THE ULTIMATE GUIDE TO SETTING UP A NEW BUSINESS
Amidst the global pandemic, worldwide turmoil, and widespread uncertainty, it is ingenuity that has still managed to thrive. The year 2020 has seen new businesses start up rapidly, new products being innovated, and new services being offered. If we consider the odds, it probably is the best time to start a new business, because:
- There are new unmet needs in the markets: The pandemic has created a need for change and transformation for individuals and businesses alike, thereby creating opportunities that did not exist before.
- There’s a lot of room in the markets: With specific needs and requirements, there are diverse customers in the markets – customers who might not always be served by traditional solutions or large-scale companies. For example, fitness solutions have typically been limited to gyms, but with the pandemic there’s an increased need for at-home fitness solutions, and that too different ones – fitness for seniors, fitness for kids, fitness without the large gym equipment etc.
- Crises gives way to opportunity: Microsoft, Airbnb, Uber, and General Motors are just some of the companies that were started during times of economic crises. So well, if you’re starting up now, you’re in good company!
- You have more free time than before: With much less commute and fewer outings, there’s more time at hand than ever before.
If you have been considering starting a new business, now is a great time to do so. While a product business will have its advantages, a service business is more likely to help you earn faster and easier. A product business is one where you sell a tangible good. A service business is one where you can utilise your knowledge and skills to earn money. There’s much less investment than a product business and it is simpler to scale it too. This guide has all you need to know when starting a service business in the UK.
How to know if you can make money selling services?
The groundwork and research are important. You need to ask yourself a few questions and gather inputs from others before you actually start your business. Here are the key questions for you to consider:
- What skill will you sell? Identify a skill that you want to sell in your service business. It can be your professional area of expertise or a personal hobby that you have in-depth knowledge about. Certain domains require licenses or certifications to practice the profession, such as CPA for a practising accountant, check if you need any.
- What is your financial goal? Think about how much you plan to earn from this business. Check if the service/skill you’re offering will be able to fetch you the monetary gains you are aiming for. For example, if you intend to earn £50,000 per annum from this venture, it is unlikely that a painting business can fetch you this income in the first few years, especially if you’re not already recognised for the work you do.
- Is there a demand for this skill in the market? Do some market research to find out if there are people who would like to pay for the service that you’re planning to offer. For example, if you’re offering personal shopper services, interview a few friends and contacts to find out if they would be willing to opt for it to save time.
- How much can you invest? There are costs associated to carry out a business. Think about what equipment would you need – say a camera, lenses, tripod, and lights for a photography business. Consider how much would you be able to invest in online advertising (e.g. Facebook or Google Ads), what would be the cost of professional help that you might need for marketing or managing finances, what would be the cost of developing your website (if you need one) etc.
- How will you earn? The revenue model forms the base of a business plan. Consider how will you charge your customers – on the basis of the time you invest (e.g. an hourly rate) or the value they get out of your service? How many customers will you need to serve in order to meet your financial goal (revenue minus spends)? Factor in the cost of acquiring these customers too, through advertising, discounting, referral gifts etc.
- Will you work part-time, full-time, or on a seasonal basis? Maybe you would like to start something as a side hustle now and take it up full-time as it scales. Or maybe you would like to directly set it up full-time. Make a conscious call on how you plan to make it work. If you do have an alternate full-time job, it might be best to start a part-time side hustle. But if you aren’t working in a job or business otherwise, you could have the capacity to take up a full-time venture.
- What are your competitors doing? If there is competition in the market for the service that you are planning to offer, research what your competitors do and what would you do differently. Is there a differentiation in terms of pricing, value, service quality? You must figure out your USP and comparative pricing before you start.
- Do you need help? You cannot do everything all by yourself. Reach out to friends and family who can help you with everyday tasks and to professionals for critical services you might need, especially legal and accounting assistance.
Should you operate as a sole trader or as a limited company in the UK?
When you have decided to pursue your venture, the first step would be to get it registered. You can choose between one of the two legal structures – sole trader or a limited company. Simply put, a sole trader is a self-employed owner of a business. It is the simplest business structure and can be commenced by selecting a name that doesn’t conflict with any registered name, and registering for taxation on the gov.uk website. A limited company is one which has its own legal identity, distinct from its shareholders or directors, even if it’s just one shareholder/director managing everything. Here are advantages and disadvantages associated with both forms:
|Sole Trader||Limited Company|
How to set up a company in UK?
Companies that are set up not-for-profit are limited by guarantee. As you’re planning to set up a company to make profits, you will need to set up a company limited by shares. Following are the steps to set-up a company in the UK:
- Choose the company’s name: You cannot use the same name as another registered company. Remember that using punctuation, special characters, or similar appearing words also qualify as a same name. Names have to end with ‘Limited’ or ‘Ltd’ or with ‘Cyfyngedig’ or ‘Cyf’ if you are registering in Wales. Check on the Companies House website to verify if the name you want is available.
- Choose director(s): There needs to be at least one director in the company. Director must be over 16 years of age and need not necessarily live in the UK but must have a registered address in the UK. A company secretory is not needed unless you want to register them for sharing the director’s responsibilities.
- Choose shareholders: There needs to be at least one shareholder, who can be a director as well.
- Decide how you’d like to run the company: You have to create documents called ‘memorandum of association’ and ‘articles of association’ that lay out the way you want to run your company.
- Check the record-keeping requirements: You have to keep records of your company’s activities as well as accounting and financial transactions for a period of 6 years.
- Register with the official address: To register your company, you need a physical address in the UK. This address has to be in the same country as you’re registering in. With these details, you can register on the Companies House website.
What are the requisite tax registrations in the UK?
Registering a company is the first step, followed by many other considerations including taxation before you start operating your business. There are three types of taxes for companies in the UK:
- VAT: Registration for VAT in UK is mandatory if your business crosses the annual turnover of £85,000 and it is voluntary if it doesn’t. People who voluntarily register get the benefit of reclaiming VAT on purchases but have to complete additional requirements and paperwork. There are three types of VAT schemes: Point of Sale Scheme wherein you record VAT at the time of sale, Apportionment Scheme where you record VAT as you buy goods for resale, and Direct Calculation Scheme wherein you make a smaller portion of sales at one VAT rate and the majority sales at another rate. There’ a penalty on non-payment of VAT: 5% of unpaid VAT up till 9 months of delay, and 10% of unpaid VAT for up to 18 months of delay. You can go through the details and register for VAT on the Companies House website.
- Corporation Tax: Corporation Tax is 18% and has to be paid within 9 months and 1 day after the end of the ‘accounting period’, which is normally one year and based on the date on which your company is first registered at Companies House. Different documents are required for filing this taxation and are enumerated on the Companies House website. A finance professional can assist you in identifying and filling the requisite forms within the given time frame. Filing a day after the deadline draws a penalty of £100, another £100 for the next 3 months, and 10% of the unpaid tax for 6 months and thereafter.
- PAYE for employers: Pay As You Earn (PAYE) is HM Revenue and Customs’ (HMRC) system for collecting Income Tax and National Insurance from employment. You need to file PAYE if any of your employees receive £120 or more in a week. You need to work out and report the deductions to HMRC on or before each payday. Penalty for delayed payment depends on the number of employees you have and ranges between £100-£400.
What are the responsibilities of a company director?
Apart from adhering to taxation, there are other duties that a company director must fulfil, including 7 as the most primary ones:
- First duty is to act within the powers of the company’s constitution, i.e. its articles of association.
- A director must promote the success of their company and justify the decisions they have taken in this regard.
- Directors must have independent judgement based on their own informed views.
- Directors must exercise reasonable care, skills, and diligence in their roles.
- Directors must maintain objectivity by disclosing to other directors/board members, any conflict of interest that could give personal benefits.
- Directors must not accept benefits offered by a third-party that might lead to a conflict of interest.
- Directors must be transparent in informing other directors if any transaction can give rise to a personal gain.
Directors must maintain a record of board’s decision-making process for 10 years to prove that they have fulfilled these duties.
How to withdraw profits from the company?
Once the business is up and running, you would want to use your earnings. For that, there are three legal ways to withdraw profits from a company in the UK:
- Payroll: Directors are classed as employees and their payroll includes the director’s salary (PAYE), expenses, and benefits. The salary amount is subjective, but directors have to pay National Insurance Contributions on earnings over £9,500. Contributions are calculated on annual earnings and not in each pay period.
- Dividends: Dividends are paid to shareholders and are taken out only when the company is profitable. It is typically paid once or twice in the year, but the directors are free to change this. Dividends are taken after the corporation tax has been paid. Also, net dividends attract no personal tax liability up to £30,892.50.
- Director loans: Director’s loan is an amount paid to the director that is not a salary or benefit and can be money that the director previously loaned to the company. Transactions of this type are recorded in the directors’ loan account and are taxed. If it is overdrawn by over £10,000, the sum is to be declared on the director’s self-assessment tax return, on which the appropriate rate of tax is applied.
How to avoid common pitfalls?
As you start out on this journey, the best way to accelerate the process and avoid common pitfalls would be to seek help from experts. The adept team of Business Formation Consultants at Nuvem9 has designed a bespoke set of solutions to assist you with setting up your business. Reach out now to Book an appointment.