If you trade in
partnership
with someone else, you are both liable by equal part unless agreed in writing otherwise.
Having clear goals of what you want your business to achieve can help you decide which legal structure would be the right one. However, waiting too long may create problems in running your business and prove expensive.
Let's say you have decided to start trading as a Limited company because this way, you and your company will be legally two separate entities. You have spoken to an accountant and been advised that now is the time to change over because they could help you with some tax savings.
They may even offer to set up a Limited company for you to save you the hustle, and everything appears in order. However, because the limited company and you are two different entities, you will need a separate business account, and all bills must be in your company's name.
Here is where the cracks start to appear. Let's say you were using software and paid a whole year in advance, or your phone contract isn't due for renewal for another year. Every expense you want to put through your limited company business must be in your company's name, not yours. It only gets more complicated when you decide that assets such as cars or vans should also be part of your business.
This is why it's easier to decide on the legal structure right at the beginning and set your business the way you want it to trade in the future. You would be effectively setting up your company again, which would be time-consuming and costly.
Have formal written agreements
Relying on "hand-shake" or informal agreements is another mistake mainly Sole Traders and Partnerships make. If you are trading in a partnership, write everything down. Personal circumstances can change, and it can be very upsetting if one of you isn't holding up their end of the bargain.
It's best to have written agreements for everything because misunderstandings can happen, and you may have different expectations of the other person.
If you have someone helping you, get them to sign a contract, even if it's a "Casual" or "0 Hours Contract". This way, you will both know exactly what is expected from you and what your rights are.
Put in place suitable systems.
You will be wearing many hats as a business owner and have to do many different jobs to achieve growth. You have started your job because you are good at something, but you will also have to do others that you know little or nothing about. For example, you will have to market yourself, do your admin and bookkeeping, prepare accounts, and comply with all the legal requirements and deadlines.
As your business grows, you will have less and less time for these. Therefore, determining what skills and resources you'll need is paramount for your company's growth.
Determining these skills and building systems before you have a business will help you focus on what is important at the given time. Initially, marketing and positioning yourself online will be your main focus because you need to let people know you exist. If you get organised during this period and get a clear idea of what you want it to look like going forward will enable you to higher someone and leave it to them when you get busier.
You will have to do the same with all areas of your business because if you don't and higher someone without telling them what your vision is for your business, they will implement their own, and you may end up with something you don't like.
Doing it all yourself.
Your business is your baby, and you will want everything done just so. Don't let that stop you from hiring people to help you until you are down on your knees. You may start resenting your business and end up losing it.
Write down all processes precisely the way you want them done and reflect on what you know how to do, what you like doing, what you hate doing and what you have experience doing.
Most people try to do their accounts by themselves at the beginning. They may even set themselves up on accounting software, and that's fantastic. It helps them to see their figures clearly and will help them with their tax return. The only problem is that they may make a mistake and need to learn how to unpick it. A small mistake usually turns over time into a bigger one. They may not even know they are making it and get themselves in a bit of a pickle.
If you feel uncertain about doing some tasks, ask for help. A good accountant will set your systems right, advise you on everything you can claim, and meet with you every month to discuss your business progress.
Focus on your finance
Finance is too often the last area of business that sole traders focus on, with some only searching for their receipts right before the deadline for their Self-Assessment tax return submission. It can be up to 18 months after these transactions have happened, making it difficult to remember what they were for and find them all.
Having your bookkeeping up to date will give your business a clear view of where it's going. You can put aside a lamp of money every month for your tax bill, giving you peace of mind and a clear idea of how much you can invest in your business and your cash flow in the coming months.
Some businesses are guilty of "bank account" accounting. They get false security by looking at their bank account, thinking everything is fine because money is in it. However, they have no real sense of how much money is theirs, how much will go to the tax man and how much profit they are making.
You need to know exactly how much profit you are making from what because you may be getting a fair amount of money, but if you are working 24/7 without seeing your family and friends and end up with a massive tax bill, you may question the point of it all. Having your bookkeeping up to date and having management accounts done monthly or quarterly will highlight any potential problems or opportunities your business will bring you.
Final thoughts
Make it easier for yourself, and reflect on your business regularly. Make sure you focus on the right area and know your numbers. Set some long-term goals and build your company with that in mind. You may feel that focusing on your finances and bookkeeping at the beginning is overkill because you only have a few receipts. However, keeping everything separate from your personal expenses and using cloud accounting software will be invaluable a few months later when you don't remember what they were for. Don't fall into that trap, and avoid these 5 mistakes when scaling your business.
