In this blog we’ll discuss the fundamental decisions around finance, company structure, processes and external support that will enable you to minimise risk while maximising revenue and profitability.
Will you incorporate a limited liability company (Ltd) or a limited liability partnership (LLP)? There are advantages to both depending on your business objectives. Both structures lend credibility to your firm and make it relatively easy to borrow money and limit your exposure to financial risk.
The mixture of long-term debt and equity you use will directly affect the risk and value of the business.
You must decide how much money should be borrowed and how cheaply you can obtain it. How much of your cash flow will go to creditors and how much will go to shareholders? Each business is different. More aggressive debt-equity ratios are great for rapid growth but may limit your earnings.
It is possible to incorporate an LLP within a company, or a company within an LLP. The latter in particular can improve cash flow.
All businesses are obliged to keep sufficient working capital to pay essential outgoings, including salaries, rents etc. Within LLPs, all profits are taxed at the partners’ marginal rate (40-45%). It can be more efficient to keep this capital within a company, where it would be subject to just 20% tax (17% as of April 2020).
This structure is for cash flow only, as the money would be taxed either way at the higher rate when taken out. Take advice to avoid falling foul of anti-avoidance legislation.
Take out adequate policies to cover you in the event of ill health or legal action:
Directors and officers insurance – protects you against being sued.
Keyman insurance – makes provisions for the incapacitation or death of a member of staff of central importance to the business.
Whether you’re Ltd or LLP, don’t be surprised by the level of admin.
Once you are trading, there’s a lot of bookkeeping. You will be required to submit statutory accounts and a tax return to HMRC each year (more if you’re FCA registered), as well as handling payroll and making monthly or quarterly payments of employees’ income tax (PAYE) and NICs. And don’t forget all the VAT payments of varying complexity every quarter.
There aren’t really any ‘optional’ obligations. Aside from cash flow, accounting and compliance are critical to the long term success of your business.
But remember, you always have the option to outsource the majority of tasks that distract you from growth.
If you’re just starting out, it pays to get it right first time. But finance never stands still. Experienced operators know it’s worth regularly taking stock of processes and structure to ensure you’re maximising the return on your dedication and hard work:
For more tips and advice for financial entrepreneurs download our FREE guide.