Starting a new business is both an exciting yet daunting experience. With so much information available out there, how do you know where to start? This article will explain the 6 main financial areas to consider when starting up a new business.
1. Why am I in business and what is my goal?
Starting a business and trying to grow it to achieve your goals can definitely have it’s challenging moments. So keeping in mind your “why” is extremely important. Why are you in business? Why have you chosen to be your own boss? This can really help put you in a positive mindset to continue pushing forward towards achieving your goals.
Now I know what you’re thinking… “I haven’t even started up my business yet, so why would I be thinking about my end goal?”
Let me enlighten you. Research suggests that 90% of the time, setting specific, challenging goals leads to a higher rate of success. So if you want your business to do well in the long term, then getting your goals into place from the very beginning will set you on the right footing for business success.
From a financial point of view, the reason you are in business and your financial goal will have a huge impact on your tax plan. For example, a person who is looking to replace their lost employment income will have a different tax plan to a person who is looking to build up a business to eventually sell or pass on to someone else.
2. What legal entity should I pick?
This question follows on nicely from the first. Once you have decided why you are in business and what you are looking to achieve, you can then make a better decision on the type of legal entity you should set up as.
There are a variety of legal entity options, but the most frequently used and discussed are:
- Limited company
- Sole trader
Something else you also need to consider here is whether you have any industry restrictions. For example, if you are in the building trade, your contractor may have made the decision not to do business with anyone who isn’t a limited company, so this is the option you have to pick if you want to get work.
Another example is that barristers are currently not allowed to operate as limited companies, so they don’t get the benefits of lower tax rates and limited liability.
3. When is the best time for me to start my new business?
Generally speaking, there is no “wrong” time to start a new business, but there are smarter times to do it depending on your personal tax circumstances.
The personal tax year runs from 6th April to 5th April each year. You need to take into account how much money you have made in the tax year to date, and how much tax you have paid on it. You then need to consider how much of the tax year is left and what rate of tax you will be paying on the income you are currently making or potentially could make.
It can be a complicated one to answer which is why I would always recommend that you seek advice from an accountant first.
4. Should I VAT register?
The current threshold for VAT is £85,000. This means that when your turnover (sales) reaches this level you are forced to register for VAT if your business is selling goods or services that are VATable. The Gov.uk website has a whole list of items that are exempt from VAT, so check the list to see if your good or service is listed. If it is exempt then VAT is not something you need to worry about.
Some people opt to register for VAT even though they haven’t reached the threshold, and this can be for varying reasons:
- Being VAT registered makes your business look bigger because your customers will think that you are making sales of £85,000 or more
- As a tradesman, being VAT registered can make you look more attractive to bigger contractors because they can claim back the VAT on their next return, and it also makes you appear more credible.
- If you sell a zero-rated good or supply then registering for VAT will mean that you don’t have to pay any VAT on your income, but you can reclaim VAT on your expenses (hence you will receive regular VAT rebates).
5. Shall I employ staff?
If you are looking to employ staff to help you with your new venture then there are a number of factors to consider here. You will need to register for a payroll scheme, you will need to assess your staff for auto-enrolment, and you will need to make sure that you comply with all relevant employment laws. There is a lot of information available on the Gov.uk website, or alternatively, there are some local employment law agencies you can have a consultation with.
6. What can I claim for tax?
When starting a new venture it is always sensible to be clear on what you can and can’t claim as a tax-deductible expense. The HMRC general rule is that an expense is deductible for tax so long as it is “wholly and exclusively for the purpose of your business”. Please bear in mind that items such as, client entertaining, using your home as your office, and running a vehicle for work are all grey areas that I would suggest you speak to an accountant about or else you may see yourself running down the wrong road and ending up on the wrong side of HMRC.
As you can see, there are a lot of things to consider just from a financial point of view. A lot of accountants these days provide free initial consultations, so please do use that service to make sure you are setting out on the right road from day one.
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