10 things to do when you become your own boss
First published 26 April 2016 • Updated 05 November 2018
Turning self-employed can bring a new lease of life. You’re no longer working for The Man and it’s all down to your own skills and vision. Just remember that running your own business is more satisfying, but also more challenging – so keep these tips to hand as you begin.
The main attraction of starting a business is that you can spend your days doing what you love. What can put you off is realising how much else there is to do. The financial side of even a small enterprise can quickly become very complex, but running this smoothly can be essential to the day-to-day health of the business.
So before you even think about setting up shop, make sure you get the financial details well mapped out in advance. It could save you a lot of stress and money later on – and could even save your business.
So, before you welcome your first customer…
Choose the business structure
The type of business entity you run will influence everything else, so it’s vital to get this right. In fact you may want to consider all the other factors first before coming back to this one and making a decision. Your options are:
- Sole trader
- Limited liability partnership (LLP)
- Limited company
- Not-for-profit organisation
Being a sole trader doesn’t mean you work alone – you can have employees, but you as an individual are personally liable for all the business debts. On the positive side, all the profits belong to you and tax is levied on net profit rather than your ‘drawings’ (i.e. money you take from the business for yourself). However, drawings are not the same as income – if you’re being assessed for a mortgage, for instance, then you’ll be assessed on net profit rather than on drawings.
A partnership is essentially a collection of sole traders working together. Each partner may have a different share of profit or capital invested, but all have unlimited liability when it comes to debts. However, a limited liability partnership (LLP) put a cap on individual liability, as the name implies.
A limited company is a separate legal entity. It is owned by shareholders, none of whom will necessarily work in the business. The company has limited liability for debt, which is borne by the shareholders. A limited company must maintain public records and annual accounts at Companies House.
A not-for-profit organisation may be a charity, social enterprise, company limited by guarantee (LBG) or community interest company (CIC). There are different implications for each kind when it comes to accounting, administration and getting funding.
Hire an accountant, but also learn about accounting
Or as one accountant put it: 'Do buy a dog, but practise barking yourself.' No matter how good your accountant, it never hurts to learn the basic principles of accounting. A good grasp of the terminology and concepts will make discussions with your accountant much more efficient, and could even reduce fees. It’s also simply good sense to make sure you understand all the advice your accountant make offer you. Buy a book on accounting for beginners and keep it by your bedside.
Be obsessive about record keeping
Keep all your receipts and record every business expense – you can’t be too neurotic about this. Go to the HMRC website and check out the full list of allowance business expenses. Your excellent record-keeping will be another way to save on accountant fees.
Have a separate business bank account
May sound obvious, but sole traders often make the mistake of mixing business money with personal, and get into an awful muddle.
But remember your finances stay connected!
Though you keep your business and personal finances separate, they remain connected in other ways. For instance, if your business is doing well but your personal credit rating has slipped, then you will probably find it difficult to borrow money for the business. When running a business it can be easy to let your personal finances get into a mess – and that can rebound on your business. Don’t make that error.
For every pound you make, think ‘Tax!’
You know the tax man is coming (unless you have friends in Panama). So why let it be a shock every year? It’s simple enough to work out approximately how much tax you’ll owe, so put away the necessary amount on a monthly basis (you could even earn interest on it while you’re waiting).
Familiarise yourself with the taxes your business will have to pay. For example, as a sole trader you’ll pay income tax and National Insurance, whereas a limited company will pay corporation tax. Any business must also register for VAT if you expect your taxable turnover to be £83,000 or more.
Take seasonal trading patterns into account
Even before you start trading, you may have an idea of the year’s best and worst times for trading. Some retailers make 80 per cent of their annual profit from the Christmas and New Year period. If you have a likely peak time, think about how you’ll tide things over for the rest of the year. If you haven’t the cash to pay your workers or creditors, you could go bust waiting for the festive season, no matter how positive your predictions.
Choose the right insurance
Your financial adviser can help you put the most appropriate insurances in place. As well as insuring for business buildings and contents, and professional indemnity (for example), you should also consider insuring the most important workers (such as yourself). Certain individuals may be your most valuable assets, and the hardest to replace. Take out key person insurance so that the critical illness or death of one individual doesn’t sink the whole business. This insurance can also be used to buy out shares from a deceased partner’s family if necessary.
Use pensions to their full potential
A pension can be an excellent way to take money from the business without incurring tax – but that’s not all. If you set up a SIPP (self-invested personal pension) then you can use it to buy land or property for the business, and have the business pay rent into the pension plan. This can be a very tax-efficient way to provide for both your business and your retirement.
Set up your adviser dream team
When starting a business, the best adviser combination is an accountant and a financial planner working together. Because your business and personal finances need to be separated in some ways but are connected in others, it’s very useful to have an exchange of information and ideas between the two. Ideally, choose two advisers who are local to each other and who have a rapport with each other as well as you.
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