Starting a new business: the first 3 things you need to do
Here are the top three things I suggest looking at first when considering going freelance or setting up a new small business.
Starting a new business brings millions of questions, and the one that I see a lot is: “What do I need to do to set up my business?”.
Number 1 – Choose your business type
What business type should I choose?
Choosing the right business structure can be tricky when starting.
This depends on:
your circumstances
the kind of business you are setting up
how much you think you might earn in the first couple of years
what type of liability you are comfortable with
and a host of other factors
Getting expert advice on this is recommended if you need more clarification.
Here are the basic details of some of your options:
Sole trader, freelance or self-employed
This is typically where most people start – they all mean the same thing in a business structure sense. You are classed as a “sole trader” by HMRC.
A sole trader is responsible for running their business and for meeting the legal requirements that come with it.
You can keep your profits after tax; however, you are also personally responsible for any debts or legal issues of your business.
As a sole trader, you must pay income tax and national insurance when you hit certain thresholds for generated profit.
A sole trader can employ staff (there are additional rules to follow), or you can outsource work via sub-contracting without employing people.
You don’t have to register immediately if it’s still early days. You only have to register as a sole trader once you have earned more than £1,000 from self-employment between the current tax year dates (6 April of this year and 5 April of next year).
You can start as a sole trader and move to Limited (or any other option) at any time, and you can also revert to being a sole trader in the future if needed.
The HMRC website gives you further advice about this business structure and explains the steps you need to take to set yourself up and the different thresholds for paying tax and national insurance.
Limited Company
If you form a limited company, its finances are separate from yours. In simple terms, if anything goes wrong, the company is liable, not you personally.
There are more reporting and management responsibilities, and taking money out of the business is more complicated.
Tax efficiency is another reason people go limited; once you start earning above £50K in profit (not turnover, profit), it’s typically time to look at going limited as the tax rate is lower.
Getting advice from a professional, such as an accountant, is recommended, but you can set up a company reasonably easily yourself.
Partnership
A partnership is the simplest way for two or more people to run a business together.
You share responsibility for your business’s debts.
For this option, you must fully know your joint responsibilities and what can happen if it goes wrong. Sadly, problems can happen down the line, and you need to account for the good and bad times when making your decisions.
Community Interest Company (CIC) / Social Enterprise
A CIC or a social enterprise is a special type of limited company that benefits the community rather than private shareholders. Find out more about this set-up.
Do I need to register for VAT?
You don’t need to worry about VAT until you are close to turning over £90,000 (at the time of writing) within a 12-month period. You have 30 days from hitting the threshold to register. You can voluntarily register if that’s beneficial to your company. Read more about registering for VAT on the HMRC website
Number 2 – Get Insured
But do I really need insurance for my small business?
In short, yes. Getting business insurance as soon as you start properly trading/making money (no matter how small) is highly recommended.
Starting with some cover is better than nothing.
You can play around with how much to be insured for, which can make a difference to the premiums, so start small and change and adapt as your business grows if finances are tight.
Is business insurance compulsory or a legal requirement?
The only business insurance “compulsory” by law is Employers’ Liability (EL) insurance if you employ anyone.
Otherwise, it is not “compulsory”, but you should ensure you are insured if the worst happens. Also, some make it a mandatory requirement if you want to work as a contract or subcontractor.
You need business insurance to protect you and others against the everyday risks of your business activities.
Insurance can cover you for lots of things which include:
Mistakes
Accidents
Theft
Damage
Legal fees
Buildings
Stock/tools
Products
Data
Business interruption
But the cover you need depends on your business and how you run it.
Think about the work you do and the risks you must cover. What are the worst things that could happen?
Could you/your business face a compensation claim from a disgruntled client because they believe you’ve been negligent?
Could your business injure a member of the public in any way?
Maybe you give some advice, but it’s incorrect, and the client sues you.
Do you have business equipment or stock to insure?
Typically, the two main insurance types needed for service-based businesses are:
Public liability insurance – If your business comes into physical contact with members of the public, whether at your premises, an office or elsewhere like a coffee shop, exhibition, co-working space etc.
Think of trips, falls, and accidents resulting from your belongings. For example, someone could trip over your laptop wire or bag and go on to claim against you.
Professional indemnity insurance is important if your business gives advice or offers a professional service to other companies or if you deal with client data or intellectual property. This is the key one and the one to get as a priority.
For example, you may provide a service to another business, and they say that you have not done the work you agreed to or that what you have provided has caused a particular problem. They could make a claim against you.
How do I get business insurance?
You can shop around for business insurance in the same way as you do for your home or car.
There are also brokers who can help you but check their charges and decide if it’s worth their help.
Get a few quotes, look carefully at the small print, and make an informed decision.
There are lots of companies out there, but these may help you to get started:
Policy Bee
With Jack (who I use)
Simply Business
Hiscox
Don’t forget to sign up for cash-back sites like TopCashback*, which may give you a nice bonus if the selected provider is registered with them.
*This is an affiliate link – we both will get a reward or discount by using this link
Number 3 – Register with The ICO
Do I need to register with anyone when setting up a small business?
The first thing to tackle is your business type, which we have covered in point one.
It is also recommended that you register with the Information Commissions Office.
The ICO is the UK’s independent body set up to uphold information rights.
You are working with data if you deal with any data – names, email addresses, addresses, etc..
This also includes written information, a diary, emails, documents, and information systems or tools you may use. Data comes in many forms.
Whether a single-person business or a big organisation, you have a legal responsibility to manage data correctly.
Most small businesses only have to pay £40 per year, but the ICO website will tell you what is correct for your business.
You or your business can be fined if you don’t comply with data protection rules.
If you are a sole trader, you are personally responsible for the fine and legal action.
You can find lots of information on the ICO website.
Conclusion
So here are the top 3 things you need to do when setting up to freelance or open your small business.
Choose your business type and register with HMRC
Get yourself insured
Register with the Information Commission Office
Bous tip - when deciding your business name, make sure you check that it’s not trademarked and the domain (e.g. the website) and social account names are available.
You must make the best choices for your circumstances, so if in doubt, get further advice from the right professional; this is just a guide and not absolute advice.
Need help?
If you want any advice on starting your own business, please get in touch or book a business clinic session.