Starting your own business

British businesses are classified into four categories... British businesses are classified into four categories:

large (250 or more employees)

medium (50 to 249 employees)

small (10 to 49 employees)

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 origins to one person starting to trade in an area in which they had some expertise. However, most people leaving the Services should gain 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 in running a commercial concern, and the newcomer to this area will need help, advice and a slice of luck if they are to succeed.

Over 40 per cent of all businesses fail in their first three years, with the major reason being poor preparation and planning. 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 safer when starting up

- cash businesses avoid chasing small sales invoices

- look around at successful and unsuccessful businesses, and try ideas out 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 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 for business and private matters to be kept separate, and to maintain and produce the proper records when required to do so. Businesses often grow and change their legal identities. 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 the profits and are responsible for all the 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 that it has to obey, and it has to disclose financial and some business information to Companies House. The members cannot be held responsible for its debts unless a court decides that 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 it makes. 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 or 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 - 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-up

There is an enormous amount of assistance from a wide variety of sources, including:

- government (Department of Trade and Industry)

- regional authorities (Business Links, and Learning and Skills Councils)

- Career Transition Partnership (self-employment awareness and business start-up courses)

- Royal British Legion

- Prince's Trust

- banks

- professional advisers (solicitors, accountants, insurance and pensions advisers, marketing experts, specialist trainers, IT experts).

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

Sources of information

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

Department for Transport and the Office of the Deputy Prime Minister, Eland House, Bressenden Place, London SW1E 5DU Tel: 020 7944 3000 Website: www.dft.gov.uk

Small Business Service, Kingsgate House, 66-74 Victoria Street, London, SW1E 6SW Tel: 0114 259 7788 Fax: 0114 259 7330 Website: www.businesslink.org

Income Tax, National Insurance and VAT Issues: Inland Revenue Enquiry Centres or Tax Offices or Tel: 0845 900 0444

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

Learning and Skills Council (England and Wales) Tel: 0845 019 4170 Website: www.lsc.gov.uk

Scottish Enterprise (Lowland Scotland) Tel: 0845 607 8787 Website: www.scottish-enterprise.com

Highlands and Islands Enterprise (Highland Scotland and the islands) Tel: 01463 234171 Website: www.hie.co.uk

Department for Employment and Learning (Northern Ireland) Tel: 028 9025 7793 Website: www.delni.gov.uk

Companies House, Crown Way, Cardiff CF14 3UZ Tel: 0870 333 3636 Website: www.companieshouse.gov.uk

The Royal British Legion, Small Business Advice, The Cottage, Ordnance Road, Tidworth, Wilts 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: 08700 940795 Website: www.rfea.org.uk

The Prince's Trust, 18 Park Square East, London NW1 4LH Tel: 020 7543 1234 Freephone: 0800 842842 Fax: 020 7543 1200 Website: www.princes-trust.org.uk

Establish a business mission and carry out a personal audit to see if you have the qualities to make it a success

Franchising is more likely to succeed than other forms of business start-up

As with many other areas of civilian life, the importance of networking cannot be overstated