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How to set up a startup

by | 16 May, 2019 | Process

According to UK Government data, 620,285 companies were incorporated in the 12 months to March 2018; in total the register contained over four million companies.

If you’re toying with the idea of setting up your own company, you’re going to be full of mixed emotions; excitement imagining the realm of possibilities for your new venture, and trepidation about how you get to the point of trading.

Setting up a business isn’t a particularly tough task, but it is important that you get it right from the start. Miss a step, or overlook something you didn’t think was important, and you risk:

  • Making life difficult for yourself later on down the line
  • Locking precious cash in your business that you can’t get out
  • Paying too much tax, or worse, being taxed on your cash twice
  • Falling foul of HMRC
  • Exposing yourself to lengthy, costly, shareholder disputes

Start by setting up your startup the right way from day one. The following process outlines the steps you need to consider when setting up a business in the UK…

Step 1: write a business plan

We can hear the groans already. You’re probably picturing a huge document that you’re anticipating will take you months to write, and even longer to research the relevant detail. You might even think about hiring someone to do it for you…

But it’s really simple. And actually, the format is irrelevant – you can have a huge document if you want, or you can write it on the back of a napkin, so long as it answers these six questions:

What sort of business do you want?

Whether you’re thinking of operating a lifestyle or growth business, or something in between, deciding what you want upfront will inform your decision making. And if you’re contemplating going into business with your partners, it ensures alignment to prevent any potential disputes.

Who are your customers?

The more detailed a profile you can create about your ‘ideal’ customer the better. The more you know about them, the easier and more effective your sales and marketing process will be.

What are you offering?

You need to consider where you’re going to play within the market, and therefore why your customers are going to come to you. Think about your positioning, differentiators, and your value proposition (i.e. the one thing you do that’s different/better to everyone else).

Who are your suppliers?

If you’re selling a product, you need to think about who you’re going to source it from, and start identifying these organisations. And if you’re providing services, you’ll need to consider the people you’ll need, and the time it will take to deliver.

What’s your funding requirement?

Every business needs cash upfront. Work out how much you need to get going, and calculate how long that’s going to last. Knowing these figures you can establish your success criteria, and determine whether you need to seek out additional funding.

What regulations apply to you?

Certain legislation, such as tax laws and data protection, apply to every business. But, there will be some legislation that is specific to the sector you’re looking to operate in. Make sure you know the law, and if you’re uncertain, do some research or ask someone in that sector.

You’ll notice we haven’t mentioned competitors…

That’s because they’re not essential to your success. If you want to, you can perform a detailed competitor analysis – this can be good to help you determine what you do/don’t like and how it would apply to your business. Or you can ignore them completely and do your own thing.

Step 2: make a financial forecast

Most startups use the break-even approach to create their forecast. By starting with your costs (including salaries) and working backwards, you can work out how much you need to sell before you hit break-even. Once you have these figures, you can then ask yourself, “Is this realistic and achievable?” to sanity-check your plans.

The break-even approach to financial forecasting contains four simple steps:

  1. Work out your fixed costs.
  2. Work out your marginal cost per unit.
  3. Work out your selling price per unit.
  4. Work out how many units you would need in order to cover your fixed costs.

Step 3: decide whether you’re a sole trader or limited company

There are pros and cons to each type of business; a sole trader is typically simpler, because you pay your tax and National Insurance after completing a self-assessment form. Limited companies involve more admin and are more expensive – but there are clever, tax-efficient ways to pay yourself through the company.

Step 4: register with Companies House

If you decide to take the plunge and set up your startup, you need to register with Companies House and pay a £13 administration fee. To register, you’ll need the following information:

  • Company name
  • Address
  • At least one director
  • The number of ordinary shares you’d like the create

(120 is recommended since it’s easily divisible by lots of different numbers)

  • Value per share*

(£1.20 is recommended and you are required to pay this fee to the company)

(if you apply online, these are created automatically)

(anyone who has over 25% of the shares or voting rights)

* if you want to put a large amount of cash into the company, do this as a Director Loan as it’s easier to get the money out, tax-free, at any time.

Step 5: register with HMRC

You will also need to register with HMRC for pay-as-you-earn (PAYE) so you can pay yourself / your employees. Once registered, HMRC will provide you the references, which you need to keep safe.

Things to think about…

  • Who will run your payroll? You? Or an accountant?
  • What day will you make salary payments?
  • How will you track staff who are paid hourly?

Step 6: register for VAT

If your turnover exceeds a certain threshold, you must register for VAT – for 19/20 this is £85k turnover per year.

But…

You may still choose to voluntarily register for VAT once you consider the following:

  • Is your business likely to exceed the threshold in the future? If so, it might be worth registering now, rather than having to suddenly increase your prices by 20%.
  • Do you have large expenses, such as equipment purchases? If so, you can typically claim VAT back.

Once you’re registered for VAT, you will need to make quarterly/annual filings, depending on which scheme you’re on. To make this really simple, you may want to consider using an accountancy software package, such as Xero.

Step 7: open a business bank account

Once you’ve registered your business, you must open a business bank account. To do this, you will need a certificate of incorporation. And you’ll usually be asked to identify the directors and anyone that owns over 25% of the business – this can make it a time-consuming process so start it as soon as you have the certificate.

When choosing which bank to open your business account with, think about…

  • Whether you want/need access to a highstreet branch
  • Online functionality
  • Rates for taking cash out of the business
  • The bank’s reputation.

Step 8: decide how you will track sales and expenses

You will need a mechanism in place for your ongoing bookkeeping. This could be a simple spreadsheet, or a software package.

Step 9: make sure you know how to pay tax efficiently

As previously mentioned, setting up as a limited company does have its perks when it comes to paying tax. Paying yourself a salary up to the NIC threshold means you’ll stay within your free personal allowance. You can then take additional cash as a dividend, which gives you the first £2k free.

Also, don’t leave tax-free money on the table, such as mileage, expenses and director loans. Make sure you know what you can claim.

Start as you mean to go on…

As you start setting up your new business, you should establish good working practices from the beginning. Start by implementing a process management system to document the way you do business. Process Bliss is the ideal process management system for startups – sign up for a free 14-day trial. 

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