Sitting down with a start up

27 July 2016

Here's a checklist of issues accountants like to discuss with clients setting up in business for the first time.

Whenever we sit down with a new client who’s considering starting a business, we spend time getting to understand what they want to do and going through their plan.

Then, our first job is to advise on the best vehicle or status for them and discuss any issues that they may not have considered.  Having worked with many start-ups, we know the things that tend to get overlooked and the mistakes that it’s possible to make.

Perhaps they’d be better off as a sole trader than a limited company? Maybe they should consider a partnership or LLP arrangement?

It can sometimes be a tough a call, as you’re weighing up pros and cons.

Coming to a decision involves asking quite a number of probing questions.

Are they targeting a regular annual income? Or perhaps trying to build a business they can sell for a fortune a few years down the line?

What level of risk are they likely to be facing?

And what are the financing arrangements? Do they have a clear idea of the cashflow issues that they’re likely to encounter?

Critically, we need to know whether they’re likely to be making a loss as they set up and establish the company.
If other family members are involved, we need to talk about how income might be shared. The business is worth nothing at day one, but it’s important to project into the future. This probably means a partnership or shareholders’ agreement.

We’ve seen the kind of disputes that can arise.

Perhaps two people are being rewarded at the same level, but only one is doing the actual work? And there’s always the possibility of a more serious bust-up. So difficult conversations are essential early on.

So we’ll talk these things over and reach the decision about the route that seems most appropriate for you.

If you’re becoming self-employed as a sole trader, you simply need to notify HMRC of your new venture. Although it is technically possible to mix your personal bank account with your business income, we don’t recommend it. If you keep a separate account, everything is much clearer from a book-keeping perspective.

If you opt for a limited company, there are obviously potential tax advantages, although the way you remunerate yourself may become more complex. VAT is something to consider, along with the need to set up a payroll and real-time filing of information.  This is where professional advice can be very important.

If you’ve already incurred expenditure towards your new business venture, this can be rolled up and included for VAT purposes and included in your accounts as a tax-deductible expense. So, as soon as you have the seeds of an idea, you should start keeping receipts.

Beyond this, we are always looking to introduce my clients to cloud-based accountancy software, such as Xero. This can save a huge amount of time, as it’s linked directly to your bank account, so you avoid a lot of data entry. As accountants, we can also keep a closer eye on how your business is performing.

Don’t forget though, you still need separate records if you’re paying out cash. And you’ll still need to keep your receipts.

And a final thought. Be prepared for the tax bills that will come along in due course. When a business is doing okay, there’s always a temptation to spend. After all, the money’s there in the account. But you should be setting aside at least 20% and living off the other 80%. That way, you’ll always have money tucked away in a savings account when HMRC comes calling.

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