Choosing the right business
First of all, you will need to decide what sort of business you wish to establish.
There are many types of business - these include franchising, freelancing, online, social enterprising; all of which carry their own pros and cons.
Hopefully our guides to some of these types of business will help you pin down exactly what sort of venture is best suited to you.
Getting this right is important, as you need to play to your strengths and set up the type of business that makes the best use of the skills and knowledge you already have.
This means you have the best chance of making your business a success.
Once you have made this decision, you then need to think about how you are going to structure your business.
There are a handful of ways that you can choose from to structure your new business through Companies House. These include a sole trader, forming a partnership, or either a private limited company or partnership.
It’s wise not to set out as a public limited company, as this will involve you raising significant funds through the stock exchange.
These are the most common methods of structure that are chosen, but there are other options available such as Community Interest Companies and cooperatives should you wish to explore them.
We recommend you start out with the simplest structure your type of business will allow.
For example, if you are setting up an online business, you may want to register as a sole trader, and then move to a different structure as your business scales up and you need to start employing people etc.
In fact, a majority of new businesses are originally set up as a sole trader – people find it simple, cost-effective and keeps bureaucracy to a minimum.
You do not need to notify Companies House, pay them any fees or deal with any other aspects of incorporating a company such as filling out registration forms and submitting accounts.
The only thing you need to do is inform HMRC that are going to be self-employed.
This allows you to get your business off the ground as quickly as possible, and you can immediately start laying the groundwork.
This includes designing and printing your business cards, setting up your website and advertising yourself to potential clients.
It’s important you register as self-employed as soon as possible; otherwise you could incur fines from the HMRC.
There are 3 ways to do this: online, calling the Newly Self-Employed Hotline or by filling out form CWF1.
The main advantages of being a sole trader are that you get to keep all the profits for yourself (after tax has been deducted) and you can make all the decisions without having to consult or convince your colleagues one way or the other.
You will also find the accounting side of your business is simpler than if you were running a partnership or private limited company.
One of the main disadvantages to running a business on your own is that you are personally liable for any debts you incur. This would not be the case if you set up through Companies House.
You should also bear in mind that you will have to pay 40% tax on your income as soon as it reaches £35,000 or more. This will then rise to 50% when your income exceeds £150,000.
As your business grows, the risks of being a sole trader become more pronounced.
You could end up putting your home and other possessions on the line if you have to borrow substantial amounts of money to expand the business.
If you are sued, you could go bankrupt and lose everything – therefore, it may be sensible to switch to a safer and more stable business structure as soon as your venture has taken off.
If you are unsure which route to take when you set up, an accountant should be able to advise you well.
However, should you choose to start as a sole trader it is very easy to switch to a limited company later.