Monday, 22 October 2012

Setting Up a Business - 8 Most Common Mistakes

Starting a new business is an exciting, busy and challenging time. But amid everything else you have to do,  it is all too easy to overlook some essential details which, if put in place at the early stages, will strengthen your business and can save time and money in the future, as easily preventable problems are avoided.
FWJ can help you avoid some common pitfalls and give your new business the best possible. start.
Contact us if you need help answering any of the following:
  1. Am I choosing the wrong trading entity?
After deciding the nature of your business, perhaps the most fundamental decision (and one that it is easy to overlook in the rush to start trading) is type of entity you wish to use. You can run a business:
(a) As a sole trader: there is no formality to your business structure; you just set up and carry out your business independently.
(b) In partnership with one or more other people: a partnership will arise where two or more people are in business together with a view to making a profit. This can be an informal (or even unintended) relationship or properly documented by a partnership agreement or by using the limited liability partnership structure.
(c) Through a limited company: this is the most formal business structure, but it is quick and easy to set up a company through which you run your business.
FWJ can offer advice on which is the right business structure for your particular needs, one that takes into account your personal situation, e.g.: income and tax, assets and risk, management and control.
  1. Am I taking on too much personal risk?
In today’s economic climate the issue of risk can never be far from the business owner’s) mind. Having decided to take the plunge, do not forget the potential impact of running your own business on you personally. The level of personal risk, including the risk to your personal or your family’s assets that you assume when running your own business can be directly affected by the business structure you have adopted.
The best way to separate your (and your family’s) assets from the obligations of the business will be to run your business through a limited liability company, which has its own legal personality and owns the assets of the company itself. As a shareholder of a company your liability (as the name implies) is limited to the value of your shareholding. However as a director, you will have numerous duties to comply with [see “Roles and Responsibilities of Directors”], some of which, if breached, could have serious consequences for you. You may need to evaluate the relative merits and drawbacks of being a company shareholder and/ or director.
As a partner or a sole trader the assets of the business are owned by you as an individual and you are fully liable for the debts of the business.  For this reason, these can be more risky business structures, but they may give you more flexibility and independence in running the business.
It is all too easy in the rush to get the business off the ground to overlook the question of who owns the assets and is responsible for the liabilities of the business. Don’t leave yourself exposed to unacceptable risks and make sure you understand your potential obligations.
FWJ can help with advice on how to minimise your exposure to risk.

  1. Do I Understand what I have agreed with my business colleagues?
Unless you are running your business alone and funding it from your own resources, it is likely that you are setting up the business with friends, relations or a professional investor who specialises in providing capital for new or developing businesses. Whilst everyone is focusing on the start up and you are all caught up with the excitement of the new enterprise, it can seem obstructive or even over-pessimistic to insist on formal documentation to govern your relationship, such as a partnership or shareholders agreement. This common mistake can be one much regretted later on, if there is no record of financial contributions to be made, distribution of rewards, allocation of decision making powers or provisions for separating interests when circumstances change.
We would always recommend an agreement is drawn up between everyone involved in the business to regulate the management of the business
A professional investor will not overlook the need for an investment agreement, but do make sure you understand the terms and do not, in the rush to receive the crucial capital, sign anything you are not happy with. Points to look out for include: investor rights to appoint directors who may have the key influence over the business or terms which require repayment of the investment or sale of the business at the investor’s demand.
We can assist you in this very important area.

  1. Have I chosen the right type of funding?
Funding for businesses can take a variety of different forms from a range of finance providers. To the inexperienced this can be baffling and, if the wrong selection is made, expensive. Do you need:-
·         A capital investment to get started?
·         A bank loan to buy a key asset?
·         A bank overdraft to smooth you through the trading cycle?
·         Cash-flow finance?
FWJ’s extensive network of brokers and long standing relationships with specialist financiers can help you find the right type of funding for your business. Once you have decided, we can guide you through the finance and any related security documents and ensure you sign the best deal for your business.

  1. Do I have proper credit control procedures in place?
Getting paid for the work you do on time, or even at all, is one of the single biggest challenges for any business. Your customers may seek to improve their own cash flow position by leaving your bills unpaid whilst your own creditors put you under pressure to pay them before you have the funds, leaving you stretched and stressed. Not collecting your invoices promptly can cripple your business’s cashflow and so it is vital that you do not overlook the paperwork until it is too late. 
Some financiers offer facilities which can incorporate a full credit management service which might meet your needs and we would be happy to introduce you to someone who can help.
At FWJ we also have a team which specialises in debt recovery work and can help advise you on your credit control and recovery procedures together with taking action to collect money from slow payers.
  1. Am I up to date with my record keeping?
Unless you are an office services provider it is unlikely you have set up your own business because you like filing and completing forms.  However a business can soon run into problems if the statutory obligations, such as tax and VAT returns (and payments) are not made, accounts not prepared or company registration formalities are not kept up to date. At their most extreme, these omissions can bring your business to an untimely end with some potentially serious consequences for you, even if you are making money.
Through our long standing connections with accountants and tax advisors, we can introduce to you the right person to handle your tax affairs. If your arrears are such that HMRC has issued a winding up petition against your company or you are facing bankruptcy proceedings, FWJ can put you in touch with insolvency practitioners and business turnaround specialists who can advise you on how to proceed. We can also help if you company has been dissolved by Companies House for the non-filing of statutory returns whilst you are still active.
If you a company director where the record keeping is found to be so poor that steps are being taken to disqualify you from acting as a director or being involved in any other way in the management of any business in future, speak to FWJ’s experienced Director Disqualification  team who can help you improve your position.
  1. Are there any terms of business?
One of the most common oversights we see, usually when trying to resolve a dispute, is the complete lack of any terms of business. Every time you perform a service or supply goods to a customer, you need to specify the terms on which you are acting: what are the goods or services required, what quantity, when, what price, where? There are many other questions: when are you to be paid, can the goods or payment be refused, what other liabilities are attached, is the work warranted?
You can make great savings of both time and money by investing in the preparation of standard terms and conditions on which you then conduct your business; make sure you have terms that meet your needs rather than find you have inadvertently agreed to operate on someone else’s terms (which are not to your advantage) or that there is no formal agreement and you find yourself embroiled in protracted (and expensive) correspondence or even litigation to protect your business.

  1. Have I sorted out our premises and employees?
There are many hidden pitfalls relating to the premises you operate from and your responsibilities towards anyone who works with you. Falling into any of these traps could cause unexpected problems for your business, for example:
·     If you plan to work from home, do the terms of your lease or mortgage prohibit the use of the property for a business? Are you covered for liability to any visitors to the premises in connection with the business?
·     If you are leasing premises, do they have the necessary user authorisations, do they meet all relevant health and safety and environmental regulations? Are there any restrictions in the terms of the lease that may inhibit the conduct of your business? What are your obligations as a tenant?
·     If you intend that anyone working with you is “self-employed”, be aware that the courts will imply a contract of employment unless the strict criteria for self employment are met, bringing with them additional responsibilities for you, including payment of tax and national insurance for employees.
·     If the company’s directors are working in the business, are they also employees? Do you have service contracts in place?

If you would like our help in making a successful start and avoiding these common mistakes, please contact us.   And we wish you good luck in your new venture.