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A guide to


Table of contents

1. Introduction

2. Things to do before you set up your business

3. Sole trader or limited company?

4. Choosing a name for your business

5. Tax and National Insurance Contributions (NICs)

6. Value Added Tax (VAT)

7. Banking

8. Accounting and bookkeeping

9. Data Protection and Consumer Credit Acts

10. Conclusion

Appendix 1: The pros and cons of becoming a limited company
Appendix 2: Useful addresses
Appendix 3: 10 Simple things you can do to boost your chances of succes

This guide was produced by The Smart Accountants and aims to

help you set up, start and run your business more effectively.

While all the information we give is correct at the time of publishing,

it is important to be aware that in certain areas information goes
out of date fast, so before making any significant decisions about
your business, you should always seek professional advice.
Things to do before you set up a business

Planning Your target market

Before committing to setting up a business, it is People choose to buy from businesses for a variety
important to carefully plan what you are going to of reasons and understanding your potential clients
offer, to whom and at what price. You also need to pain or problem is essential for your business to be
invest time to lay out the first steps you are going to a success. It may be that you are targeting a range
take on your journey as well as how you want your of clients with different needs, or a niche where the
business to look after 1 year, 3 years and possibly clients all have similar needs. Either way, being
even 5 years. confident that the market is big enough to give you
an opportunity for success in the long term as well
Unless you are planning to borrow money, theres as buoyant enough to be able to support the pricing
probably no need to write a War & Peace business structure you are hoping for are essential in your
plan, but having some sort of business path laid planning process.
out in writing will keep you on track and performing
at your best. If you are planning on borrowing Price
money or seeking funding, you will need a detailed The potential customers you are planning to target
business plan, together with financial projections. will more than likely have an established price
range that they are prepared to pay no matter
Here are some basics you should consider before what you plan to sell. Where your offering lies on
you start your journey: that range of prices will depend upon the value you
add to your clients.
Your product
The purpose of any business is to make money. In very simple terms, if you have unique skills or
Businesses make money by selling products or benefits that are short in supply, you will be able
services to buyers who have a pain to soothe or a to charge more for your product or service than
problem to solve and are prepared to pay money if you are offering a solution that is similar to
for the best solution. As a business owner you will your competitors. In order to be able to charge
provide a product or a service that solves a clients a premium price you can either deliver a unique
problem or soothes their pain. How you define and or short in supply solution, or consider delivering
describe your product or service will depend on your your solution differently. For example, you could
target market together with market conditions at the choose to major on providing really good service
time, but as an absolute minimum, you should be or flexibility if these add extra value to your clients.
addressing a very specific need in the market.
Finding your first clients when you set up your
business can be tough. It is important that before
you take the leap of faith into any form of self-
employment that you have at least some clients
signed up ready to use your service or ready to
buy your product. Working with people in your
network who know the value you can add is a
great way of getting started. Thereafter, you
should have a promotional plan that might involve
using networking, creating a website and seeking
referrals to grow your business.

Unless you need to invest in specialised equipment,
premises or tools, setting up your business neednt
be too onerous from a financial point of view. In
the ideal world, you will be able to self-fund your
investment, and you should also have rainy day
funds set aside for at least 6 months to see you
through the early days. If you do need funding, you
should always seek capital from a trusted source
and if possible avoid putting any of your personal
assets at risk. When it comes to funding, it is really
important to work with a trusted advisor such as
your accountant.

Management and control

Running a business isnt all plain sailing. Unlike
a job, theres no one behind you asking if youve
done what you were supposed to do or why you
werent at work when you said you would be. This
is particularly problematic for people who set up
businesses and run them from home. The freedom
offered by this type of work is liberating, but only
for those people who are sufficiently driven to
actually deliver the work before they enjoy their
freedom. While some small business owners enjoy
a great lifestyle, if you are in any doubt about your
self-motivation, you should think twice about your
Sole trader or limited company?

Its common for small business owners to start their

journey as a sole trader and make the move to
limited company later. But for some, the argument
for starting out as a limited company is strong.
There is no formula that lets every entrepreneur
confidently decide between one or the other, but
this part of this guide should help you move closer to
knowing which would work best for you. Thereafter,
you should seek professional advice.

How much do you earn/are you likely to earn?

In most cases there is a good argument for setting
up a limited company if you earn 25,000 a year
or more. While this isnt the case for every small
business owner, it is the magic number for most.

Are you likely to have a high level of expenses?

Limited company status allows for a broader range
of expenses and this may be advantageous for
some small business owners.

Are you planning a long term, growing career

as a contractor?
If so, then the likelihood is that you will enjoy more
tax planning opportunities by operating a limited
company than as a sole trader or working on a self-
employed basis.

Are you concerned about risk?

When you work on a self-employed basis or as a
sole trader, any losses you make or any debts you
incur expose your personal assets to risk. What
this means is that the likes of your home could be
at risk. With a limited company, in most instances,
debts and losses are ring-fenced to the assets
of the business, which means that your personal
assets are not at risk.
Choosing a name for your business

If you are a sole trader or are self-employed, you can call your business more
or less whatever you choose. The only possible issue that might arise is that
you could leave yourself open to attack if you choose a very similar name to
a competitor and this can be proved to have given rise to loss or damage.

However, if you are operating as a limited company, your choice of name will be
regulated by the Department of Trade and Industry and Companies House. You
will need to choose a name that isnt already in use, or doesnt resemble too
closely a name that is already in use. Apart from that, you need to choose a
name that couldnt be considered to be misleading e.g. Royal, British or Group.

The other thing that you need to consider when it comes to choosing a
name for your business is whether you are planning an online presence
or not. If you are, ideally your domain name and your business name will
match. This can add a further layer of complication when it comes to choosing
your business name but is well worth the effort of making sure you get it right.

Once you have your business name, you should display it prominently at your
place of work and it should appear on all business correspondence, alongside the
permanent address of the business.

Tax and National Insurance Contributions

When you trade as a sole trader or on a self- 1st April 2020, 18%. This means that many small
employed basis, your personal and business tax business owners could be better off working under
are treated as the same. If you operate as a limited a limited company structure. Whats more, when
company on the other hand, your personal tax you operate this way, you become an employee of
affairs remain personal and the business is required your own company and can set your income based
to make its own tax return. on a combination of salary and dividends according
to your business results and your personal needs.
Sole trader tax and National Insurance When you work this way, you will pay PAYE and
Contributions National Insurance on your salary and tax on your
Individuals benefit from a personal allowance and dividends.
then move through the different thresholds of tax
from basic, through higher to additional rates. When it comes to National Insurance Contributions,
When you are a sole trader or are self-employed, in this type of arrangement the limited company
your income less expenses will be returned on will pay Class 1 NICs on salary and no NICs on
your personal tax return and you will pay tax at dividends.
the appropriate rate for your income. You will also
be required to pay Class 2 and Class 4 National This structure can add up to significant savings for
Insurance Contributions (NICs) on your total many small business owners. But before choosing
income. your structure or changing your structure you should
always seek advice from a trusted professional.
Limited company tax and National Insurance
Limited companies pay corporation tax. The rate
of corporation tax on 1st April 2017 will be 19% and

Find out more about tax and NIC rates.

Value Added Tax

During the tax year 2017/2018, all self-employed

people and limited companies must register for
VAT if their turnover reaches 83,000. VAT is a
subject that many small business owners shy away
from, but it is not as fearful as some may think.

When you register for VAT, youre obliged to charge

VAT at 20% on your sales. For many business owners
this isnt an issue because their clients are also
registered for VAT, so will be able to claim this back.

When it comes to business perception and

position, many small business owners are happy
to register for VAT because it makes them feel
as if their business is taken more seriously by
customers. While this may or may not be the case,
if you are either on the borderline of registering
for VAT or think that voluntary registration
might add power to your business elbow, its
well worth seeking some professional advice.

When registered for VAT you have certain obligations

to respect, such as keeping clear records and
making quarterly returns. While VAT isnt particularly
onerous, in most cases, best advice is to team up
with a good accountant or bookkeeper to help you.

No matter how small your business, you should ideally have separate business and
personal bank accounts. Working this way from the start makes everything tidier
and easier from an accounting viewpoint. So, best advice is that no matter whether
you are self-employed or operate as a limited company, you should open a business
bank account.

You can choose whether you bank with a high street bank or online. Irrespective of
where you do your banking you will be required to demonstrate to the bank manager
that you are capable of operating the business and that your funding requirements
are realistic and achievable. It is a good idea to provide your bank manager with a
copy of your business plan.

If you intend borrowing money, banks are understandably quite demanding in

respect of the information they require. At the most basic level you will be required
to demonstrate that you will be able to repay any borrowing and provide security if
required. In many instances, the security that is sought is a charge over your home.

When lending money, banks take a view on the value of assets in a forced sale
scenario and typically wont lend more than 80% of the forced sale value less any
other borrowings secured on the asset. Banks also look at what is called gearing.
Gearing is the ratio between the funds you put into the business and the funds you
borrow. In most instances, banks will look for at least 50% of any funding to be
provided by you.
Accounting and bookkeeping

The only way to know if your business is successful he right accountant will take time to get to know
or not is to keep a close record of income and and understand your business and make sure you
expenditure. This means that you need to note have the best system in place to help make your life
every transaction that goes through your business easier and keep your accounts in order.
Below is an outline of the main records that a typical
For sole traders, the requirements are reasonably business needs to have. Your accountant will use
relaxed, but as a limited company, you have a these records as the basis of their checks and
statutory responsibility to maintain adequate account preparation. While not all businesses will
records that makes it easy for anyone to be able to need all of these records, the more complex your
establish the financial position of your business at business becomes, the more detailed your records
any time. need to be. This not only makes reconciliation and
checking easier, but it also reduces your accounting
Certain businesses may be subject to an annual costs. Whats more, this sort of information means
audit, which means that your accounts need that you can truly keep your finger on the pulse of
to be maintained to the standard required by your business performance.
your auditor. If you are registered for VAT your
accounting procedures need to fulfil your HMRC Most small business owners find that using an
responsibilities. online accounting system makes their lives a whole
lot easier. Online systems mean they can keep
The best way to know that you are maintaining your their accounts in order while on the move. At The
accounts correctly and to avoid nasty surprises in Smart Accountants we can recommend the best
the future, is to have a good accountant on-side. accounting package for your particular business.

A purchase day book which shows all the A sales ledger that contains separate
invoices from suppliers. accounts for each customer as well as the
current payment situation.
A purchase ledger which contains separate
accounts for each supplier and shows the A petty cash book which is used to show
current payment situation. small payments made in cash.
A cash book that records all bank payments Salary and PAYE records.
and receipts.
A sales day book that records all your sales Records of business mileage where
invoices. appropriate.
Data Protection and Consumer Credit Acts

Data Protection Act

Many small business owners dont need to worry
about the Data Protection Act, but if you use a
computer for your accounting, you need to check
your obligations to this act. If you hold names
and addresses of customers and suppliers on
your computer you could be affected. Generally
speaking, if you use those records only for
accounting there is no requirement to register.
If you use the database for other purposes, for
example mailshots, you will probably need to
register under the Data Protection Act. If you are
in any doubt about your obligations, you should
check with your accountant or business advisor.

Consumer Credit Act

If you want to lend money, sell on credit or offer
hire purchase, you may require a Consumer Credit
Act licence. If you are in any doubt about whether
you require a licence, you should check with the
Office of Fair Trading or your accountant.

Setting up a business of any size is exciting and complex in equal measure.

Knowing your job or role is a given, but knowing everything you need to do to
make sure that your business is run efficiently, effectively and within the law is
a completely different matter. It is all too easy to inadvertently fall foul of the
law and find yourself in a situation where you are facing penalties if youre not
sure about whats required. This is particularly the case when starting out on
your journey.

Most small business owners agree that the very best way to get off on the right
foot and stay in control of your business is by having a trusted professional on
side. This is why having the likes of The Smart Accountants on side means
you can concentrate on what you do best and enjoy real peace of mind about
all things business-related.
Appendix 1:
The pros and cons of becoming a limited company

Pros Cons

Setting up a limited company means that your The only real disadvantage of setting up a limited
personal assets are separated from the affairs company for most contractors is overcoming the
of your business. Although there are certain fear and reluctance that they have around the task.
exceptions, this means that any debts or While incorporation isnt the right solution for every
losses incurred by the company will not lead contractor, if you think it might be right for you, it is
to you losing your home for example. well worth exploring.
There are significantly greater tax planning
opportunities offered by a limited company
structure than self-employment.
Tax rates paid by limited companies are lower
than high-earning individuals.
National Insurance Contributions paid by
limited companies are lower than high-earning
Disposing of your limited company is
straightforward and tax planning opportunities
can often be used to mitigate inheritance tax.
Appendix 2:
Useful addresses

The Smart Accountants


Companies House

VAT Registrations Office

Department for Business Innovation and Skills (BIS)

Institute of Chartered Accountants in England & Wales

Instutute of Chartered Accountants of Scotland

Appendix 3:
10 steps to boost your chances of success

1. Plan 4. Project
Good planning is at the core of every successful You should invest time to project your financial
business. Before you start your small business you goals as well as your performance goals. Only
should have a clear plan of what youre going to by setting out your stall clearly can you hope to
offer, to whom, at what price and how youre going reach the levels of success you are hoping for.
to attract those clients. Thereafter you need to plan Again, these dont necessarily need to contain lots
on an ongoing basis to make sure that you are ready of detail, but you should be certain that you have
and well positioned to seize business opportunities sufficient funding set aside to cushion you during
as they come along. Plans neednt be War & Peace. lean periods. You should also be clear about what
Just a simple roadmap to your success will help you you need to be doing in order to attract sufficient
get back on track should you find yourself wavering. clients.

2. Promote 5. Create processes

Unless you already have sufficient clients lined up Prior to the reality of being self-employed, people
to do business with you, you are going to have to dream of days with less structure than before and
promote your business in order to get the chance to more freedom to do as they wish. While a small
grow your customer base. How you promote your business owners life can look that way from the
business will depend on the sector youre in, but outside, its essential to have processes to make
you should be thinking about things like your value sure that everything that needs to get done gets
proposition, your client profiles, your sales and done. Those processes neednt be complicated
marketing messages and your reach-out plan as an nor cumbersome, but success relies on having the
absolute minimum. Many small business owners basic management and day-to-day running tasks
also find that an online presence and the social covered by having the right procedures in place to
media are great ways to promote their businesses. make sure nothing slips through the net.

3. Position 6. Keep your accounts in order

Where you position your business in your clients It is rare for bookkeeping or accounting to be a
mind will affect where they position you in the small business owners favourite task, but keeping
marketplace as well as the price you are able your accounts in order as you go along will make
to command. Positioning can be altered by your year end a whole lot easier. A great way to
establishing yourself as an expert in a certain field do this is by using a cloud-based accounting and
or being known as an expert. Such strategies bookkeeping system that allows you to update your
allow certain small business owners to command records on the move. At The Smart Accountants,
significantly higher prices. this is how we work with our clients.
7. Monitor performance
You go into business to make money and the only
way you can know if you are making money or not
is to regularly monitor your performance. The ideal
is that you know at any one time how much you
have outstanding in unpaid invoices, how much
in invoices due to be issued and how much in the
pipeline. You neednt look at the figures every day,
but if you develop a system where you can quickly
and easily establish your position, youll not only
feel a whole lot more in control, youll also be better
positioned to be proactive should you need to be.

8. Deliver
One of the best ways to make sure you become
and stay a successful business owner is to deliver.
Consistent delivery across the board sets you apart
from the competition and will help you make sure
that you and your product or service is in demand.

9. Stay up to date
Being great at what you do means staying up to
date with changes. Its essential to make reading
and learning part of your daily routine, even if
theres no longer anyone behind you pushing you
to do so. An easy way to do this is to sign up for
updates from trusted sources and make a point of
reading with a purpose every day as well as looking
out for learning opportunities as you go along.

10. Establish your network of trusted contacts

Being self-employed can be a lonely life,
particularly at the start and sometimes you can
find yourself in situations where you dont know
who to turn to for help or advice. It is essential,
particularly in the early stages to have a trusted
network of contacts such as friends and family to
get you through the emotionally challenging times,
as well as accountants and solicitors to help get
you through the professionally tough times. At The
Smart Accountants we understand the challenges
that you face as a small business owner and can
help make your journey a whole lot easier.