19 Testing the market – field research For businesses selling products, market stalls can be a great way to test consumer reactions. You can hand out free samples, offer demonstrations, or test which product varieties sell best. Take the opportunity to sign people up to mailing lists so you can communicate with your customers. If you sell wholesale or to other businesses, trade shows can help you meet potential customers, network with other entrepreneurs and scope out the competition. While desk research involves finding and using information collected by other organisations, field research is about collecting your own information. You can do this by talking to potential customers, conducting surveys and experiments, or using social media. If your business is a physical place, like a shop or café, you might want to observe how people move through the area and use other cafes, shops and restaurants nearby. To find out more about how the BIPC's market information services have helped start-ups across the country, visit bl.uk/bipc/market-information
20 Customer development Customer development is a process for engaging with the people you have identified as potential customers. Through this process, you can find out whether they need the product or service you are offering and if they are likely to use it. Customer discovery Have conversations with people in your target customer group to find out how they currently handle the activity in which they would use your product or service. If your business idea provides a solution to a problem this would tell you how people solve the problem now and if they are ready for a new solution. In this scenario, a useful question would be ‘tell me about the last three times you…’. Customer validation Test how potential customers might value your product or service by carrying out experiments. You might give out free samples, sell early versions of a product or set up a simple website home page to measure traffic. These experiments are sometimes called a Minimum Viable Product (MVP). They aim to measure people’s responses to a version of your product or service to help you assess whether people are likely to want to buy it when it is fully launched. Many web sources can provide detailed guidance on how to set up and conduct customer development activities. Web resources: customer development The Entrepreneur's Library: A Look Inside ‘Lean Customer Development’ by Cindy Alvarez: youtube.com/watch?v=SdVp140EEn4 How to Learn from Customers when Everyone is Lying to You by Rob Fitzpatrick: youtube.com/watch?v=0LwbFZkyRKk Who do you interview?: youtube.com/watch?v=m0kiZocBbO8 How to find your customers: youtube.com/watch?v=wWpEiSKeDDo What do you ask? youtube.com/watch?v=OTkP2JDeGWM Analysing your customer interview results: youtube.com/watch?v=sz3OA4B6hp8
21 Business formation – choose a structure Legal formation One of the first things you will need to do when you start a business is to decide what legal status is best suited to you and your plans. The information below outlines the main options, which are sole trader, partnership and limited company. There are alternatives available, such as a Limited Liability Partnership (LLP) and Community Interest Company (CIC). Here are some questions you can ask yourself to help you determine the best structure for your business. • How will your business generate money now and in the future? • How will your business operate? • How much control do you want? • How much liability can you really afford? Brian Danclair Fish, Wings & Tings
22 Sole trading
- You can trade as an individual and take in up to £1,000 from April 6 until April 5 without having to pay income tax – this is called a Trading Allowance.
- If you take in more than £1,000 you need to register this income to HMRC through the self-assessment process and pay income tax. From 2029 the UK government is introducing a new simplified online service for those who earn between £1,000 – £3,000.
- You still need to comply with trading regulations and should hold business insurance if needed. When you start a business working for yourself you can be referred to as a sole trader, as self-employed or as a sole proprietor. These terms all mean the same thing: that you have complete control over how your business is run, make all the decisions and take all the profits. A sole trader can hire employees and give them managerial roles, but most sole traders want to run a business on their own. Being a sole trader gives you total freedom and control over your business. You can start trading almost immediately, without too much initial investment or many overheads. As a sole trader, you will need to complete an annual self-assessment form to pay your taxes. You must keep accurate records of income and expenses because you will pay tax at the personal rate on your net profits. Class 4 National Insurance Contributions (NICs) are payable as a percentage of your net profits depending on how much profit you make. You will also pay fixed-rate Class 2 NICs. Register as a sole trader at gov.uk/set-up-sole-trader
23 Advantages • Start-up formalities are minimal: you simply register as self–employed by contacting HM Revenue & Customs (HMRC). • The cost of setting up your business will be low. • No accounting or business audits are necessary. • You will have full autonomy over all business decisions, and all earnings from the business belong to you. Disadvantages • There is unlimited liability for debts, so if your business loses money, you may have to sell your personal assets (such as your house or car) to pay off business debts. In an extreme case this could result in bankruptcy. • It can be difficult to obtain capital to expand your business as banks tend to be risk averse with regard to sole traders. The British Business Bank is an exception: british-business-bank.co.uk • Because your business is dependent on you alone, it is unlikely either to have much value in itself or to survive if you suddenly became incapacitated • As a sole trader, you are entitled to fewer social security benefits than as an employee. Other considerations If your profits are over the VAT threshold, you will have to pay VAT. Find out more at gov.uk/vat-registration Suman Hanif Pageful Productions
24 Limited Company Advantages • Liability for debts is limited. • The organisation is likely to have an unlimited lifespan. • Capital can be raised by issuing shares. • Finance comes from shareholders, loans from banks or other financial institutions (which are often easier to obtain than for businesses with other types of status) and retained profits. • A board of directors and a management team control the business. • Your overall tax bill might be lower. • Your business may be perceived as being more 'professional' than a business operated by a sole trader.
- You can register as a company limited by shares at Companies House. This type of company is for making a profit. The registration fee is £50.
- The company is managed by shareholders.
- As a company director, you will have responsibilities to the company and will need to file corporate reports every year.
- Your company name does not need to be the same as your trading name. Company names must be unique.
- Find out more at gov.uk/set-up-limited-company The biggest difference between limited companies and sole traders is that limited companies are treated as a separate entity from their owners, with their own legal existence. Most importantly, the company's finances are separate from the personal finances of the owners. If you are setting up a venture that needs substantial start-up capital, limited company status will give you more protection if your venture fails. It may also be more beneficial from a tax point of view to set up as a limited company, depending on your personal circumstances and expected earning potential. Shareholders (or members) of the company can be individuals or other companies. They are not liable for the debts of the company unless they have given personal guarantees on, say, bank loans. Therefore, if the company fails, they lose only the money they have invested in the business. You can register a limited company at gov.uk/limited-company-formation/register- your-company for £50.
25 Disadvantages • The costs of administering your business will be higher and setting up will be more complicated than for other types of business. You will need to have constitutional documents (called a Memorandum and Articles of Association) drawn up. The company must be registered with the Registrar of Companies at Companies House. • Stringent accounting and audit requirements apply to limited companies. • You have legal responsibilities as a Company Director and failure to meet these may result in you being struck off. Other considerations If your profits are over the VAT threshold, you will have to pay VAT. Find out more at gov.uk/vat-registration It is worth noting that companies can be bought off the shelf quite cheaply through a company registration agent, accountant or solicitor. All the paperwork will have been prepared and the company can begin trading almost immediately. Here are some examples of businesses that help set up limited companies. • Rapid Formations rapidformations.co.uk • The Formations Company theformationscompany.com • 1stFormations 1stformations.co.uk TOM GREEN Square Feet Co Work
26 Partnerships, Limited Liability Partnerships (LLP) In a partnership, two or more people set up in business together. They share the risks, costs and responsibilities as well as the profits. Each partner needs to register as self- employed and each is responsible for sending in their own tax return as an individual. There is no legal requirement to have a written partnership agreement, though it is recommended that you consult a solicitor to have one drawn up. This agreement will set out basic principles such as what share of the profits you and the other partner/s will take and what each partner's role will be. Partnerships are often entered into by groups of professionals, such as lawyers and accountants, who work together to share skills and knowledge in order to provide a wider range of services than they could on their own. You must register your partnership for Self Assessment with HM Revenue & Customs (HMRC) if you’re the nominated partner. This means you’re responsible for sending the partnership’s tax return. The other partners must register separately. A partner does not have to be an actual person. For example, a limited company counts as a legal person and can also be a partner. No legal documents are mandatory so starting up need not be more complicated or expensive than for a sole trader. If you have a partnership agreement professionally drawn up, legal costs will be incurred for that purpose. You can register as a partnership at gov.uk/set-up-business-partnership
- Choose a name for your partnership and a nominated partner.
- Register with HM Revenue & Customs.
- The nominated partner is responsible for managing the partnership’s tax returns and keeping business records.
27 Advantages • The business is more likely to survive and continue trading if one of you leaves, becomes incapacitated or dies. • Day-to-day management can be made easier by the allocation of roles to specific partners. • Greater success might arise through a combination of talents than could be achieved alone. • More capital may be available to invest in your business. • You might find it easier to spend time away from your business because operating responsibilities can be shared. Disadvantages • Like sole traders, partners have unlimited liability for business debts. • Disagreements between partners can lead to the dissolution of the partnership. • All partners can be held responsible for any one partner’s negligence. This is important because individual partners have the freedom to act on behalf of the partnership as a whole, for example to make a binding contract without the authority of the other partners. • The partnership has no legal existence of its own and is simply a collection of individuals. If a partner resigns, dies or goes bankrupt, and there is no Deed of Partnership, the Partnership Act 1890 will apply, under which the partnership must be dissolved. Other considerations If your profits are over the VAT threshold, you will have to pay VAT. Find out more at gov.uk/vat-registration