Starting your own business

British businesses are classified into four categories: large (250 or more employees), medium (50 to 249 employees), small (10 to 49 employees) and micro (one to nine employees). There has been an increase in the number of trading entities in recent years, with the majority of the growth being in micro and small firms, where the survival rate for new businesses has improved with more start-ups and higher levels of self-employment.

There is nothing unusual about starting up a business, and the vast majority of multinational concerns can trace their origin to one person starting to trade in an area in which they had some expertise. However, most people leaving the Services should get experience by working for someone else in a similar field before launching a business. 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.

Over 40 per cent 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 more expensive, and this includes franchising

- operating in a field that is known to you, or at least familiar, is a safer bet 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 your reasons, you will need to establish a business mission, and to carry out a personal analysis or audit to see if you have the qualities 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 and produce the proper records when required to do so. Businesses often grow and change their legal identity. However, in this article, we are more interested in Little Local Business Ltd than Global Enterprise plc.

Sole traders operate under their own name, or a business name, are entitled to all profits and are responsible for all losses. They must keep proper business records and accounts, but they 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 only liable 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 the limited company has to obey, and it also has to disclose financial and some business information to Companies House. 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 (usually charities), 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.

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’.

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 great weakness in their management.

- Health and safety – including registration with the Health & 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, and certain solvents or aerosols.

- Employees – including their legal rights (which often become greater the longer they have worked for the business), the basic rules on recruitment, employment contracts, 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 that 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 the location.

- Intellectual property and licences involving any company name and logo, inventions, product design and copyright will need to be protected. 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:

- the government (Department for Trade and Industry), including the Small Business Service

- 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

- 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.

Useful contacts

The Department for Trade and Industry, Enquiry Unit, 1 Victoria Street, London SW1H 0ET Tel: 020 7215 5000 Website: www.dti.gov.uk

Small Business Service, Kingsgate House, 66–74 Victoria Street, London SW1E 6SW Tel helpline: 0845 600 9006 Website: www.businesslink.org

UK online for business Tel infoline: 0845 715 2000 Website: www.ukonlineforbusiness.gov.uk

Learning and Skills Council (England and Wales), Cheylesmore House, Quinton Road, Coventry CV1 2WT Tel: 0870 900 6800 Fax: 02476 493600 Website: www.lsc.gov.uk

Scottish Enterprise (Lowland Scotland), 5 Atlantic Quay, 150 Broomielaw, Glasgow G2 8LU Tel: 0845 607 8787 Fax: 0141 221 3217 Website: www.scottish-enterprise.com

Highlands and Islands Enterprise (Highland Scotland and the Islands), Cowan House, Inverness Retail and Business Park, Inverness IV2 7GF Tel: 01463 234171 Fax: 01463 244469 Website: www.hie.co.uk

Department for Employment and 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, Cardiff CF14 3UZ Tel: 0870 333 3636 Fax: 02920 380900 Website: www.companieshouse.gov.uk

The Royal British Legion, Small Business Advice, The Cottage, Ordnance Road, Tidworth, Hants SP9 7QD Tel: 01980 847753 Fax: 01980 847734 Website: www.britishlegion.org.uk

Regular Forces Employment Association, 49 Pall Mall, London SW1Y 5JG Tel: 020 7321 2011 Fax: 020 7839 0970 Website: www.rfea.org.uk

The Prince’s Trust, 18 Park Square East, London NW1 4LH Freefone: 0800 842 842 Fax: 020 7543 1200 Website: www.princes-trust.org.uk