Last month we discussed moving from your initial idea to a robust business plan. This month we consider the basic elements you need to get right from the outset when launching a startup:
The structure when launching a startup:
Sole trader, company or partnership…which is best for you, and how do you know?
The decision will depend on your individual circumstances and will be guided by factors like:
- Tax: Sole proprietor or partnerships may not be tax advantageous if your turnover is expected to increase rapidly. With a corporate structure, you might want to consider the implications of double taxation of the income. It’s better to run actual calculations and consider tax impact.
- Flexibility: Forming a company means you are entering into a deep long-term relationship. It’s not easy to break-up with your co-founders or dissolve a company and it can get very messy.
- Costs: A corporate structure also increases your costs because of the increased admin burden. Partnerships or LLPs are more flexible and easier to manage.
- Liability: A limited liability structure safeguards your personal assets and allows you to take more risks in the business.
- Future plans: When launching a startup, do you think about where you want your business to be in 5-10 years’ time? Are you going to need to look for external funding? If so, a company has a range of options like issuing new shares. It is also more lucrative to lenders. Another thing to think about is whether you’re aiming to get to a point where you can sell your business, or what would happen if you weren’t there to run it anymore. While a sole proprietorship or partnership may dissolve upon the death of its owner or owners, a corporation can be readily distributed to family members.
Buying shares in your company
If you decide to go ahead with a corporate structure, you will need to allot shares to yourself. Most people in the UK form a limited company with just one share. This makes it complicated to expand by bringing in outside investors in the future because you cannot divide one share. Suppose after 2 years your company is worth millions, and you have to buy more shares to retain your majority shareholding, you will have to make a fat cash outlay to purchase shares in your own company. The solution for many, is to issue 100 shares, because each share then represents 1% of the company. It makes it easier to divide up shares, if you need to. It also means you can sell small chunks to more people; rather than large portions of the company to only a handful of people.
HMRC imposes a fine of up to £3000 for failure to keep proper records, so its important you want what records to keep and for how long. Our top tips in this respect are:
- Open a separate bank account: When launching a startup, people often use their own personal bank account for their business, but this can make your profit calculations a bit trickier. Most accounting systems can automatically link to your business bank account which is a lot easier than trying to upload all your transactions manually.
- Choose a simple, easy to use accounting software A good accounting system will ensure that your record-keeping is kept up to date from the beginning – saving you time when you’ve got stacks of other things to think about! We would recommend moving to online accounting systems, which give you added advantage of accessing real time information from anywhere, and even on your mobile.
Registering your trade
When you start trading, there is a time limit within which you need to inform HMRC that you have commenced trading or opened a bank account. The rules are strict and there are automatic penalties for failure.
Trademarks and Intellectual property
As soon as a new business is established, owners take the step of getting a distinctive logo, trademark and trading name. Over time, founders become emotionally attached to it and so it can come as a massive shock when someone comes along and tells you to stop using it.
Similarly, it is important you take steps to protect the intellectual property when work has been done by other service providers or your employees, like developing an app for your business.
As a fully qualified tax adviser and accountant and with an impressive history in the corporate environment; Sonal brings significant experience and expertise to RightCue Tax Advisers, where she has the role of Managing Partner. If you would like further advice on any of the above, please contact Sonal on 01256 406601 or firstname.lastname@example.org.