Starting your own business

British businesses are classified into three categories: large (250 or more employees), medium (50 to 249 employees) and small (1 to 49 employees). According to figures released by the Department for Business Innovation & Skills (BIS) in October 2009, there are around 4.8 million business enterprises in the UK: 6,000 of these are large and 27,000 are medium-sized, which means that 99.3% of British enterprises are classified as small. Together, UK private-sector enterprises employ a total of 23.1 million people and have a combined annual turnover of £3,000 billion.

Small and medium-sized enterprises (SMEs) together account for just over half of employment (13.7 million people, 59.4% of the total) and turnover (50.1%). Small enterprises alone account for 47.9% of employment and 36.5% of turnover. An estimated 3 million businesses have no employees (i.e. they are sole proprietorships and partnerships comprising only the self-employed owner-manager(s), or companies comprising only an employee director), with a combined turnover of nearly £232 billion. The more than 1.2 million businesses with employees have an estimated combined turnover of more than £2,763 billion.

Getting started

There is nothing unusual about starting up a business, however most of those leaving the Services should think about gaining experience by working for someone else in a similar field before branching out on their own. There is a great deal of theory and even more practice involved in running a commercial concern, and the newcomer to this area will need help, advice and a slice of luck if they are going to succeed. Unless an individual has such a brilliant idea that delay in launching means that someone else may get there first, it is strongly recommended that they gain business experience before going it alone.

Almost half of all businesses fail in their first three years, with the major reason being poor preparation and planning. With this in mind, there are some basics to be considered:

setting up from scratch has the advantage of a clean start, but little feel for whether the idea is going to work
buying an existing business can be expensive, and that includes franchising
operating in a field that is known to you, or at least familiar, is safer when starting up
cash businesses avoid chasing small sales invoices
look around at successful and unsuccessful businesses, and try out ideas on friends and family
work out why you want to start a business.

Whatever the reasons, you will need to establish a business mission, and to carry out a personal analysis or audit to see if you possess the qualities needed to make it a success. Following on from the mission comes a business plan that may be as short as six months or may look ten years ahead. Most consider the period up to about three to five years out, but concentrate on the specifics of the next 12 months or so.

Types of business

Initially, it is probably best to keep things as simple as possible. It is important to keep business and private matters separate, and to keep proper records and be able to produce them when required to. Businesses often grow and change their legal identity. However, in this article we are concentrating on Little Local Business Ltd.

Sole traders operate under their own name, or a business name, are entitled to all the profits and are responsible for all the losses. They must keep proper business records and accounts, but do not need to submit them to scrutiny to anyone except the tax and legal authorities. They are, however, personally liable for any debts the business may incur.

A partnership is customary for a number of professions, and is an arrangement whereby a number of people effectively agree to operate as a sole trader. They may have a formal deed of partnership, or simply split the profits or losses equally. Some income is often divided in proportion to individuals’ levels of investment and the rest is treated as salary, split according to worth and contribution.

A limited liability partnership has to disclose annual accounts and returns. Members have limited liability in the event of a loss (although the partnership will be fully liable), but they will be taxed as if it was an ordinary partnership.

A limited company simply means that the members of the company (the shareholders) are liable only for the debts of the company up to the amount unpaid on any share(s) they have bought. There are a number of rules and regulations, and the disclosure of financial and some business information to Companies House is required. The members cannot be held responsible for its debts unless a court decides there has been negligence or malpractice.

It is also possible to have private unlimited companies (very rare) and private limited companies limited by guarantee (e.g. charities and not-for-profit organisations), where members’ liability is limited to the amount they have agreed to contribute to the company’s assets if it is wound up. Public limited companies have the designation PLC (or plc) after their names; this means that shares can be sold to members of the general public, although ‘listing’ on a stock exchange requires many criteria to be met so that investors are properly protected.

Company directors and secretaries must understand their responsibilities and the legal implications of their appointment, including the company’s Memorandum and Articles of Association. Individuals thinking about using a limited company as their private trading vehicle should be aware that IR35 regulations distinguish between a ‘contract of service’ and a ‘contract for services’, and a single-contract company is liable to be treated as a sole trader.

A franchise is now a common way of starting a business, and is basically one person copying another’s proven business and receiving support from them, in exchange for an up-front payment (the franchise fee) and ongoing fees (royalties). It is an option for those who have some money to invest and who want the independence of self-employment coupled with the support of the franchisor. Franchising is more likely to succeed than other forms of business start-up.

Issues that affect businesses

Financial issues – including sales and purchases records, VAT (if registered), wages, Income Tax and National Insurance, bank accounts, cash flow, loans, benefits in kind, dividends, insurances and Corporation Tax on any profit made. More businesses fail because they get their cash flow wrong and become insolvent than because they have any other weakness.
Health and safety – including registration with the Health and Safety Executive (factories and workshops) and/or the local authority (offices and shops). There will be additional requirements if the business involves food and drink or is liable to cause pollution.
Environmental issues – including the disposal of business rubbish, hazardous materials, or certain solvents or aerosols.
Employees – including their legal rights, recruitment, employment, discrimination, sickness, pregnancy, dismissal and discipline. Employer’s Liability Insurance is a legal requirement to afford protection for employees who might be injured at work.
Premises may be necessary for manufacturing or retail businesses, while others can trade from the owner’s home, reducing overheads and producing a better quality of life. For businesses that need premises, the most important thing to consider is location.
Intellectual property and licences involving any company name and logo, inventions, product design and copyright. Certain business activities will need to be licensed by a wide range of authorities.

Help available for business start-ups

There is an enormous amount of assistance available, from a wide variety of sources. These include:

government (Department for Business Innovation & Skills (BIS))
regional authorities (Business Links, and Learning and Skills Councils)
Career Transition Partnership (self-employment awareness and business start-up courses)
the Royal British Legion
the Prince’s Trust
banks (perhaps less helpful than previously)
professional advisers (solicitors, accountants, insurance and pensions advisers, marketing experts, specialist trainers, IT experts).

Like many other areas of civilian life, the importance of networking cannot be overstated.

Further information

Department for Business Innovation & Skills (BIS), Ministerial Correspondence Unit, 1 Victoria Street, London SW1H 0ET Tel: 020 7215 5000 Website: www.berr.gov.uk

Local Business Link through a contact line for the local office: 0845 600 9006 Website: www.businesslink.gov.uk

Learning and Skills Council (England and Wales), Cheylesmore House, Quinton Road, Coventry CV1 2WT Tel: 0870 900 6800 Website: www.lsc.gov.uk

Scottish Enterprise, Atrium Court, 50 Waterloo Street, Glasgow G2 6HQ Tel: 0845 607 8787 Website: www.scottish-enterprise.com

Highlands and Islands Enterprise, Cowan House, Inverness Business and Retail Park, Inverness IV2 7GF Tel: 01463 234171 Website: www.hie.co.uk

Department for Employment & Learning (Northern Ireland), Adelaide House, 39–49 Adelaide Street, Belfast BT2 8FD Tel: 028 9025 7777 Website: www.delni.gov.uk

Companies House, Crown Way, Maindy, Cardiff CF14 3UZ Tel: 0303 1234 500 Website: www.companieshouse.gov.uk

Royal British Legion, Small Business Advice Office, The Cottage, Ordnance Road, Tidworth, Hants SP9 7QD Tel: 01980 847753 Website: www.britishlegion.org.uk

Regular Forces Employment Association Ltd, First Floor, Mountbarrow House, 6–20 Elizabeth Street, London SW1W 9RB Tel: 0121 236 0058 Website: www.rfea.org.uk

The Prince’s Trust, 18 Park Square East, London NW1 4LH Tel: 020 7543 1234 Website: www.princes-trust.org.uk