Funding and rewards – Managing finances in a Startup

Our most recent Norwich event, held at the John Innes Centre, generated lots of discussion between the speaker Mark Donaldson (Mint Consulting)  and a lively audience. The reason being that it covered a wide range of topics that early-stage entrepreneurs don’t usually think about.

In the first part of the seminar, we learned what to take into consideration when deciding the legal form to adopt: companies, LLTs, sole proprietorship, partnerships or charities. Many factors come into play when choosing a legal structure.

First of all, the structure that the business adopts will have a big impact on how profit is taxed. Basically, each form is taxed somewhat differently, and the structure of your business can have significant personal tax consequences. Since it looks like we will remain in a relatively high tax economy over the next few years, it is more important than ever to manage your tax affairs effectively.

Also, depending on the nature of your business, you should adopt the form that grants you the flexibility you need.

If the business is set up as a sole trade/partnership then the owners will become self employed and will need to complete self assessment tax returns each year. The owners will be taxed on their share of the profit from the business each year, with tax payment normally due in January and July.

If the new business is a limited company then the taxation of profits is somewhat different. Limited companies are separate entities for both taxation and legal purposes. If the company makes a profit then this will be subject to corporation tax.

In a limited company if you are a shareholder you may only withdraw funds through dividends. If you are also a company director or employee you may in addition receive compensation through salary or director’s loans. In all cases, the income will be subject to personal taxation. In general, it is best to have a mix of salary and dividends if possible. This is because dividends are not subject to PAYE deductions.

It should be pointed out that most choices are not irrevocable. It’s possible to migrate from one legal form to another as needs change.

Going forwards in the key decisions for HMRC & businesses, if a new business is to take on employees then they need to start dealing with payroll and PAYE on a monthly basis. New companies will need to set up a PAYE scheme and obtain the appropriate PAYE references.

Moreover, if your business will be making sales of more than £77,000 in a year then you will need to register your business for VAT, and then add VAT to your invoices. But whether this means that your prices will go up will depend on whether your customers are VAT registered or not.

Small businesses should consider the flat rate VAT scheme which simplifies the process of completing a VAT return by applying a flat rate to your gross sales and paying this amount to HMRC rather than calculating the VAT at 20% on all your sales invoices and deducting the VAT on any purchase invoices.

Registering for VAT will mean that you will need to complete and submit quarterly VAT returns and pay any VAT due to HMRC. VAT returns are now required to be filed online.

Next step is finding a way to finance your business. the Key points you should keep in mind are:

  • Consider different sources of funding
  • Understand your business financing needs and always factor in a contingency
  • Be clear on the way you will execute your Business Plan
  • Understand the meaning of your financial projections and make sure they are realistic

Based on the above you can choose the funding options which best fit your business, with a fair balance of risk and reward:

  • Personal cash / Bootstrapping
  • Bank financing/lending
  • External investors /angel funding
  • Joint Ventures
  • Partnership with suppliers
  • Grant funding

In the second session, the discussion covered the following topics:

  • Different ways to lend funds to the business, depending on the structure chosen.
  • Managing cashflow in the business on the various sides (production, Bank, customers, suppliers and HMRC).
  • Models of funding, exploring advantages and difficulties for two main categories of funding, Equity and Debt.
  • Enterprise Investment Scheme, to encourage inward investment into SME’s from business angels, reducing exposure risk to an investor, and providing 30% income tax relief to individuals investing (providing shares held for 3 years).
  • R&D Tax Credits, to provide Corporation Tax relief which may reduce the tax owed.

The last topic introduced is not usually considered when starting a business on your own: exiting the business. It is important to plan for the sale, making your business as attractive and valuable as possible, even though it may take many years to get your business ready.

Starting a business is a huge step, and being aware of the key legal and financial options/constraints from the beginning is essential. As we learned, these decisions can have significant consequences on your business.

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