Starting a Business [cont.]

Last week we published a blog which explored what you should take into consideration when starting a business. This is such a big topic to cover, as there is so much to take into consideration and we didn’t want to overload you by putting it all in one blog.

Please see part 2 of starting a business, which explores the other points that we haven’t yet covered when starting a business.

How do I record my business transactions?

For the purposes of accounting, it’s important for your business transactions to be traceable – at the very least, you would expect an entry in your accounts to match up with an entry in the supplier’s or customer’s accounts.

Good invoicing is key to this, so have clear payment terms in place, and make sure you issue invoices with a unique invoice number, date of issue, deadline for payment, itemised charges, total amount, and how to make payment (including your bank account number, for electronic funds transfers).

Keep a record of outgoing invoices and check them off as they are paid; if you sell things ad hoc for cash, consider investing in a till that can print receipts, or have a receipt pad handy that you can fill in with a pen, so both you and your customer have a copy of the transaction.

Similarly, keep all of your own receipts for business expenses. This is much easier than trawling through bank statements later trying to remember what’s what, and having the receipts makes it possible to prove your expenses to HMRC if they ever ask.

Trading structure: Should I be LTD or sole trader?

The two main options available to you when starting a business are to work as a self-employed sole trader or to set up a limited company, which you’ll often see referred to as LTD for short.

Sole traders pay annual income tax on anything over the personal tax-free allowance (which has been increasing steadily in recent years, so it’s worth checking what you can earn tax-free right now).

Limited companies pay Corporation Tax at the relevant rate, but in especially profitable years, profits can be retained by the company and distributed as dividends during leaner times.

Generally speaking, if you are only earning a ‘normal’ amount as a sole trader, it’s probably easier not to register a company.

The major benefit of registering an LTD is that any legal claims made against your business usually won’t be able to affect your personal finances – so while you might go out of business, you won’t go personally bankrupt too.

On the other hand, being a company director increases the amount of legislation that applies to you and the paperwork you need to maintain, so many people choose to take the risk of being a sole trader, particularly if you’re in a profession where you’re very unlikely to face legal action at any point.

Checklist when starting a business

The list below is fairly comprehensive, but be vigilant to any specific issues that apply depending on the type of business you are starting, especially in more tightly regulated industries.

For most general businesses, this list covers the main bases, including the most pressing financial issues you should prioritise.

• Getting Started
• Research your chosen market
• Write a business plan
• Start your business*
• Register as a sole trader OR
• Register your limited company

*Within all of this, at some point you just have to start trading – you can actually do this before you are registered as self-employed with HMRC, but you can only wait a few months before registering, and you’ll have to pay tax on anything you earned in the meantime at the appropriate rate.

Growing Your Business

• Employ your first staff
• Form a partnership
• Switch from sole trader to registered company
• Set up a social enterprise

These may or may not apply to you, depending on the nature of your business. It’s worth taking the time to be aware of the long-term options though, as it will be easier to grow if you structure your business appropriately from the start.

Finance and Funding

• Record income and expenditure
• Write your accounts (or have an accountant do it for you)
• File your first accounts
• Pay your first tax bill
• Search for grants, business loans and other funding
• Take action on overdue invoices and late payments

Your business exists to make money (except for specific exceptions like charities) so prioritise financial issues. Keep on top of your record-keeping and give extra attention to your first set of accounts and tax bill, so you know what to expect in subsequent years. Credit control, cash flow and getting paid on time are key issues too, as is finding funding for future expansion plans or to help with setup costs.

More advice on starting a business?

There are many factors to consider when starting a business? We couldn’t fit it all the information into one blog, so we have split it up into different blogs. If you want to carry on reading, simply follow this link:  Starting A Business Continued.