disadvantage of being a sole trader is that you are personally liable for any contracts or debts incurred by your business. In addition, you may find it difficult to get a business loan or investment. However, for freelancers or tradespeople with low overheads and no plans to grow beyond the amount of work they can personally manage, being a sole trader is a quick, uncomplicated way to launch your venture.
Traditional partnerships involve two or more people pooling their capital and expertise to create a business. This often works well for ‘Mom and Pop’ ventures (and before you dismiss these as insignificant, Carole and Michael Middleton, parents of the Duchess of Cambridge run ‘Party Pieces’ as a traditional partnership, and their turnover is estimated at £30 million per annum).
Like sole traders, partners are taxed on the business profits. Each partner is also jointly and severally liable for any debts and contracts entered into by the partnership. One partner will need to be appointed to be responsible for all the business’s records and tax returns. They will be known as the ‘nominated partner’.
It is imperative that you have a Partnership Agreement if you plan to set up a traditional partnership or a Limited Liability Partnership (discussed below). Failure to do so means that the Partnership Act 1890 will govern your partnership, which may not be adequate for the modern start-up. Under the Partnership Act 1890, profits must be divided equally between partners, regardless of how much capital one party brought into the business, or how much (or little) work a particular partner does. In addition, under section 26, one partner can dissolve the entire partnership, simply by giving notice. This often happens when one partner retires or the partnership can dissolve immediately upon the death of a partner. It goes without saying that you will likely want more certainty on how the partnership is governed.
By entering into a Partnership Agreement, you and the other partner/s decide on matters such as:
- how profits and liabilities will be divided
- duties and responsibilities of each partner
- how to resolve disputes
- how and under what circumstances a partnership will be dissolved
Limited Liability Partnerships (‘LLP’)
An LLP is more similar to a limited company than a traditional partnership. As with limited liability companies (explained below), an LLP is a separate legal entity from its members, which means that each partner’s liability for debts and contracts is limited. Many professionals such as solicitors, dentists and architect firms adopt this type of structure.
You will need to file accounts and details of its members with Companies House, which will be available to the public.
Any loans the LLP gives or receives will be in its own name, as opposed to in the name of its partners.
Whilst LLPs are governed by the Limited Liability Partnership Act 2000, the partners can enter into a private and confidential agreement to govern their organisation. They are free to agree matters such as:
- who will be responsible for management
- how decisions will be made
- how new partners can be appointed
- how the profits will be shared
Limited Liability Company
Choosing this option provides several advantages, not least in cutting the amount of tax paid (NB: please take tax advice before setting up any structure). Company directors usually pay themselves a minimal salary to ensure they stay below the minimum income threshold for income tax and then award themselves dividends. Corporation tax is paid on profits.
Setting up a company is simple. You can either do it yourself or instruct your solicitor or accountant to do it for you. One of the first tasks (and often the most difficult) is to choose a name for your enterprise. It must be unique. You will then need to register the following documents at the Companies House:
- Memorandum of Association – this includes the names and addresses of the shareholders
- Articles of Association – this document outlines the duties of the directors the rights of any shareholders and generally sets out the procedures for how the company will be governed during its lifetime
- Form IN01– contains details of the company’s name, particulars of the director(s), company secretary (optional), details of any shareholders, and details of the share capital (if it is a company limited by shares)
It is also wise to have a shareholders’ agreement, particularly if you have several shareholders each investing different amounts of capital. A shareholders’ agreement is a private document that sets out the duties and responsibilities of the directors to the shareholders and provides rights for minority shareholders. It can also set out policies and procedures for resolving shareholder disputes. If you are looking for investment, having a shareholders’ agreement is another way of showing your company is stable and highly organised – always an attractive proposition.
Limited liability companies have a legal duty to file their annual accounts with Companies House and ensure that information on its shareholders and directors is up-to-date and accurate.
Having a brilliant business idea is one thing; however, no matter how modest or grand your idea, you will need capital to purchase supplies, market your product, and deliver it to customers. Some start-ups require very little in the way of initial capital, especially those that provide a web-based service such as content writing, web-designing, software development, and consultancy services such as PR. However, if you plan to sell tangible goods or open a food business, you are likely to be dealing with manufacturers and suppliers well before you open your doors. And regardless of your turnover, they will want to be paid.
There are three main ways of funding your start-up:
- Through your own savings and then organically allowing it to grow as sales increase (also referred to as ‘bootstrapping’)
- Start-up loans
- Acquiring investment
When people think of entrepreneurs, they imagine Type-A, super-confident people who happily risk their own money and that of other peoples. While this is still true, the rise in self-employment has also seen many others rely on their personal savings and hard-headed gumption to fund their venture.
Bootstrapping usually means much slower growth as the increase you do enjoy is organic, which in turn pays for the business’ expansion. This typically leads to long-term stability, which is attractive to investors if you wish to seek out third-party funding in the future. The downside is you may wait a long time to see a personal return on your investment, especially if you are reinvesting the company’s profits into further development.
There are several options you can explore if you wish to secure a start-up loan; the UK government is one of them. If you have a good idea, you can apply for a loan of up to £25,000. The current interest rate is 6% a year, and the loan must be paid back over five years. In addition to securing the loan, successful applicants will also receive mentorship.
Entrepreneurs aged under 30 can apply for a loan from The Prince’s Trust. In addition, local councils also have schemes. Also, don’t write off high-street banks, many of them are happy to work with start-ups as long as their business plan shows they can afford to pay back what they have borrowed. If you do choose to take out a bank loan, make sure you have the loan agreement checked over by a legal professional. This also goes for any insurance policies you sign up to; undetected costs contained in the small print can break an unprepared small business which is struggling with cash-flow.
Finding an investor
You may have heard of the term ‘angel investor’ during your research into starting your own business. These are wealthy people who choose to invest in your start-up in exchange for equity. Angel investors can provide a much-needed monetary lifeline for entrepreneurs and are often found amongst your friends and family, although they can also be found through successful networking.
To attract an angel investor, you need to be able to pitch your business well. Dragon’s Den provides an excellent example of how this is done, and the type of questions you will be asked by potential investors who want to see a return on their profit. You need to be completely transparent and prepared for some serious due diligence to be performed on both the business and yourself as a person, especially if your venture has yet to turn a profit.
Venture capital firms also invest in start-ups, especially those in the tech sector. In return for a capital investment, these companies will want a share in your business and potentially a seat on the manager’s table to ensure you are meeting projected financial forecasts.
Terms and conditions
Before you start to trade, you need to set out clearly to customers/clients and suppliers how you plan to trade
Your terms & conditions essentially set out how you will do business. If you do not have a clear set of terms and conditions for your trade, you can be at the mercy of others, who will impose their own preferred terms where possible. For example, many large corporations insist on 60-day payment terms (some even stretch this to 90 days). This can wreak havoc on your cash flow. By stating in your terms and conditions when you expect payment to be made for your services, you can set and agree expectations early on and control when money comes into your bank account.
Your terms and conditions should, as a minimum, cover the following:
- the price for the goods or services
- a description of the services provided
- payment terms
- refunds and returns policy
- warranties and indemnities
- your liability and insurance
- intellectual property rights
- any other terms specific to the transaction
- any express rejection of the other party’s terms and conditions
In addition your terms and conditions can include:
- the jurisdiction any dispute will be resolved in (English law and English court jurisdiction should be the starting point)
- a clause to exclude the right of third parties to enforce the agreement
- whether the parties can sub-contract any work and if so, is consent required?
- how disputes will be resolved
If you are conducting business through an online sales platform, you will need to ensure customers agree to your terms and conditions before placing an order. The legal requirements for how you should make customers aware of your terms and conditions has become increasingly onerous over the years, so you should ensure that your online processes are well thought out and presented clearly.
Going out on your own is an incredibly courageous, exciting step and is filled with opportunity. We want to celebrate your success and assist you in any way we can. If you have any questions regarding points that have been mentioned in this article, please call us on 020 3588 3500.
 Facebook was born in 2004 but did not reach the mass market until 2007. Twitter were launched in 2006
 The iPhone was launched in January 2007 and the Android came to the market in November 2008 – https://www.theguardian.com/technology/2012/jan/24/smartphones-timeline