Understanding how to start a business in the UK brings plenty of attractive opportunities for entrepreneurs, as the country has a strong legal framework, it grants wider access to global markets, and has a supportive startup environment. There is a range of structures and resources that the UK offers to help your business grow. Nevertheless, translating your business idea into reality can be challenging, as it requires a clear understanding of what a business entails, various types of businesses, and which type is congruent with your goals.
We have collaboratively worked with expert startup accountants, formation specialists, and our service partners to help you with an exceptionally valuable guide.
Understand The Meaning Of Business Before Opening A Business In The UK
In practical terms, a small business is an entity that deals in an exchange of goods or services in return for an economic benefit, mostly money. Primarily, all Businesses in the world engage in trading activity for the sole purpose of earning a profit. To start a small business, one can either pursue a start-up home business or one can sell their products or services from office premises.
According to Companies House, a business can primarily be classified into three company sizes:Â small, medium, or large. Furthermore, for small companies, there is a sub-classification known as a micro-entity. It mainly applies to very small companies.
Now, to determine the size of your company, such as whether it is a micro-entity, small, or medium-sized, the government has thresholds for:
- The company’s turnover.
- Balance sheet total. It considers the total of the fixed and current assets.
- The average number of employees
Notably, if your business does not fulfil the criteria for micro-entities, small, or medium, it will be classified as a large-sized company.
According to The Federation of Small Businesses, by the start of 2024, there were 5.45 million small businesses, with 0 to 49 employees. It constitutes 99.2% of the overall business population. More importantly, small-medium enterprises (SMEs) make up 99.8% of the business population, i.e., 5.5 million businesses.
In addition, SMEs represent three-fifths of the employment and about half of the turnover in the UK private sector. Given the current popularity of SMEs, it should encourage you to open your business in the UK if you’re still undecided about it.
What Are The Various Types Of Businesses?
Having a thorough understanding of the types can help in terms of choosing the most suitable structure for the business, and designing a strong foundation which complements the nature of the product or service being offered. This guide to starting a business in the UK is a step-by-step guide which will help you to start and grow your entity during your business journey as an entrepreneur or a newly self-employed individual. Let’s take a look at the three major types of businesses: service, merchandising, and manufacturing.
Service Business
As the name suggests, the service business provides services to potential customers. Services are also known as intangible products (products which do not possess a physical form). Examples of service businesses include salons, schools, banks, law firms, accountants, and so on.
Manufacturing Business
The manufacturing business buys products to use as materials to manufacture a new product. These new businesses deal with the transformation of purchased products. For instance, raw material, labour, and factory overheads are combined with a manufacturing business to produce a new product. Lastly, goods manufactured in this way are then sold to customers.
Merchandising Business
In the merchandising business, the entrepreneur buys products from wholesalers at wholesale prices. They then resell these products at retail prices. Simply put, they profit by selling products at higher prices than the purchase costs. Examples of merchandising businesses include grocery stores, convenience stores, distributors, and so on.
It is worth underlining here that small businesses that have been traditional brick-and-mortar businesses are adapting to selling online to remain relevant and grow their business faster.
The fourth type of business exists, which is known as a Hybrid Business. Hybrid Businesses refer to the kind of business that can be classified into more than a single type of business. However, when push comes to shove, hybrid businesses are classified into one of the three kinds of businesses based on their main business interest.
How To Set Up A Business In The Uk? Step By Step Guide
The trend to be self-employed is increasing at an astounding pace. Young individuals are opting to start selling their products or services by setting up a business in the global business markets. No matter if you want to open a product-based or service-based business, you must follow these steps for a great startup.
Step 1: Assess The Viability Of Your Business Idea
For starters, a tree can never grow without first planting the seed. The same goes for starting a company in the UK. You must first have a crystal clear business idea so that it can reach fruition later. For example, if you are considering setting up a new business as your only income source, then you most likely have a business idea to work on. Your idea might be something that already has an existing business model around it, or you can create a unique business idea. Regardless of its nature, you must thoroughly analyse the business idea to remain fully prepared to counter any unforeseen circumstances in future.
Moreover, if others are already carrying out your business idea, you must analyse the market trends and the competitors to learn their way of working and how you can outsmart them.
Lastly, it is wise to remember that speed, quality, delivery, and X factor are the elements that can outdo and surpass your product or service in the market. Hence, be sure to have a solid idea of them.
Step 2: Assess Yourself, Are You Ready To Open A Business In The UK?
After you have assessed the viability of your business idea, it’s time to do some self-reflection. In most cases, starting your own business in the UK can cost you more than you have budgeted for. Consequently, you must do much deliberation before starting a new business in the UK to ensure you encounter fewer impediments in the way.
In addition, you will also need to evaluate your major strengths and weaknesses since these areas might incur additional expenses for bought-in expertise. Helpfully, our business idea validation checklist below can be a good place to start.
Step 3: Conduct Market Research
Before you write your business plan, you must work on the potential customers for your product or service and for that, you must conduct market research. It is imperative to analyse consumer behaviour and the economic trends of the industry. Analysing consumer behaviour gives you an insight into what potential customers need to get by buying the products and services the industry is offering.
You can rely on the existing information of the industry. However, it might not work in your favour as your products and services may be different from what others are offering in the industry. Therefore, you can conduct your own market research by talking to target customers, conducting a survey, or interviewing focus groups. You must also do a competitive analysis to assess the space in the industry to get your business running smoothly. Conduct thorough market research before starting a new business to reduce risks and refine your business idea, enabling you to proceed to the next step: creating a business plan.
Step 4: Write a Business Plan
A great business plan is a strategic representation of your new business idea. It outlines the key objectives that business owners want to achieve with the start of the new business.
Principally, a business plan incorporates financial, marketing, and operational aspects to keep your business stronger than anyone else in the industry. This plan is what you can use to onboard stakeholders, angel investors, and partners.
Further, it is crucial to create a business plan that can answer a few of the important questions, like
- What would your business structure be?
- Who is going to finance your small business idea?
- Who are your potential customers?
- How will you market your product or services to them?
If you want to make a plan that can guide you through each stage and phase of your business, the following guide on how to write a business plan, curated by our expert Accountants service in London, can help you a great deal.
Step 5: Choosing The Right Business Structure
One of the most important factors in a business plan before starting a business is to decide on the optimal legal structure of the company. Deciding on the right legal structure from the very beginning will determine how you pay your taxes and the digital reporting of these taxes, which is crucial if you do not want to face any legal penalties.
Nonetheless, you can make things easier for yourself by taking professional business advice, as the expert opinion can play a pivotal role in deciding what kind of relief you can offer your investors to enable them to save money and convince them to invest in your business.
Now, there are four main types of business structures in the UK, each with its own operational rules and tax liabilities.
Sole Traders
One of the simplest ways to start a business in the UK is to establish yourself as a sole trader. In this legal structure, there is no difference between the owner and the business. To set up a sole trader business in the UK, you must first register your business for Self-Assessment with HMRC. You will also be liable to file a tax return every year. Hence, it would be better to seek professional tax help if you want to file your tax returns smoothly and hassle-free.
Partnerships
Setting up as a ‘General Partnership’ is similar to being a sole trader. However, in a partnership, there is more than one person involved in managing the company. Notably, those who own or found a partnership are called its partners. They can be either individuals or companies, or a combination of both.
They share the responsibility for the business debts that may occur along the way. Similarly, business profits are shared, and individual members of the partnership pay income taxes on their profit share.
To open a partnership business, you need to register with HMRC, and both parties must be involved in registering the business.
Limited Liability Partnerships (LLPs)
A limited liability partnership allows partners to have limited liability, such that their business obligations remain limited to their investment in the business. It means that in the event the LLP is unable to pay its debts, the members’ financial liability is limited to the extent of their investment in the business.
Additionally, the structure of an LLP allows for both individuals and companies to be its members/partners. In order to set up an LLP in the UK, it is necessary to:
- Choose a company name.
- Have a registered office address.
- Have at least two members to run the company.
- Have an agreement (called a partnership agreement) that outlines how the LLP will be run.
- Register the LLP with Companies House.
Lastly, similar to a regular partnership, each LLP member is taxed individually on the share of the profits they receive. Consequently, each member must register with HMRC for Self Assessment, file a tax return each year, and pay NICs on their income.
Limited Company
Limited companies have shareholders, which makes them an ideal choice for entrepreneurs seeking to grow their business by obtaining more financing. There are, however, differences in the tax and savings of a limited company as compared to a sole trader. Most of the limited companies operating in the UK are limited by shares.
More importantly, like an LLP, a limited company also benefits the members with limited liability. It signifies that the shareholders’ personal assets are treated separately from the company’s finances or assets. As an outcome, a limited company structure provides you with the greatest legal protection, limiting the shareholders’ liabilities to the money they invested.
Now, regarding the filing and reporting requirements, a limited company must incorporate itself with Companies House. It is noteworthy here that there are incorporation costs in order for it to be registered with the Companies House.
Similarly, you will have corporation tax liabilities on the profits the company yields. Last but not least, you will have to file annual accounts and returns in the UK.
Fortunately, a good UK formation agent or a good Accounting services UK can ease the process of starting a new company in the UK. Furthermore, they can help to fulfil the compliance requirements of a limited company structure.
Step 6: Choose A Business Name
Choosing a business name is no less of a substantial step in understanding how to start a business in the UK. As your company name will be the identity of your business activities, it must not include any offensive words or similarities to any other registered business name. Particularly, the business name you choose before starting a business should be according to the guidelines set by the government of the UK. As mentioned above, each business structure has different requirements for the name.
Step 7: Pick A Business Location
If you plan to operate online, then you’ll need an engaging and user-friendly website. If you have the skills, you can build it yourself, or you can hire a professional web designer to do it for you.
To give your business a real meaning, you must decide on the location for starting your business. Principally, a location with the best resources and maximum target audience will help you reach your maximum potential quickly.
Another important factor to consider if you are running your business from home is the tax allowances you will be entitled to. These allowances include internet, lighting, and phone lines. This can save you some money and will become part of your corporation tax return.
If you plan to run your business in an office space, there are separate factors that need to be considered. For example, if you are planning on running a business from a rented property, there are health and safety standards that you need to ensure your employees’ well-being. These can be the smallest details, like making sure the working environment is comfortable, providing clean toilets, and access to drinking water.
Step 8: Do The Budgeting And Feasibility Study
Before you start a business, it is important that you know your startup costs. Calculating the costs beforehand will help you estimate the profits, secure a business loan, and attract investors to invest in your company. Moreover, it will trim down your tax payments. These costs may be different depending on the structure and type of the business. Therefore, budgeting is a vital aspect of running a business.
Consider The General Costs Involved In Starting A Business
While the costs for each business will be different based on the business structure, the following are some general costs to be considered:
Incorporating or registering your company with Companies House:
- Insurance-related cost
- Staff costs
- Rental costs and council tax
- Utility bills such as heating, water, and phone bills
- Internet bills
- Equipment for your business
- Website maintenance cost
- Accountancy costs
- Legal fees
- Branding and social media advertising cost
- Customer services
- Office space expenses, including utility bills, internet, equipment, and maintenance
- Hiring staff
- Marketing and advertising
Given this long list of costs, make sure you have prepared a well-costed budget before getting started. You will need to keep some cash in reserve, as unexpected expenses are inevitable.
Step 9: Develop Marketing And Branding Strategy
Whether you are operating a product-or service-based business, an engaging audience is a must to turn into return customers. Your business should be accessible to everyone looking for the specific product or service you offer. You can start by building a striking and impactful identity for your business, followed by targeted advertising and marketing efforts.
A well-crafted marketing plan includes the approaches you may take to attract your target audience. This is where your market research and potential client base studies will help you build a strategy that must evolve and change to fit the needs of the business and its stages.
You can use low-cost tools for marketing your company or business. For instance, a website can be the best option to start. Choose a domain name for your business or company. The domain name can be regional or global, depending on what products or services you are providing and the business location.
Another way to add to this strategy would be to use social media. Nowadays, social media ads are what most traders use to up their marketing game when they intend to target a specific demographic.
Further down the line, you may also need to set up a customer service to cater to queries related to your new venture. At the start, you can handle this customer service until you hire staff.
Step 10: Have An Insurance Plan To Ensure Business Continuity
While success can be achieved, no one can guarantee its permanence. No matter what the size of your business is, there may be certain unexpected difficulties or impediments that you encounter over time. That’s where a contingency plan should always be in the picture.
There may be certain types of insurance plans that you might be required to implement in line with your business nature. To make things easier, you may adopt a liability insurance plan, along with the insurance your business is legally required to have. The liability insurance will provide you with sufficient coverage if you are faced with any legal costs. Alternatively, an insurance broker can be your middleman, guiding you through the dos and don’ts of insurance planning.
Step 11: Obtain Legal Documentation For A New Business
Each business requires different sets of legal documentation, including licenses and permits. Hence, it is necessary that you research the required permits and licenses to operate your business. There are many businesses where you will need to obtain legal licenses, such as:
- Child Care Services
- Financial and Credit Services
- Pet Services
- Piercing services
- Goods haulage (HGV)
- Import and export
- Security Services
- Sports services
- Taxi driver
Step 12: Get Business Advice From An Expert
When you start trading in the UK, you can typically register as either a sole trader, a limited company, or a partnership. Whichever option you choose, it’s a good idea to get start-up business advice from an accountant. Before starting, having an expert on board will help to cover all bases of the target market, venture capital, and dealing with the Financial Conduct Authority.
It would be highly advisable to hire an expert accounting firm if you have the funds. There are several reasons for needing an expert accountant to start on the correct foundations while saving money and time.Â
Step 13: Consider The Funding Options For Your Business
Starting a business is the easy part; keeping it running is what’s hard. A business requires a constant or steady source of funds to run. A business owner needs to be very clear from day one about where the business will get its funds. You might have savings or pursue a business loan, or there might be angel investors who want to help you with the finances. Nonetheless, a business will need a decent amount of cash flow to have a strong foundation.
Now that you have estimated the initial costs you might need to run the business, you should start collecting the required funds. Make sure to collect extra, as the estimation might show some differences.
Step 14: Register your Startup
Now that you have your company plan set up and your funds ready, you are ready to take the next step towards a successful startup: registering your business or company with the UK government. Legal structures in the UK have different registration requirements that you must provide as a self-employed individual, partner, or company.
Once you register the business with HMRC or Companies House, you will get the tax ID for your business to file and report your tax returns. You need to prepare a few documents, including the trade name, company information, and the corporate structure.
Step 15: Open A Business Bank Account
If you intend to open a business in the UK and get it registered, it is very important to keep your personal and business finances separate. You can do that by opening one or more bank accounts. This will not only reduce administrative and tax implications, but it will also make sure that you build a credit history for your business through the business bank profile.
Not only that, but a separate account also gives off the professional image of your company to your clients. You can easily manage your business transactions with this account without mixing up important information. The clear transactions will help you later when you have to report your annual accounts to the concerned authorities.
Video: How to Open a Business Bank Account when starting a business in the UK?
Watch the video to find out everything about opening a business bank account in the UK
Step 16: Consider If You Need To Hire Staff
By following the steps mentioned above, you are ready to implement the business idea in reality. You will now start trading and serving the target audience.
However, the question here is, how? Are you working on your own, or do you need staff to handle all the different roles in the company? Being a freelancer or sole trader does not mean they do not need to hire employees to work for them. Even if you are a sole trader, you might need one or two heads to manage the sales smoothly.
Similarly, as per your business needs, you must contemplate whether you need to hire agency workers, freelancers, or full-time employees.
Now, there are a few factors to consider before you start hiring staff, like:
- Estimate the hiring budget
- The total headcount you may need to hire
- Target the skills you need
- The market rate of the skills you require
- How will you retain employees
Step 17: Do Not Forget Bookkeeping
Now, when you have hired staff and are ready to work, you are just one step away. And that is to keep your bookkeeping up to the standard of the concerned authorities. Effective Bookkeeping Is what boosts new startups into successful enterprises.
Step 18: Have A Business Exit Strategy In Place
It may seem unnecessary to think of an exit strategy when starting a small business in the UK. However, having a business exit strategy in place is a crucial component of any business plan to help ensure long-term growth. This will enable better objective setting, better conversations with investors and better planning to maximise the tax efficiency when selling your business rather than ending it at a loss.
What’s the Quickest Way to Start Strong? – Use a Lean start-up Business Model
The lean start-up business model is all about finding new ideas in the quickest and most efficient way. Furthermore, it refers to bringing that service or product to market using techniques that get rid of redundant processes.
The main principles of Lean Business Start-up are:
- Managed use of Resources. Try to use resources in the most efficient way to showcase the product in front of customers.
- Most Viable Product: The process involves trying out every possible iteration of an idea to produce the most viable product. This procedure is also known as the development of a Minimum Viable Product (MVP).
It is all about learning from these failures and giving your start-up a chance to refine processes to develop the start-up as quickly as possible.
Conclusion
In brief, knowing the nuts and bolts of how to start a business in the UK can be an exciting and challenging experience simultaneously. Although being your own boss comes with countless rewards, it also means bearing more responsibility and risks. Deciding on what type of business you wish to set up is an essential starting point and should be made with careful consideration. You also need to think about where you will be running your business, whether you will be hiring staff, getting insurance, and think about a range of other start-up costs.
In addition to practical considerations, turning to a professional can significantly lower your stress on how to set up and run a business smoothly, as well as ensure tax optimisation. Hence, do not stall and start making the attempts to turn your business dreams into reality today.
Generally Asked Questions
What are the key business structures when starting a business in the UK?
The most common business structures in the UK are Sole Proprietorship, Limited Liability Company, and Partnership.
How to start a business?
The quickest way to start a business is to prepare a product or service and begin selling, provided you have a customer base in place.
However, the following steps are involved in setting up a new business in the UK:
- Have a clear business idea.
- Conduct market research about your business idea.
- Write a business plan.
- Select the right business structure.
- Choose a business name, address, and location.
- Consider budgeting and feasibility.
- Register your business with HMRC or Companies House.
- Have a contingency plan.
- Curate marketing strategy.
- Hire employees.
- Seek expert advice.
- Bookkeeping.
Do I need a business plan?
A business plan is a go-to document that explains the ins and outs of your business in your absence or explains it in detail where you cannot due to time constraints. It is a must-have when you are looking to raise funds and bring on co-founders. Moreover, when you expect to pursue an aggressive growth plan, revisiting this document can help you get back perspective.
What do you need to start a business before setting up a small business?
The key questions you need to ask yourself before starting a new business are:
- Do I have sufficient funds to survive for at least 6 to 8 months?
- How do I start a business with limited resources, and in how much time?
- Do I have a go-to-market strategy or a customer acquisition strategy?
- Does my business model actually work when tested?
