Fired up with enthusiasm for producing the next must have widget or providing a service that will break social media? Don’t get carried away – consider the following points…
1. What form should the business take? For example, a sole trade, partnership or limited company?
Very often, a sole trade business is the way to start, as it is inexpensive to start (and stop if things go wrong…), it is also a quick way of starting with the minimum of admin. However, the tax planning opportunities are more limited, especially if you have another source of income, perhaps a salary. You also have unlimited liability so if things go wrong, your personal assets are at risk.
A partnership can be effective if you wish to bring someone else into the business; it shares the same advantages of the sole trade but also the negative of unlimited liability. In my 25 years of experience, I have also seen business partners fall out many times so you need to tread carefully.
A limited company can be a good solution; as the name suggests, business owners are only liable for the capital they have put into the company, hence personal assets are protected. There can also be tax advantages if you have another source of income and/or the profits of the company are above, say £50,000. However, they are more expensive to start and to stop and the admin burden is considerably more.
2. What finance will I need to get my business off the ground?
Consider what finance will be needed in Year 1. Be wary of committing too much finance before expected returns because, if the business does not go well, you will be substantially out of pocket.
Be wary also of short term finance like an overdraft or credit card debt as these can be expensive. Try to match finance with revenue, for example, try to get a fixed term loan to fund assets that will be used to generate revenue in the long term.
It is also worth looking at what start up grants are available, both in general, but which might also be specific to your business or area.
3. The likely cash position in the first 2 years
Many start-up businesses do not succeed, not because the idea or product isn’t a good one but because the business owner simply runs out of money. There are many ways for a new business to spend money; for example on a flash new website; or on expensive advertising. You need to consider what the business actually needs and what is an appropriate level of spend.
Consider doing a cash flow forecast to identify probable ‘pinch points’, as well as your anticipated forecast, also do a pessimistic forecast so you are prepared.
4. How will the business run alongside other income sources?
Many business owners already have a job or some other form of income when they start their business. This is because, very often, the new business is not in a position to replace their main income straight away. Managing both streams of income to ensure the best tax result can be tricky and this is where your professional advisor can help. Additionally, they can help you to manage the transition as the new business grows and takes over.
5. Who will my professional advisors be?
This is really the most important point as everything else comes from it. There is a multitude of issues for any new business owner to consider. Having the right advisors in place will help make the right decisions for the business at the right time.
The most important advisor will be the accountant; I’m aware I would say that, but it is true – the accountant should be looking at all aspects of a business and can act as a gateway for other advice to be sourced.
With this article, I am merely scratching the service of a very important and potentially complicated subject; I would therefore urge any potential business owners to seek professional advice before they decide.
At Thomas Westcott, we are experts at providing advice that potential business owners need. Call me to arrange a free zoom session to review your options and discuss your plans. Alternatively, please join us for our webinar, Starting a business during a pandemic on 28 January.