Being a Shrewd Entrepreneur
Setting Up a New Business
It seems to be impossible to suppress the British business scene.
This year is expected to herald the record-breaking creation of an additional 85,000 brand new businesses to those formed in 2019.
This will see the highest number ever in one year in the history of British industry. In percentage terms this is a year on year increase of 12.3% - the sharpest increase since 2011.
Companies House have reported that 59,358 new companies were created just between June and August this year. This high figure is thought to be as a result of individuals made redundant owing to Covid setting up their new ventures combined perhaps with an element of fraudulent companies being set up to abuse the government Covid financial relief packages.
The highest growth areas unsurprisingly include medical goods retail (up 176 per cent), e-commerce (up 88 per cent) and clothing (up 55 per cent).
The business areas with the largest fall in company creation included vets (down 48 per cent year on year), opticians (down 33 per cent) and aviation mechanical services (down 44 per cent).
So, it is sweet and sour really – good news but tempered by the fact that a lot of new creations are on the back of Covid redundancies.
There is also the fact that three quarters of the small business scene (about 6 million enterprises) are sole traders who are unlikely to be able to or need to employ many people.
History however has proved that downturns can and often do result in a rise in the entrepreneurs, innovation, and cottage industries.
Different options open for new starts – what is your best structure?
Once you have decided on a new venture, an early crucial decision is to how best to structure it.
Clearly, there are different options available and you may need to take some early professional advice. A lot will depend on how big your enterprise will be and in what market. Your legal liability can be shaped by the structure of your business as can your ability to raise finance.
It is important to seriously consider this aspect.
What really suits your venture best?
If there are a number of you teaming up, you might prefer a Partnership or Limited Company. If you are by yourself providing a much-needed straightforward service, you might consider that it is best to operate as a sole trader. Your accountant will advise you on the different tax consequences for each option.
Let’s have a look at the main options (in no particular order of course).
This means you will be self -employed and this is probably the most favoured choice for the individual supplying basic services. It is straightforward in that no registration and subsequent filing at Companies House is required. You will save a lot of admin time and associated costs. You may or may not be VAT registered as this will depend on your turnover.
You can retain your profits but the responsibility for business debts rests with you. Accordingly, any loss or profit is down to you!
To an extent this is similar to being a sole trader, but is where individuals team up together to run a business. The result is that losses, profits, debts, liabilities etc are shared. The shares are decided by the partners. Partners often agree to inject capital into the partnership to help it operate. Partnerships should really be recorded in a written Partnership Agreement which evidences in writing the mutual obligations and expectations of each partner and provides remedies for any transgressions.
General partnerships tend to have unlimited liability, so a good insurance policy is vital.
It is possible however to create a Limited Liability Partnership, which can limit the liability of the partners – this must be done through Companies House and carries responsibilities and formalities which mirror those required of a Limited Company.
A Limited Company is a company whose liability is limited by its shares. This is immensely popular. The company is owned by the shareholders. In small companies, the shareholders (owners) are often the directors. The directors are actually employed by the company and are not really self-employed (although this phrase is often casually used). It is important to have a written Shareholders Agreement for the same reason that Partnerships should have a Partnership Agreement.
This option results in less pressure on personal finances as if the business fails, the shareholders do not have personal liability unless they signed personal guarantees whilst trading or failed to discharge those duties expected by law of a director (in which case personal liability can follow in certain circumstances).
Choosing this option results in you having to comply with the filing regime at Companies House.
Firstly, the company needs to be incorporated, followed by annual filing requirements and notifications of certain changes. This does increase admin time and does involve fees. Directors can be paid both a salary and dividends or maybe receive company loans. Your accountant will advise the best way forward.
What will you decide?
Furthermore, if you have specific needs or requests, you can use our tailor-made service whereby we can prepare bespoke documents - Not only that – we can also help you any subsequent Data Protection or Trademark Registration requirements.
5th November 2020
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