Avoiding the Start-Up pitfalls 1 - setting up the right structure
When you’re starting up, getting the fundamentals right may be unexciting, but getting it wrong can be disastrous.
It might seem that I’m stating the obvious, but choosing the right business structure for your start-up venture really is essential for a range of businesses and, in particular, tax reasons. There are cases where simply changing from one business structure to another has cost the business owner tens of thousands of pounds due to the complexity of UK tax law, and the eagerness of HMRC to get what they can, wherever they can.
You need to keep an eye future needs as much as current ones.
You will need to decide which business structure best suits your end game. Are you on a “see where this leads” business journey, relying on organic growth? Or do you have a 3 year plan that includes sourcing funding and a clear exit strategy? Or something else? Whatever it is, you will need to choose between one of the four business entity types:
- sole trader/sole practitioner (an individual); [NS to expand]
- a partnership (two or more individuals or companies); [NS to expand]
- a limited liability partnership or [NS to expand]
- a limited company. [NS to expand]
There are both advantages and disadvantages for each trading structure in terms of control, perception, support, costs and tax implications.
Each situation must be judged individually. As well as the tax and national insurance issues, you will need to consider such things as the nature and expected rate of growth of the business, the degree of commercial risk, administrative obligations, pensions and retirement, and your personal preferences.
In the early years of a business, operating as a sole trader is often attractive because funds can be used with fewer restrictions. But as your business develops, there may be advantages to incorporating (forming a limited company).
If you are thinking of starting up in partnership, it is essential to have a formal agreement drawn up, and to take professional advice.
Anyone can set-up a business structure. But not everyone should.
I’ve really just touched the surface of some of the considerations you need to take when getting your start-up business structure sorted. While you can just buy online services for pennies – I’ve seen them for as little as £3.99 – remember this: getting your company structure right is an investment in time and expertise that you need to take seriously. Get it wrong and you could be shelling out a lot more that £3.99! A qualified accountant with experience in helping start-ups identify and choose the right set-up for their vision really is the only way to go.
To find out more about how we work with serious startups, have a look here. Or you can call Acconomy on 01202 678 993, or even email Nigel directly on firstname.lastname@example.org