How to start a small business: a step-by-step guide

Introduction

Setting up a small business is a major undertaking. But if you take it step by step, you can take each challenge as it comes and hopefully avoid the pitfalls that many new enterprises run into.

Here are the essential steps to cover when setting up your small business.

1. Having an idea

Your first step is having an idea. What can you do well that others will pay for?

You then need to find out how much demand there is for your product or service, and how much competition.

For this you'll need to do plenty of market research, which can test the viability of your idea (and may also give you new or different ones).

Many businesses start when a commercial hobby or freelance service escalates to the point where it could become something more.

If you decide your business could be profit-making, you can proceed on your journey.

2. Register as self-employed

Even if you’ve filed tax returns before, you must notify HMRC as soon as possible after you become self-employed (i.e. start your business). You can register for self-assessment here.

You will now be established as a sole trader. However, you may benefit from having a different business structure.

Whatever your structure, you should have a separate business bank account, to keep your personal and business finances separate. If your business is a company, this will in any case be a legal requirement.

3. Which business structure?

What kind of business entity will you be running? Business structure is one of the most important decisions, as it affects everything from tax to liability. 

You may want to consider all the other factors first before making a decision, but have your options in mind from the start. These are:

• Sole trader
• Partnership
• Limited liability partnership (LLP)
• Limited company
• Not-for-profit organisation

The way your business operates will have legal implications as well as financial ones. You should therefore also consult a small business solicitor when choosing a business structure.

Here you can find out more about how to set up a limited company.

4. Choose a name

Ensure your preferred name is available by searching online and the Companies House website especially.

If you are starting a limited company, you must register it at Companies House. Use their WebCHeck service to ensure that your name is not already in use.

Also check the Trade Marks Register to ensure you will not infringe any existing trademarks.

Don’t invest in any branded materials until you are sure you can use your chosen name. When your choice is confirmed, buy the appropriate website domain.

You may also want to buy any similar URLs to prevent copycats.

5. Write a business plan

If you don’t already have a written business plan, now is the time to create one. A business plan is usually essential if you need to raise bank finance or investment.

First, work out your business model. Once you know this, you can set about creating a workable plan based around it. Your business plan is a document that:

• Identifies your business goals
• Outlines your business strategy for achieving these goals
• Presents a realistic action plan to show how this strategy will work in practice

A business plan should also include:

• Your marketing and sales strategy
• Your financials (e.g. cash flow forecasts)

Check out our guide to writing a business plan.

6. Set up business insurance

Before your business carries out any work, you must have the appropriate business insurance in place.

If you employ others, you must by law have employers’ liability insurance (in case one of your staff is injured or falls ill due to their work).

Similarly, if your business uses vehicles then you must have commercial motor insurance.

Depending on the kind of work you do, you may also want to have:

• Public liability insurance
• Professional indemnity insurance
• Commercial property insurance
• Key person insurance

Talk to a financial adviser who specialises in protection about obtaining suitable cover for your business.

7. Ensure compliance

Your business must be fully compliant – that is, it must conform to all relevant legislation covering your area of activities.

For instance, if the business serves food, it must comply with food safety and hygiene legislation, and if the business handles customer data it must conform to the Data Protection Act.

Your business may also need licences or permits to carry out certain activities.

You can find which ones you may need using this licence finder at Gov.uk.

A small business solicitor can help you fulfil all the necessary compliance.

8. Appoint an accountant

Although in a small business it’s possible to handle the accounts yourself, this is rarely the best use of a boss’s time.

Using a qualified accountant also gives you peace of mind that your finances are sound and that the business is paying all the necessary tax.

Your accountant can also advise you on whether to register for VAT. This is compulsory over a certain level of turnover, but it may make financial sense to do so voluntarily.

Find out how else an accountant can help you.

9. Set up your business premises

Decide where your business will be based – at your home, or in commercial premises.

If you rent or buy premises, you may have to pay business rates. Renting a business property also involves various tenant responsibilities.

If your business will be based in your home, then you may need to obtain special permissions and/or insurance. Find out more at Gov.uk.

You may be able to benefit from special business rates, tax reliefs and other perks if you set up your business in a particular area, known as an enterprise zone. Find out more about enterprise zones.

10. Create your brand

Your brand is far more than just your logo and visual style. It’s everything they represent to customers.

Think about the qualities you’d like people to associate with you – e.g. reliability, quality or a sense of fun – and then try to build these qualities into all your visual and written materials.

However, use your discretion. Swish branding may be appropriate for, say, a maker of greetings cards – but it may be wasted on a handyman business. Find out more about building your brand.

11. Set up your communications

You must be able to reach your customers. It must be easy for them to find you. And you need to be able to have a conversation with them if something goes wrong.

So you need a communications strategy. Decide how you will handle things like:

• Advertising and marketing
• PR
• Customer services
• Complaints
• Social media

Ensure you have the necessary capacity for each of these – e.g. sufficient time (or staff) to engage with your customers.

12. Recruit your staff

When should you hire staff? Many bosses would answer, ‘When you have no alternative.’

Taking on permanent staff is a major undertaking, so explore all other options first.

Use freelancers, sub-contractors and agency staff initially, until it becomes clear that a permanent role makes more financial sense.

A strong business plan will help you answer this question.

As an employer you must:

• Pay at least the minimum wage
• Have employer’s liability insurance
• Enrol all eligible employees in a workplace pension scheme
• Provide statutory minimum paid holiday and sick pay
• Provide paid maternity, paternity and adoption leave
• Attend to staff development

These are just some of your responsibilities towards your employees.

Your accountant can help you with key responsibilities such as setting up your payroll, employer National Insurance contributions and employment contracts.

Find out more about being an employer.

Seek additional funding

When should you look for additional funding for your small business? In the initial setup phase you may have to rely on your own resources, or at best a small business loan.

However, once your business is trading and demonstrating profitability, you are in a much stronger position to seek additional funding to help it grow.

Banks and other lenders will feel more confident lending to you, and investors may well be interested in a slice of your profits.

Funding for a limited company

As a limited company you’ll have more funding options. You can either seek out loans from banks or P2P lenders (such as Funding Circle and Ratesetter), or offer a share of your company in exchange for private equity funding.

Funding for a sole trader or partnership

As a sole trader or partnership you can’t sell shares in your business, but can still obtain funding in the form of loans (see above).

Here you can find out more about raising finance for your business.

Find out more about running a successful startup.