How to start a small business: A 7-step guide

Whether you’re newly qualified or highly experienced, starting a small business will involve a lot of new challenges. Here’s our guide.

Becoming a self-employed tradesman or small business owner gives you the freedom of being your own boss and to choose what jobs you take and when you work. But it does involve long hours, no regular salary and plenty of paperwork.

Also, if you do decide to go it alone, you’ll have to develop some key new skills. These aren’t just the skills of your trade (although you’ll need those too!).

Learning how to start a small business and make it work will take time and effort. You’ll need to get to grips with tricky tasks from bookkeeping to marketing. But if you can put in the work, you might just find that you come to love it.

Benefits of becoming self-employed

Becoming self-employed is attractive for several reasons. Below are some of benefits of starting a small business.

The freedom to work in your own way.
The fact that you’ll keep the lion’s share of your profits.
The challenge and excitement that comes from going it alone.

Our 7-step becoming self-employed guide

So if those benefits sound great to you, does that mean you’re ready to start your small business right now?

Things might not be so simple. If you’re unsure whether the self-employed route is right for you, we’ve put together 10 questions for tradesmen to ask before becoming your own boss. But if you’re confident that you have what it takes, it’s time to read on.

1. Should I start a business now?

So let’s assume you have the right personality for self-employment. You’re hard-working, flexible, and organised. Above all, you love to do a good job. The next question to ask yourself is, “Should I start a business right now?”

To answer that, you’ll need to answer a few more questions.

Firstly, do you already have the skills and experience you need? If not, can you keep working for a couple more years first? Or can you change your plans so you’ll only take on smaller jobs to begin with?

Be careful not to promise more to your clients than you can deliver – a bad reputation can take a long time to erase.

Secondly, don’t neglect your wider situation. Is your home life stable and suitable for starting your own business? Do you have debts you can clear or savings you can make first? Your income is very likely to go down before it goes up. So make sure your life’s on an even keel before taking the plunge.

Finally, have you looked into all the sources of support that are around? This could include:

Small business finance options (for most tradesmen, this probably means a bank loan or overdraft).
Training from local colleges or other providers.
Local support groups where you can meet useful contacts and get advice.

Happy that you have all the answers? Well, maybe self-employment could be right for you after all.

2. Make your small business planning more than an afterthought

It’s tempting for small business owners to make and break their plans as they go. So if your business did worse than you’d predicted in the first year, you just go back in time and change your expectations. This is always a bad strategy. It’s best to be honest and act on disappointments early. Worst of all is to ignore problems until your business really hits trouble.

Do I need a business plan to start a business?

Experts disagree about whether every small business needs a business plan. Certainly, if you want any form of funding, like a loan from the bank, you’ll need to put one together. But if you’re starting small or investing only your own money, the answer is a bit more complex.

So does that mean a business plan is unnecessary? Not exactly. A business plan will help you think about what you expect to happen, help you set targets and make sure you understand the market.

If you’re starting out part-time or have no overheads to speak of, then you might find you can skip this step. For example, if you’ve just finished an apprenticeship and you’re living at home, you might be able to dip your toe into being a self-employed tradesman. Some would say a business plan isn’t needed in that situation.

Nevertheless, most new businesses would probably benefit from a business plan, even if it’s just a one-page list of bullet points.

How much to start a small business?

‘How much to start a small business?’ is the kind of question a lot of people ask. But in reality, nobody can answer – at least, not in a way that’s true for every business.

The answer depends on your industry, starting point, living expenses and where you are in the country. That’s alongside many other factors.

You might be lucky to be starting up in an inexpensive trade. Still, it’s easy to underestimate how much it costs to start a business. And it’s easy to overestimate your early profits. It takes time to build up a loyal base of customers, no matter how good you are.

So before you register your business name or print out any leaflets or business cards for your new enterprise, take some time to get a rough idea of how much you can expect to pay out to get your business off the ground.

3. Decide on a small business legal structure

It’s not the most exciting aspect of setting up your own business. But deciding on a small business structure is still one of the most important jobs on your to-do list.

What is a legal structure?

The legal structure of a business determines how certain tasks must be undertaken. This includes:

How you’re allowed to withdraw profits.
The paperwork that must be filled in.

The easiest way to understand legal structures is to look at the three most common examples. Your new business’ legal structure is likely to be one of these.

Working as a sole trader

The simplest way to set up in business is to become a sole trader. This basically involves:

Registering for self-assessment
Keeping a record (including receipts) of your incomings and outgoings
Submitting your tax returns
Paying your taxes on time

This structure works well for a huge number of small businesses. The advantages of being a sole trader are clear: it’s quick, cheap and easy to set up, and the ongoing paperwork is fairly minimal.

But there are disadvantages of being a sole trader too. The most important one is that there’s no legal barrier between you and your business. This means if your business owes any debts, they’re your debts too.

Setting up a business partnership

If you’re going into business with anyone else, you could consider forming a business partnership. This is a fairly easy way to start a small business.

You need to decide how much of the business each of you will own. This will affect both how you divide the profits and how you’re affected by any liabilities. As with being a sole trader, the partnership’s debts are also the debts of the partners themselves – there’s no legal difference.

If you form a partnership, you’re advised to have a partnership agreement drawn up. This could help you if are any disputes in the future.

Setting up a private limited company

A private limited company exists in its own right. One of the main advantages of a limited company is that you can only be held liable for what you’ve invested in the company. This sets it apart from sole traders and business partnerships.

Using this structure can also make your business look more professional in the eyes of bigger clients. There can be tax advantages in some cases too.

On the other hand, one of the biggest disadvantages of forming a private limited company is that they involve more complicated paperwork. While there are lots of cheap company formation services around, it’s probably a good idea to visit a good accountant to help you through the process.

Once you have the company, the complicated paperwork goes on. Similarly, some tasks have to be done in a very specific way. For example, you can only withdraw money from a limited company by:

Paying yourself dividends (money taken out of the company’s profits and paid to you as a shareholder)
Setting up a PAYE system and withdrawing a salary

What’s the best legal structure for my small business?

There isn’t a single best legal structure for all small businesses. That’s why each three of the above structures are popular choices in the UK. You’ll need to weigh up the pros and cons of each structure based on your business. That’s why a chat with a good accountant can be helpful.

4. Register with HMRC as self employed

Register with HMRC as self-employed as soon as possible. If you don't, you could be fined 100% of any tax that is due to be paid in addition to the amount of tax that has been left unpaid.

By signing up sooner rather than later, you can benefit from the reminders they send out. Which means that you are less likely to forget about an upcoming deadline. But be aware that knowing the deadlines is your responsibility rather than theirs.)

Upcoming deadlines for submission of your tax returns include:

Self-assessment registration: 5 October 2016
Paper tax returns: 31 October 2016
Online tax returns: 31 January 2017
Pay the tax you owe: 31 January 2017

5. Build up your tools and/or equipment

Perhaps you’re lucky enough to work in a trade which doesn’t involve any expensive kit.

But most tradesmen will need to fork out on professional grade tools and equipment for their new business, which are sturdy enough to do the job. To make this affordable, you may need to build up your inventory slowly. Or you might be able to hire certain equipment as and when you need it. If that’s not possible, make sure not to take on any jobs you can’t yet perform.

6. Marketing strategies for small business owners and tradesmen

Not everyone who wants to start a small business has an interest in computing and the digital world. But you’ll need to get a reasonable grasp, otherwise you could struggle to get your name out there.

Firstly, get a website and keep it up to date. You can include information about your service, reviews from your customers and helpful images. Three options for getting your website are:

Having someone design and host it for you (easiest but most expensive)
Paying for web hosting and learning to design and run it yourself (low-cost and flexible but time-consuming)
Use an easy website builder solution (low-cost and easy but not always so flexible)

Learn how to use social media, particularly Twitter, Facebook, Instagram, and possibly LinkedIn too. You can run competitions, give advice and generally come across as a friendly and positive presence. This way, you’ll encourage people to try your service when the time comes.

Traditional marketing has its place too. Nobody likes spending money for advertising that doesn’t work. So ask your new customers how they heard about your service and always keep good records. You can also give out coupon codes as part of each ad – it’s a great way to encourage new customers, for one thing. Unique codes and talking to your customers help you find out which of your marketing efforts are paying off.

7. Take cover

All of this effort to get your business off the ground could be wiped out if you’re not prepared for accidents or misunderstandings. The right insurance could cover you against a range of mishaps. You may need to consider:

Public liability insurance, which covers individuals and businesses against costly claims from third parties for injury or damage to property.
Employers’ liability insurance is an optional section of cover which extends to cover claims from your employees. It is a legal obligation to have this insurance in place if you have employees, so make sure you’re covered.
Van insurance – or, if you intend to use your vehicle for business purposes, you’ll need to let your insurer know.