3 Common Mistakes That Start Ups Make That Can Leave Them Financially Worse Off

Starting and growing your business is both exciting and challenging.  You are embarking on a journey of discovery, developing new skills as well as your business. However, wouldn’t it make sense to start up from the best possible position, at least financially?

This article identifies the three areas that, if not properly thought out and addressed from the outset, can leave a business – and more importantly the individual(s) starting the business worse off.

1. They don’t choose the right operating structure.

Experience has shown that a significant number of people lose out on reducing their tax bills simply because they aren’t aware of the advantages and disadvantages of the different business operating structures.

If you are thinking about starting, or have started your business, here is the summary on some of the most common ways of trading here in the UK.


Sole Proprietorship or Sole Trader

When you operate as a sole trader, you run your own business as an individual and are self-employed.  That individual element is what we suggest you take note of.  Any business debts that occur become your debts and your personal assets, for example property you own, are not protected.  If the business fails, your assets are at risk. To summarise then, there is little distinction between you and the business.

Any profits you earn, after you have paid tax via the self-assessment system, are yours.


Limited Company

A limited company is its own legal identity, and as such has it’s own bank account(s) and debts created through trading are the companies.  There is a clear distinction between personal and company assets as a director – which offers some protection in case of business failure, so long as: there is no proof of fraudulent activity; or the director and the company aren’t  held responsible for an act; or there is evidence of corporate manslaughter.

And as the title suggests, as a shareholder your liability is limited (‘limited by shares’).  As a director of a limited company tax is deducted from Pay As You Earn (see this article for more on payroll and PAYE). Shareholders can receive dividends from the company. Limited companies pay corporation tax and complete a company tax return.  Directors also have an obligation to complete a personal tax return if they have received any form of income from the company.

The operating procedures for a limited company are more complex than a sole trader, however you shouldn’t be put off by this – this may be the right trading structure for you.  There are advantages and disadvantages to your business being a sole trader vs limited company.


Business Partnership

business partnership is, as the name suggests, where yourself and your partner or partners share responsibility for the business.  Noting that a partner can actually be a limited company since it has a legal entity.  Each partner shares in the losses, the profits and tax.  Partnerships are common for professional practices such as law firms.  There are different types of partnerships, limited partnerships and limited liability partnerships.

Once you have established the right trading style for your circumstances you will need to either register as a sole trader/business partnership with HMRC  or commence your company formation. However, we recommend that you speak with a certified accountant to discuss your business idea ahead of making your decision. A full accountancy practice such as ourselves can guide you through the process, consider a no obligation consultation to find out how.


2. Fail to Plan, Plan to Fail


Your Business Plan

One of the factors determining your trading structure will be your business idea and your business plan. Consider how much market research, realistic forecasting and cashflow planning you have actually performed.  For example, what personal remuneration do you plan/need to take from your business and what are the tax implications for you personally as well as your business? Do you intend to have premises or employ staff?  Will your business need seed investment to develop your business idea? Many businesses fail to make a realistic business plan –the back of an envelope doesn’t count!

Even if you are not seeking start up business funding, having a business plan that is “living and breathing” will help you course correct as your business starts to trade.  What is meant by course correcting? Maybe some of the key assumptions you made are no longer valid.  Maybe your product or service needs further tuning to more niche markets? Remember starting and growing your business is like being on a journey – for all the planning – even a SAT NAV device can leave us in a field when we expected to be progressing forward on the highway! It’s not all about the destination.

Business planning may at first feel like you are plucking figures out of the sky, however as you progress, the more and more data you gather from your research and from trading will mean that you will be able to produce more realistic future cash flow forecasts.


Cash is King

Cash flow prediction management is critical to any business, irrespective of the trading type.  The reason so many start up businesses fail is that they simply run out of money, they are unable to trade any further as they become insolvent.  What may be a great business idea with a lot of potential becomes another failure statistic.

If you need to seek funding for your business, your business stakeholders such as banks and investors will require regular cash flow forecasts.

In creating your cash flow predictions for your business as part of your business planning, you will need to identify all your outgoings. These will include your business tax liabilities and your personal remuneration.  Your business trading structure and your business plan are inextricably linked. You can’t plan one without the other.


3.No Personal Survival Budget


And that brings me onto the third common mistake made, your personal financial needs.  Most businesses take a lot longer to establish than expected. That’s why we always recommend that you have a robust (and realistic) handle on your personal survival budget.

Not managing your personal financial needs against your business financial needs can lead to serious debt or worse bankruptcy.

Ask yourself this question:

What would happen if my business didn’t receive any income for 6 months, for 1 year and for 18 months?

Here is a link to a personal survival budget planner that you are free to use.

Having worked with a diverse range of start up businesses, it is clear that all of them want freedom in some form. Whether that’s financial freedom, time freedom or the freedom to make a difference.


Addressing these 3 common mistakes at the outset makes sure that your business starts with a much more solid financial foundation. And thus, so do you.


SF Chartered Certified Accountants can help you identify the right trading structure, develop your business plan and establish that solid trading foundation in your business – whether you are a start up or a more establish business.  CONTACT US for a free confidential, no obligation consultation.

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