A business plan is the key to success in many respects. It sets out the core ideas and principles of a business and how the business is projected to run and to grow in the future. Just going through the process of thinking about, and writing down how you are going to get from where you are now to where you want to be is incredibly important - it will make you consider problems that you maybe hadn't thought of before - and hopefully work out solutions.
If you need financial investment to start your business then it is highly unlikely that any lender will lend money without a sound and viable business plan. For that reason you need to be brutally honest with yourself about the issues you are going to face - any bank or finance house is going to be honest, and if you get past them your customers are going to be even more honest!
A good business plan should provide a thorough examination of the product or service your business is going to offer, your target market, mode of operation and projected financial results. As the business is running your business plan should then provide a useful indication of how your business is performing and whether you have been able to reach the milestones and goals that are set in it.
There are essentially three main types of business structure:
- Sole Trader
The quickest and simplest way of initially setting up a business, as no legal formalities are required to operate in this way. The business of a sole trader is merged with their personal assets (so for example if someone was suing a sole trader they could go after any assets the sole trader owned - regardless of whether or not they are connected with the business).
A sole trader keeps all profits (after payment of tax), but a sole trader is personally responsible for any losses made.
In a business partnership responsibility for profits and losses are shared between the partners of the business (each partner pays tax on their share of the profits).
As a partnership involves different parties, it is vitally important to draw up a written agreement (A Partnership Agreement) which outlines the terms of the partnership. Although everyone is in agreement at the start, business and life can be turbulent and changeable - so it's important to consider what changes could happen and have that taken care of within the partnership agreement. At the outset of a business people can be excited and make assumptions about what the other partners are thinking - putting those details into a partnership agreement help to confirm what you all expect each other to do. As an example:-
- - how many hours a week will you be putting into the business?
- - how many holidays you will take?
- - how and when you will take money out of the business?
As with a sole trader, the business and personal affairs of partners of a business are not separate- it is possible to set up a Limited Liability Partnership (LLP) so that partners are not personally responsible for business losses.
A limited company is a separate legal entity which is responsible for profit and loss. This means that a company owner is not personally responsible for the losses of the business. Every limited company has members who own shares in the company. Directors are responsible for running the company. Limited company’s must be registered at Companies House and there are strict and numerous legal regulations to comply with. The word "Limited" means limited liability - i.e. Investors (owners) in the company are only liable to the extent of the amount of money they have put into the business. On the face of it this sounds like it takes the risk out. However if directors act wrecklessly in running the company then they can be held personally liable for debts incurred by the business. Similarly if you are looking to borrow money from a bank and you have a limited liability company they may look to take personal guarantees to protect their risk.
All businesses need to keep records. They can be maintained by hand or may be computerised but should contain details of payments, receipts, credit purchases and sales, assets and liabilities. If you are considering purchasing computer software to maintain your records, obtain professional advice.
The books and records are used to produce the accounts. If the records are well kept it will be easier to put together the accounts. Accounts must be prepared for the Inland Revenue (HMRC - Her Majesty's Revenue & Customs). A limited company may need to have an audit and will need to make the accounts publicly available by filing them at Companies House within a strict time limit.
When starting a business, it is important to consider tax implications and so it follows that you should get proper advice from an appropriately qualified accountant on these matters. We are not tax advisors, but as a general guide please consider the following:
- - The type and rate of taxation on profits will depend on the form of business structure. However, the taxable profit will normally differ from the profit shown in the accounts due to certain expenses which are not allowed for tax purposes and the timing of some tax allowances.
- - The rates of National Insurance (NI) contributions are generally lower for a sole trader or partnership than for a director of a company but the entitlements can also differ. In a company, it may be possible to avoid NI by paying dividends rather than salary.
- - Correctly accounting for VAT is an essential part of any business and failure to do so may result in a significant loss. When starting a business you should consider the need to register for VAT. If the value of your taxable sales or services exceeds the registration limit you will be legally obliged to register. Many businesses don't register at first but as they grow it eventually becomes compulsory to be VAT registered
If you own or occupy business premises, you need to understand the legal obligations and restrictions that affect you. Below are a few examples of potential issues to consider:
- - The premises must have planning permission that allows them to be used for your type of business. So for example if you're looking at buying a shop that has been used as a bookshop and you want to use it to open a chip shop then you will need change of use to be granted by the local authority otherwise you won't be able to operate
- - You must comply with building, fire, and health and safety regulations.
- - Stamp duty is payable on commercial leases and you are likely to be liable for business rates.
- - If you provide goods or services to the public, you must take reasonable steps to make your premises accessible - for example ramps as well as or instead of entrance steps.
- - If you lease the premises, you need to comply with the terms of that lease. If you are negotiating the terms of a lease, you should think very carefully about the length of it- whilst it is good to have the security of a long lease for the stability of a business, it is a long term obligation - if you stop trading then you are still liable for the rest of the term of the lease. For a start up business it is better to negotiate a shorter lease term or at least a break clause.
- - For some businesses, you may require a licence to operate or to sell certain products - such as alcohol.
- - There may be restrictions on times when deliveries are allowed, noise and pollution levels, and how you dispose of waste.
Whatever premises you choose you will need to make sure that they are properly insured. In addition there are a wide range of other insurance policies available to cover risks to the business itself.
Some are legal requirements such as comprehensive insurance cover for any business motor vehicles and employers’ liability insurance, whilst others such as business asset insurance, professional indemnity insurance and public liability insurance may be required.
What you need will vary depending on what sector you intend to operate within.
It may be necessary for a business to employee staff- whether at the outset when a business is formed, or later on when the business has grown.
this is a huge step to take from two perspectives:-
- Firstly, your staff will often make or break your business by giving good or bad service so it's vitally important to employ the right people and ensure that they understand what is expected of them from the start (In relation to this I'd recommend reading "The E-Myth - why most small businesses don't work and what to do about it by Michael Gerber".
- Secondly, employing staff is a big responsibility from a legal perspective- there are strict laws governing the relationship between employers and employees. Business owners will certainly need to become familiar with employment law!
Employers are obliged to pay wages and to deduct national insurance and income tax and pay these deductions to HMRC. Consequently payroll records need to be kept. A workplace pension offers employees the opportunity to save for their retirement. UK employers are legally required to automatically enroll workers into a workplace pension scheme if they
- - are aged between 22 and state pension age
- - earn more than £10,000 a year
- - work in the UK
At Fidler & Pepper we make it our business to help your business:- whether you are just starting out or are well established. We can offer comprehensive and no nonsense legal advice on business matters and with our Business Fixed Fee Menu you will know the costs of this from the outset.
It is vital that you seek the appropriate professional advice to give your business the best chance of success and that is where we come in! Call our Business team on 01623 663246