Starting Up In Business

Business structure

There are three common types of business structure:

Sole trader

A sole trader is an individual who runs their own business.  This structure is straightforward to set up with minimal paperwork and is established without legal formality.  However, the business of a sole trader is not distinguished from the proprietor's personal affairs.  This means the sole trader is personally liable for any debts of the business.  Business income and expenses are reported on the sole trader’s personal tax return.

Partnership

A partnership involves two or more individuals sharing ownership and responsibility for a business.  It is advisable to draw up a written agreement which can outline each partner’s roles, responsibilities, profit-sharing and any decision-making process.  Like sole traders, the business and personal affairs of the partners are not legally separate. A further possibility is to use what is known as a Limited Liability Partnership (LLP).

Limited Company

A limited company is a separate legal entity from its owners.  Shareholders own the company by holding shares, but their liability is generally limited to the amount invested in the company.  However, companies require a higher level of compliance with greater legal regulations and accountancy procedures.

Each business structure has its own advantages and disadvantages, so it is essential for new entrants to consider a number of factors including:

• The tax implications
• The legal entity
• Ownership and liability.

For further information, please see separate guidance note on FAS New Entrant ‘Succession and Business Structures’ at https://www.fas.scot/rural-business/new-entrants/.

The business plan

A well thought out business plan is a vital tool for any new entrant. If your business needs finance, a realistic and comprehensive business plan will be essential to obtain funding.  A robust business plan should describe you by way of a CV, details of the new business, product or service offered, your target market, existing skills and what your capital requirements are.  Additionally, your business plan should include 3 years of financial projections.  These projections should help provide a clear picture of expected financial performance and demonstrate the viability of your plans to support lending requests.

See FAS New Entrants guidance note ‘Business Planning and Financial Management’ at https://www.fas.scot/rural-business/new-entrants/.

Books and records

All businesses need to keep records. Financial records should include details of payments, receipts, credit purchases and sale debtors, plus other assets and liabilities.

Regular preparation of your books and records can help with monitoring your goals against your financial projections (suggest at least monthly). It is also important to maintain regular book-keeping records for taxation purposes.

Accounts

The books and records are used to produce financial accounts. Good book-keeping will make it easier and less costly to compile the official financial accounts/statement. Accounts must be prepared for HMRC. Strict requirements as to the layout of these accounts are set if the business is formed as a company.

A company and an LLP may need to have an audit and will need to make the accounts publicly available by filing them at Companies House within a strict time limit.

Taxation

Consider issues of taxation when starting a business:-

Taxable profits

The type and rate of taxation will depend on the form of business structure. However, the taxable profit will normally differ from the profit shown in the end of year financial accounts due to certain expenses, which are not allowed for tax purposes, and the timing of some tax allowances.

National insurance (NI)

The rates of NI contributions are generally lower for a sole trader or partnership than for a director of a company but the entitlements can also differ. In a company, it may be possible to avoid or reduce NI by paying a dividend rather than a salary.

Value added tax (VAT)

Correctly accounting for VAT is an essential part of any business and neglect may result in a significant loss.

When starting a business you should consider the need to register for VAT. If the value of your taxable sales or services exceeds the registration limit, you will be obliged to register. It can often be beneficial for agricultural businesses to register for VAT before you reach the statutory threshold so that VAT can be reclaimed on purchases.

All VAT registered business are now required to comply with Making Tax Digital (MTD), whereby the business maintains ‘digital’ records and submits VAT returns through MTD compatible software

Additional free guidance is available from HMRC at https://www.gov.uk/working-for-yourself or contact your accountant for detail. See FAS New Entrants guidance note ‘Taxation of Agricultural Businesses – a summary’ at https://www.fas.scot/rural-business/new-entrants/.

Employing others

For the business to get off the ground or to enable expansion, it may be necessary to employ staff.

It is the employer's responsibility to deduct income tax and national insurance and to account for pension and student loan deductions. Payments then require to be paid to HMRC. Payroll records should be carefully maintained.

You will also need to be familiar with employment law. For further information, please see the FAS Managing People resources at https://www.fas.scot/rural-business/managing_people/.

Insurance

Comprehensive insurance for business motor vehicles and employer's liability insurance are a legal requirement. Other types of insurance such as the below should also be considered:

• Public liability
• Consequential loss, business assets
• ‘Key person’ insurance (life assurance or life assurance and critical illness cover policy)

Pensions

Putting money into a pension scheme can be a way of saving for retirement because of currently favourable tax rules.

Employers are required to automatically enrol all employees between 22 years old and state pension age that earn over £10,000 in a pension scheme and to make contributions to that scheme on their behalf.  You must pay at least 3% of your employee’s ‘qualifying earnings’ into your staff’s pension scheme.

Further guidance is available at https://www.gov.uk/workplace-pensions-employers.

Getting further help

It is always necessary to tailor advice to fit your situation when starting a business. Any plan must take account of your circumstances and aspirations.

Whilst business success can never be guaranteed, professional advice can help to avoid some of the problems that befall new businesses. Taxes have specific rules and reliefs which apply to specific trades such as agriculture and it is advisable to seek the advice of an accountant who specialises in this area. It is also advisable to take advice on the financial records you need to maintain or employ the services of an experienced bookkeeper.

In addition to financial management, also see FAS New Entrant guidance note ‘Starting an Agricultural Business’ for more information on required statutory and advisory registrations and records at https://www.fas.scot/downloads/starting-agricultural-business-2/.

Sources of assistance:

Registration for taxes can be done online by visiting the HMRC website at www.hmrc.gov.uk.  HM Revenue & Customs also gives advice on starting your own business at https://www.gov.uk/set-up-business.