Startups – getting it right from the beginning
There are a number of key things you need to consider when starting up a business: what is the legal form of your business, how will you fund it, what reporting requirements need to be considered and, if needed, how will you attract and reward employees?
At the outset of any new business, the owner or owners should have a clear understanding of where the business aims to be at some future date not too far ahead. Performance targets are crucial to measuring the success of a business. Examples of these may simply be turnover, profits and/or market share. Financial forecasts should be prepared for a fixed period. These are often outlined within the business plan, the format and details of which will be tailored to the needs and size of the business.
Appreciating this at the beginning of any new business venture, whatever its potential scale, will facilitate and determine many decisions which need to be made. One should ensure that decisions made at this point will allow the business to establish a solid foundation from which it can not only survive, but also develop into a profitable and financially secure entity.
The aims here are just to set out some brief points for consideration by the shareholders and directors, to promote a better understanding of the commercial risks, and to assist in identifying any weaker areas or gaps where professional advice may be key to the success
of the business.
Legal structure & considerations
The legal structure of your business is one of the most important decisions for a startup, as it can determine the amount of liability you have.
Although other legal forms such as sole traders, partnerships and limited liability partnerships can be equally valid in certain circumstances, this article focuses on a limited company as this is often the chosen legal form for a startup business.
Thought should be given to the share structure, for example the number of shares to issue and also potentially issuing different classes of shares with possibly different voting and dividend rights.
Additionally, shareholder agreements are an important governance document setting out to shareholders their rights and obligations during ownership. If new shareholders are introduced, it is vital that the existing shareholders have an understanding of what will happen to the share structure as a result. As well as how this impacts on the control of the business and any anticipated financial rewards. Equally important is what happens to the shares of those that leave for whatever reason and how this might alter the ownership ratios.
The startup needs sufficient funds to meet its obligations, and to allow growth and expansion. Other than traditional debt finance it may be possible to attract new investors via the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS). These share schemes are popular with a number of our clients due to the tax reliefs available.
Reporting requirements: Points to consider
Understanding and complying with all reporting obligations is essential to avoid penalties from either HMRC or Companies House.
- Taxes to consider include VAT, PAYE and corporation tax. Consider the stage at which an entity should register for VAT, as it may be worth registering before expecting to meet the VAT threshold.
- Is the entity undertaking any research or development? If so a generous tax relief may be available.
- Discussing these issues with our clients, allows us to provide timely and relevant advice ensuring our clients meet their obligations and obtain reliefs where available. Additionally, advising clients of any tax due and the payment dates allows them to manage and monitor cash flow.
The nature and size of the company will determine the format of the statutory accounts and whether an audit is required. Accurate and up to date company financial records are essential to provide important management information for decision making. We often assist clients in choosing the right software and suggest relevant reports that would be useful to the management team and third parties as needed.
Building a team
Retaining the right employees, and finding ways to motivate and reward them, is key to the success of businesses. In some startups the remuneration package may include a mixture of salary, benefits and equity. Share options are often popular with startup enterprises because they are a way to engage the employees in the longer term future of the business.
Being able to understand the overall tax costs for the company and the individual allows each to find the
blend that rewards and motivates talent.
The above are just some of the issues that may arise in the early days of a business. If you are starting a business and require advice on any of the points raised, please get in touch.
Date: 17th July, 2019
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