Starting your own business

[Chris_in_notts]

I've been self-employed, running my own business for 9 years. Some thoughts which may or may not be useful.

 

Setup - I have a Limited Liability Company. This means that if something goes horribly wrong I can walk away. The costs for this, and my payroll, come to about £1,500 a year. Unless you're a natural accountant then getting someone to do it for you is well worth it. By the way, accountants are all mean with money.

 

The Bank - Cashflow is all important. You need a trustworthy bank manager (or business manager). You have to go to see them in person, every couple of months. You need to build up a relationship. Online accounts are no good.

 

Setup costs - There are costs for setting up the LLC.You'll need printing for leaflets and cards (try Printcarrier.com - the printing people [ALL WE DO IS PRINT]).

 

Running costs - Transport (you will need a car). Fuel, food (never eat on on a job, always take your own, it'll save a fortune). Hardware. Christ, the computer hardware. You need to get that stuff shifted as fast as you can. If you've just bought £3,000 of computer hardware, the faster you get the money for that the better. It's better if you can get the client to buy the equipment. Why? Because, when your turnover hits around £56,000 you will have to register for VAT. Which means more paperwork.

 

Oh, and always take a deposit. No matter who it is. Nobody is your friend. Everyone is a client.

 

Breaking the law and taking cash without putting it through the books - This is illegal. It is also widespread due to the high costs of running a small business and the high costs of regulation. I've had eight tax rises (Income tax, NI, Employers NI, Corporation Tax) in the last nine years so I really can sympathise with the people who do it.

 

Discipline. This is the hardest thing. When you've just come in at 8pm on Saturday night, and you know you're back out again on Monday morning at 8am, and that Sunday afternoon is the only chance this week that you will have to do your invoices, do you have the discipline to sit down and do them while all your friends are having a barbecue and drinking beer? If the answer is 'maybe', then self-employment may not be for you.

 

Customer turnover - Unless your customer base is extremely loyal you can expect to lose 25% of them every year. Some move, some lose your address, some use someone else. You need to advertise constantly.

 

Reputation - Your reputation is the most important thing. If people trust you they will recommend you. 90% of my work comes from recommendation. Those people know that I'm good, they know that I can be trusted and that is worth its weight in gold.

 

Loneliness - If you love the office vibe you will hate self-employment.

 

Contacts - This is so important. One good contact is worth a year's advertising. If you can find someone who knows everyone (head of the Rotary, pub landlord, that kind of thing) and who knows and trusts you and has used you, that person will also be worth their weight in gold. Get in on local committees, local groups (all free ones), get to know everyone you can.

 

Don't expect to break even for 18 months. You can expect poverty and penury and misery.

 

And I wouldn't change it for the world. There hasn't been a day gone by in the last nine years where I've woken up and wished I worked for someone. Not. One. Day.

 

Oh, I've wished for the money and the security. But I'm not prepared to pay the price. And there's something quite special about getting up on a sunny Wednesday morning when you don't have any work on and going for a walk while everyone's at work.

 

73K for VAT now

[contink]

Not all accountants cost that much. Especially if you keep good records in the first place.

Agreed but running a Limited company is nothing at all like running a sole tradership with a much higher bar required. Having the time to learn what needs to be submitted, in what format, within what timeframe, etc.. is not something you do overnight.

 

A Limited Company can save you a lot in tax if you speak to the right accountant. You can claim a lot more under a limited company than you can as a sole trader.

 

Also a limited company is a seperate legal entity so unless you provide a personal guarantee to any loans, if the limited company goes belly up for whatever reason, your personal assets cannot be touched, unless it can be proven you've acted improperly.

 

I see the same arguments all of the time from people who started out not engaging an accountant and then realised it was a false economy not having one.

Yes, but, as per my points above, you are only referring to the positives and not even touching on the downsides at all... My research into all of this proved significantly to me that a lot of people jump in to Limited company because of the same arguments you've given but then find out they've stuffed themselves because of things like:

- The limited company MUST stay in profit, so there's no drawing out cash in a hurry because you need to pay the rent when the business is showing a loss.

 

... that's just an example but one that made me stop and think long and hard.

Yes spreadsheets are all fine and dandy if your accounting is simple. But can be prone to errors which may not be picked up.

Couldn't agree more... One thing I'd definitely get is an accounts package and start inputting the information properly. Saves a LOT of headaches later on, even if short term it seems like you could do it quicker... Good analogy is touch typing... Pain in the backside to learn, requiring lots of practice, but once you have it, the time saved is phenomenal.

 

As for artificially keeping the turnover low to avoid VAT registration is playing with fire. BTW the threshhold is now £73k.

Who said artificially? My point was to think long and hard about whether you want to aim that high as it's more than just a bump in the road.

 

Sure there maybe an administrative headache, but worth it for the tax savings.

Ok... at this point I disagree... You're making the exact same mistake I did when I thought about this (all too briefly) up until 4 months ago.

 

Yes, you are avoiding the issue of paying VAT on the items and services you buy in and sell on but you will also be adding a markup on these products and services (the value added bit) which you then have to apply tax to. If you're working for SME's that are VAT registered then this works fine and may actually be a positive, but if the end-user are Joe Public or sole-traders then it's not quite so attractive. VAT goes on top of everything... Put another way you are turned into an unpaid tax collector for the VAT man.

 

That's a cr*p explanation but to give a concrete example:

 

I have a product normally sold at £10.

Components, for arguments sake cost: £4.60 with £3.60 of that coming from within the EU so I'm paying 60p in VAT

Profit: £5.40

 

Assume I become VAT registered

I now pay £4.00 for my components.. Great! BUT...

I now have to charge my customers 20% of the price...

Choice #1: Increase price to £12 and risk losing customers but retain profit @ £6

Choice #2: Drop price to £8.33 so the inc VAT price is now £10 but now profit is @ £4.33

 

Of course, if you start out VAT registered you avoid this nasty decision but it's not something you do without thinking it through.

 

Of course the other thing is that it's yet more paperwork to add to the administration side of things.

 

 

 

I harp on about the administration and costs in this because at one point recently I realised I was spending 50% of my time dealing with administration (which does not pay the bills) and not with the actual income generation side of things, ie: selling. It's a very easy trap to fall into when starting out as well because you often have that whole "this is easy" rose glass tint thing going on... Lots of hours free, few clients, low stress but as the client numbers increase and the pressure increases, you start realising time is the most precious commodity of all. In my case I had a little boy appear just as everything went nuts so not only did administration suffer but so did quality of work, support, etc... Hard lesson to learn but one that Gatt can at least plan for.

 

 

Speak to an accountant for them to advise on the best structure for your company.

As I said earlier, on this I really couldn't agree more... I had a bookkeeper until recently and they didn't provide the information and advice that would, on reflection have saved me close to £3k in more than 5 years so I'm counting some costs there.

[wizzard]

contink,

 

No disrespect to bookkeepers but they're not really qualified to give advice, they're there to make sure your records are up to date.

[contink]

contink,

 

No disrespect to bookkeepers but they're not really qualified to give advice, they're there to make sure your records are up to date.

Yep... and boy do I know that now

 

The word is most definitely "Ouch!"... It didn't kill me so one of those "Live n'learn" things I guess...

[Andrew_C]

An accountant shouldn't cost you anything. They should be able to save you their fees in reduced tax liability! That is, unless you are very good already, and know all the regulations and loop-holes.

[Flatpackhamster]

.

- The limited company MUST stay in profit, so there's no drawing out cash in a hurry because you need to pay the rent when the business is showing a loss.

 

I don't know where you heard that, but it isn't true.

[contink]

I don't know where you heard that, but it isn't true.

Ok... perhaps clarification...

 

You cannot draw a dividend (usually the most tax efficient way to receive any income from your Ltd company) if the company is not in profit. Wages are obviously different but as a director you are charged with keeping the company in profit.

 

That's probably a simplistic explanation but that's what I've been told by my accountant and I suspect he might be somewhat qualified to know.

[Flatpackhamster]

Ok... perhaps clarification...

 

You cannot draw a dividend (usually the most tax efficient way to receive any income from your Ltd company) if the company is not in profit. Wages are obviously different but as a director you are charged with keeping the company in profit.

 

That's probably a simplistic explanation but that's what I've been told by my accountant and I suspect he might be somewhat qualified to know.

 

No, you can't draw a dividend. You can still pay yourself a salary and you can still receive a bonus. But they're both taxable at a higher rate than the dividend.

 

So if you urgently need to pay the rent, you can do it. But you can't do it tax efficiently.