In the UK, businesses typically register as either sole trader, a limited company, or as a partnership.
Whichever option you choose, it’s a good idea to get the advice of local based experts like an accountant before starting out. Having an expert on board will really help to make sure you cover all bases and get started on the right footing.
Whilst starting up and expanding your business into new markets abroad can be both daunting and exciting, it is important to keep a clear head from the outset so that the basic practical decisions you need to make support your business’s development.
Top Tips for Setting Up a Business in the UK
Here's an outline of some of the key information you need to know about before starting your business in the UK, and some of the essential criteria you need to consider to turn your business into a flourishing success.
UK Company Formation
Before you can proceed with a UK Company Formation you need to decide on your business structure, that is a sole trader, a limited company, or a partnership.
Deciding on the right structure from the very start before initiating your UK Company formation will have a major impact on how you start and progress your business.
I. Sole Trader
One of the simplest ways to set up a business in the UK is to establish yourself as a sole trader. To do this, all you need to do is register for Self-Assessment (with HM Revenue & Customs) and file a tax return every year (after an initial grace period of one year).
However, as a sole trader, you hold responsibility for any debts your business may accrue, and it is not the most tax-efficient structure, so it may not be the right option for riskier or larger scale ventures.
As a sole trader, you’ll also need to make sure to keep detailed records of sales and expenses (to save yourself days when it comes to filling out your tax return), pay income tax on your profits, and make national insurance contributions.
If your business has a turnover of £85,000, you have to register for a VAT registration certificate and complete and pay VAT returns. All in all, this route is a good one for smaller businesses.
Setting up as a ‘General Partnership’ is similar to being a sole trader, but in partnership with one or more people who share responsibility for any business debts. This means that those members of the partnership are responsible for any business losses or bills owed if the business gets into trouble.
Business profits are shared, and the individual members of the partnership pay tax on their share of the profits. It is important to note that a partner doesn’t have to be an individual person. A partner can also be a limited company who has a share in the partnership.
Once this is decided, you will need to select the ‘nominated partner’ whose responsibility it is to register the partnership with HMRC and make sure the tax return is delivered on time.
You can also opt for a ‘Limited Partnership.’ This is different to a General Partnership as the responsibility for any debts is not shared amongst the partners, rather, there are two roles: the ‘general partner’ and the ‘limited partner’ with the general partner having the liability if the partnership runs into any debt. As for the limited partner, their contribution is financial, and they will not have responsibility for any debts incurred by the partnership.
Finally, there is the ‘Limited Liability Partnership’ or LLP. This has the benefit of no-one being personally liable for the business’ debts should they run into difficulties and the business is unable to pay. In this setup, members can either be individuals or a company, and each pays tax on whatever share of the profits they receive.
To set up an LLP you need an address, an LLP agreement and, of course, to register the partnership with Companies House.
III. Limited company
If you want to proceed with a UK company formation, the Limited Company structure is probably your best option. Setting up as a limited company affords you the greatest legal protection as your personal finances will be treated separately from company finances.
However, there are additional reporting responsibilities and you will probably want to get the support of an accountant in the UK if you do go down this route. One of the additional requirements is registering as an incorporated company with Companies House and filing annual accounts and returns in the UK. A good UK formations agent like Clear House Accountants can ease the process of forming your company and abiding by UK compliance requirements that come with a limited company structure.
Other requirements of the limited company are having:
- A company name that is not used by anybody else (ending with ‘Limited’, ‘Ltd’ or the Welsh equivalents)
- A physical UK address (in the same country as your company is registered in)
- a minimum of one shareholder (there is no limit to the number of shareholders your limited company can have)
- A ‘memorandum and articles of association’ listing the written rules of the company, and
- details of anyone with voting rights in your company or who owns more than 25% of shares.
It is very important to know what business structure is best for your business and the vision that you have for it before you decide that you want to proceed with launching you company in the UK.
Other Factors to Consider When Starting a Business in the UK
1. Where will your business be running from?
Whether you will be running your business from home or from an alternative site, you will need to make sure you know what the rules and permissions are relating to this. Again, having access to a good accountant or a trustworthy and knowledgeable acquaintance can ease the process of understanding complicated rules and processes without the need to spend hours upon hours reading them by yourself.
If you are planning on running your business from home, it is a good idea to notify your landlord if you are renting or to let your mortgage provider know if you own your home. You may need to pay business rates for the part of your home you are using your business for, so this is worth checking out via the Valuation Office Agency.
Another important factor to consider, if you are running your business from home, is the tax allowances you will be entitled to – such as the internet, lighting and phone line – as this can save you some money and needs to be included on your tax return. It may not seem much, but over the course of the year, this can be a decent saving.
For those of you who are wanting to run your business outside of your home, there are other factors to consider. For example, if you are planning on running a business from a rented property, you will have certain responsibilities related to the health and safety standards of the building and of the well-being of those who work for you. This includes making sure the working environment is comfortable, providing toilets and access to drinking water. Should you be hiring staff, these are just a few of the varied things you will need to consider.
2. Will you be hiring staff?
As mentioned above, hiring staff has implications in relation to health and safety considerations. However, you’ll also have other requirements placed on you whether your hiring agency workers, freelancers or full-time employees.
The three key things you will need to get to grips with are:
- Running your own payroll
- Making national insurance contributions (and how to claim the allowance to reduce your own tax bill), and
- Providing eligible staff with their now mandatory workplace pensions.
In addition to understanding these areas, you’ll be required to check that anyone you employ is legally entitled to work in the UK, purchase employment insurance as soon as you employ someone, provide written terms and conditions and job descriptions to any new employee, and let HMRC know you’ll be employing people by registering as an employer.
Businesses who have access to a good accountant tend to avoid costly mistakes and errors which save them time and money in the long run and keep them on the right side of HMRC.
The good news about becoming an employer is that you will receive up to £3,000 worth of tax relief on your own national Insurance bill if you are paying an employee’s Class 1 National Insurance contribution. You can claim this when completing an Employer Payment Summary.
3. How do I insure my business?
Unexpected difficulties can be faced by any business big or small, so it is a good idea to make sure you take out some insurance. While insurance is a good idea, some businesses that deliver specific services are required by law to have specific types of insurance.
For instance, if you are going to be running a delivery service you need to have motor insurance and if you are going to be hiring staff you are required to have employer’s liability insurance in case your employees become ill or injured as a result of their work. Make sure you check out what the legal insurance requirements are for your type of business.
The world of insurance can be a real headache so, to go back to basics, we recommend that taking out some liability insurance (along with the insurance your business is legally required to have) is an important starting point. This will cover you if you are faced with any legal costs if you incur damages or any other unexpected costs.
4. What about the costs involved in starting a business?
This brings us to costs, as you can see from the previous sections there will be costs to consider when starting your own business, especially if you will be renting or buying a space to run your business from. So, it is important to budget for these.
It’d advisable to speak to a credible financial advisor or accountant who is both technically capable and strategically located to help you prepare a business plan or a business model canvas supported by a detailed budget plan. This can help you to avoid any nasty surprises in the future and to be better prepared to get investors, banks or other stakeholders on board as and when required.
While the costs for each business will be different, here are some general costs to consider:
- Registering your company (also known as company incorporation) with Companies House
- Staff costs
- Rental costs and council tax
- Utility bills such as heating, water, and phone bills
- Equipment for your business
- Accountancy costs
- Legal fees
- Branding and advertising
Given this long list of costs to consider, making sure you prepare a well-costed budget before getting started is a must. You will need to make sure that you have the capital required, and also make sure you keep some cash in reserve as it is inevitable that there will be unexpected expenses along the way.
5. Are you truly prepared to start your own business?
Starting a business can take its toll on your pockets, but it can also have a high emotional cost too. It will require a huge amount of planning, graft, and learning if you are going to successfully set up a business in the UK. You’ll also need to consider where your major strengths are and, conversely, what your major weaknesses are, as these areas might require some additional outlays for bought in expertise.
Beyond this basic understanding, if you are starting a business, you need to be passionate about the venture you are embarking upon if it is going to be successful. It seems trite to say, but passion is perhaps the key ingredient to enable a new business to succeed, because it can drive you on through the energy-sapping process of taking something from inception and into fruition, growth and flourishing.
Protect Your New Business Against Failure
Why does a new business fail?
Studies show that around 30% of new businesses fail during their first 2 years of operation, with the key causes coming down to a lack of research at the beginning stages to make your business a niche area, unthought-of marketing and branding, a breakdown in leadership and not using the right professionals for help when you should have.
In order to prevent this, make sure you conduct in-depth research before starting out. This will help you understand the market area you are getting into, create space and structure with a business plan, make sure your financing has wiggle room, have a decent marketing strategy, internet presence and physical location, and are flexible enough to adapt if your initial plan is not running smoothly.
Understanding yourself, your business and target customers is vital if your business is going to succeed.
Reach out to trusted experts and other business owners in your industry who have valuable experience, as well. It can also help to build a strong foundation for your business and address some operational concerns.
Starting a business in the UK will be both an exciting and challenging time. Being your own boss comes with countless rewards, but it also means taking on responsibility. Think about your target market, where you will be running your business from, whether you will be hiring staff, getting insurance, a range of start-up costs and plan well ahead of time.
In addition to these practical considerations, make sure you take some time to ensure you are mentally prepared for the task of starting your own business. A successful business requires passion and hard work at its center, so make sure your idea is something you really believe in and are willing to dedicate your time to.
With all of these key ingredients and some careful planning and consideration, I’m sure you will make your business a success!