Starting a new business – what you need to know

Starting a new business is an exciting venture, often spurred by fresh inspiration following the festive break or summer holidays.

However, moving from an idea to a fully functioning business requires careful planning and awareness of key financial and legal considerations.

Here we look at the fundamental aspects of starting a new business, providing valuable insights to help entrepreneurs navigate the process with confidence.

We look at three key areas: creating a business plan, understanding business structures, and managing tax responsibilities.

One of the first crucial steps in starting a business is developing a plan. A well-structured business plan serves as a roadmap, helping to clarify objectives, forecast financial needs, and anticipate potential challenges. It does not need to be an overly complex document, but it should outline essential aspects such as:

- The product or service being offered.

- Pricing strategy and projected income.

- Expected costs, including overheads and initial investments.

- Growth plans and financial sustainability.

For those making the leap into full-time self-employment, a business plan is even more important, as it helps ensure that personal financial obligations, such as mortgage payments, can be met. A solid strategy also provides reassurance during periods of uncertainty, offering a reference point to track progress and make informed decisions.

While some business owners prefer a more flexible approach, having a basic plan in place can prevent unnecessary missteps and provide a clearer path to success.

Understanding different business structures is essential, as the choice impacts taxation, liability, and administrative responsibilities. The most common structures include:

• Sole Trader. The simplest form of business where the individual is personally responsible for all profits, losses, and liabilities. While easy to set up, sole traders have no legal distinction between personal and business assets, meaning personal finances are at risk.
• Limited company. A popular option that creates a separate legal entity, providing financial protection to the owner. Directors manage the company, while shareholders benefit from dividends. Setting up as a limited company requires more administration but offers reduced liability.
• Limited liability partnership (LLP). Suitable for businesses with multiple owners, LLPs provide liability protection similar to limited companies but allow partners to retain flexibility in management and taxation.

Many new businesses opt for a limited company due to the reduced personal financial risk, but speaking to an accountant beforehand can clarify the best structure for individual circumstances. Importantly, business structures can evolve over time, meaning owners are not locked into a single setup permanently.

A successful business must operate with a clear understanding of its tax obligations. Some of the key taxes that new business owners need to be aware of include:

• Corporation Tax. If operating as a limited company, profits up to £50,000 are taxed at 19%, while profits above £250,000 attract a 25% rate. For businesses earning between these thresholds, an effective rate of 26.5% applies. Knowing these rates allows for better financial planning.
• VAT (Value Added Tax). Businesses must register for VAT if their turnover exceeds £90,000 in a rolling 12-month period. Voluntary registration is also an option and can be beneficial depending on client type and the ability to reclaim VAT on expenses.
• Income Tax and National Insurance. Directors typically receive a small salary to utilise tax allowances effectively, with additional income drawn as dividends. Understanding how these are taxed is important to avoid unexpected bills. Businesses with employees must also account for employer National Insurance and pension contributions.

Effective financial management ensures that tax bills do not come as a surprise. Setting aside a percentage of revenue for tax payments in a dedicated account is a useful strategy. Regular reviews with an accountant can also highlight opportunities for tax efficiency and ensure compliance with HMRC regulations.

Starting a business requires more than just a great idea; knowing how to structure the business, manage finances, and plan for tax obligations is essential for long-term success. A business plan provides direction, while the right legal structure offers financial protection. Understanding tax liabilities and seeking professional advice early on can safeguard against future financial difficulties.