Whilst we talk a lot on the Start-up Hub about the experience of being a start-up, we don’t often talk about how to actually ‘start up’ a start-up.
There are plenty of things to consider before you try and decide on how many office beanbags you need or whether to have a pinball machine or a pool table in the office. One of the first decisions to make will be how to structure your company.
This can be a pretty confusing process, so we’ve got some expert advice from Michael O’Brien, partner and head of technology at Kreston Reeves, the award-winning chartered accountants and financial advisers.
So you’ve taken the leap and decided to set up your own tech business. For many people, finally coming to that decision is not an easy one, with much soul searching and sleepless nights to get over their initial fears: “Can I run my own business? Is my idea good enough? How am I going to pay the bills?”
As any entrepreneur will tell you, however, the difficult decisions do not stop there. The choices you continue to make about your business in the early days are crucial.
Not structuring your business effectively can have a considerable knock-on effect in future and can be hard to undo further down the line.
What are my options?
When setting up a business in the UK you have three main options:
- Limited Company
- Sole Trader (or Limited Liability Partnership if there is more than one founder/owner)
- Limited Liability Partnership(LLP)
Most businesses would choose either option one or two. A limited liability partnership (LLP) is normally used by specific types of businesses (such as law and accountancy firms). In essence, LLPs have the limited liability benefits that limited companies do, but they are taxed more like a partnership.
The vast majority of tech start-ups will be set up as limited companies.
What are the benefits of registering as a limited company?
The major advantage of a Limited Company setup is that it provides the business with a limitation of liability.
This means that the owners/founders are not held personally accountable for any of the liabilities of the business in the way that they would be in a sole trader or partnership business structure. With the uncertainty and risks in setting up any new business this is a significant consideration.
Limited companies also provide the founders with flexibility on how they are remunerated.
They can have salary, dividends (if profitable) and also be provided with benefits by the business such as pension contributions or private medical cover.
All of this provides greater tax planning opportunities that a Sole Trader structure does not have. As a Sole Trader all profits are effectively taxed as if they were salary.
However this does assume founders will be taking remuneration from their start up, which is often something of a pipe dream in the early period.
Limited companies also offer a structure allowing easier additional investment.
Limited companies – unlike sole traders and partnerships – have share capital, so are able to issue new shares to third party investors and offer share options to employees. This also allows the founders to plan their succession more effectively, if this becomes a consideration in the future..
Being a Limited Company can also give the business an impression of scale and of being an established enterprise, providing potential access to a greater customer base that might hesitate to do business with a sole trader.
Having your business name registered as a limited company also provides some protection from other businesses setting up with the same name, whereas a sole trader business would not have this security.
For any business though, you should also look to trademark and protect any business or brand names – looking after your intellectual property is absolutely vital, and can appeal to potential investors too.
What about the Sole Trader option?
The major benefit of a sole trader structure is that you do not have to file any business accounts on public record, whereas all limited companies need to file their accounts and company information on public record at Companies House.
This means that as a sole trader your business information is more private and the compliance and regulatory costs of running a business are reduced.
Preparing annual accounts and tax returns for a limited company is generally more costly than it would be for a sole trader, as company accounts require significantly more disclosures.
And if the business is loss-making there is an opportunity as a sole trader to offset these losses against other income you may have personally, potentially reducing the personal tax you will need to pay in that period.
But these benefits are typically outweighed once the business has employees or starts entering contracts with suppliers or customers.
Where can I keep my money safe?
Assuming you’ve gone with the limited company option and got that set up successfully, the next step is to get a bank account opened.
This can take some time so do not leave it to the last minute.
The bank will want to see ID documents for the directors and shareholders of the company and know about what your plans are for the business. Don’t think that you will be able to get a bank account opened over the counter during your lunch hour. This can take several weeks, and without a business bank account the company cannot operate easily.
Most of the main banks have specialist technology or entrepreneurial teams – speak to your accountant, lawyer or the office manager of your co-work space who often have contacts in these areas..
What next?
Well, that’s where the endless pot of inspiration and self-belief that lead you to make the leap in the first place comes in – good luck!
Michael O’Brien specialises in working with clients in the technology, digital media and creative industries; including owner managed businesses and also large multinational corporations. Michael provides his clients with expert accounting, financial and tax advice and works with them to develop strategies for growth at home and internationally. He and his team provide mentoring support to a number of start-ups and he is a judge of the Cisco BIG Awards. For more information, you can visit their website or follow Kreston Reeves on Twitter.
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