Self-employment
Being self-employed can have its advantages. These include:
The risks depend on how you set up the business. For example, if you set up a limited business and sell shares to friends or family, you are less personally liable for any costs if the business doesn't succeed. However, this means that you have the responsibility of making sure that your friends and family's investments aren't lost too.
The disadvantages of being self-employed as a sole trader or through freelance or consultancy work include:
Read about money and tax essentials.
The most common sectors include media and journalism, art and design, IT, sports and fitness and banking and finance.
Graduates from disciplines such as the performing arts, media production and art and design should prepare for periods of self-employment, if not for the entirety of their careers at least for some time before securing an in-house position.
A recent survey that asked graduates what they were doing six months after graduation found that more than three quarters of graduates working as musicians were self-employed/freelance. It also revealed that more than half of those working as artists and more than a third working as textile designers were self-employed.
The Destinations of Leavers from Higher Education survey also found that all graduates working as garden designers, upholsterers and electricians were self-employed as well as more than half of acupuncturists, osteopaths and homeopaths. (What Do Graduates Do? HECSU/AGCAS, 2012).
When it comes to the arts, there is a high number of freelance workers but they are often competing with each other for fewer contracts and aren't aware of the 'hidden jobs market' which is taking over advertisements in being the most popular way of freelancers finding work.
Recent arts graduates may find this new way of entering the industry tricky as it relies on networking to tap into this 'hidden market'. Find out more at The Guardian - How to be an Arts Freelancer in 2013.
There are a couple of approaches you can take when setting up a business. A business owner may not wish to change their structure and approach to business and may stick to using traditional knowledge and skills.
Entrepreneurs on the other hand will look to continue to grow a business, be responsive to opportunities, and take a creative and visionary approach. (Quality Assurance Agency, 2012)
The National Centre for Entrepreneurship in Education (NCEE) advises that a range of skills are needed in order to be a successful business owner. These include:
When you set up a business you're taking a risk as to whether your business will work. Usually, if a start-up is going to fail, it will do so in the first 12 months.
Aim to reduce the risk of your start-up failing by testing your idea. This is important particularly if you're looking at finding funding or a business loan to help set up your business, as you'll need to convince the investors that you have done your research to find out whether your idea has a reasonable chance of succeeding when it is brought to market.
If you've invented something new whether it's an idea, service or a physical product that doesn't already exist, register your idea to make sure that nobody replicates it. Visit GOV.UK - Trademarks, Copyright and Intellectual Property to find out more.
Whether your business idea is original or not, you'll still need to research the market you're looking to enter and identify potential customers to test out your idea. This is to find out if there is real demand for your product or service.
Find out the needs of your potential customers, create a prototype of your product, then go back to these customers and get feedback about your product or service.
Larger companies test their ideas for years and spend large sums of money on research to test the market before launching their ideas. However, you don't need to spend a lot of money, employ a market research company, or go out with a questionnaire and ask hundreds of people on the street to do your research. Find out about some low cost ways to research the market at The Start Up Donut - Market Research .
If you need to secure funding either through a grant or a bank loan then your business plan must be strong enough to convince funders to invest in your idea. However, that doesn't mean that when you bring your product or service to the market you will satisfy your customer's needs profitably.
To find out more see how to write a business plan and marketing your business.
Setting up an online business is similar to setting up a physical business - you still need a business plan and to find funding but there are additional things to consider. It isn't just a case of buying a domain name, setting up a website and then watching orders for your product or service come in. You must think about how you will market your business.
Begin by writing a business plan. For advice and guidance see how to write a business plan. Before you spend money on a domain name and building a website find out if your idea will work. This means consider your market, check out your competition, and think about who your target market is.
Once you've done some research you can buy a domain name. There are a number of providers that sell these including Go Daddy. Prices vary with a .com name costing from £6.99 for one year to £9.42 for ten years.
Getting someone to build your website can prove expensive, costing anything from £500 to £20,000. Speak to friends and family to find out if anyone can recommend a web developer who can produce what you need for a reasonable price.
It can take a long time for a web business to grow but with patience and a well laid out marketing plan you will find that work will come in.
The type of business you set up will determine the legal requirements you will have to meet. Legal requirements include, the paperwork you have to fill out, the taxes you have to pay, how much profit you take and what you will lose (your responsibilities) should you make a loss in your business.
A range of options exist:
Sole trader - Also known as a sole proprietor, this is the option to choose if you run your own business and you take all of the profits you make after you pay tax on them.
Although the term sole trader infers that you will be working alone it doesn't mean that you can't employ people but rather you are solely responsible for the business. Therefore you are responsible for any losses you make, all of the record keeping of your sales and spending and paying the bills for anything you buy for the business e.g. stock.
Partnership - When a business is owned by two or more people who are all responsible for funding the investment and start-up of the company. They are also liable for any losses the company may make.
All business profits can be shared by the partners and each partner pays tax and National Insurance on their share of the profit. A partner doesn't necessarily have to be a person it can be a limited company which counts as a 'legal person'. The company must choose a nominated partner to take responsibility for the book keeping and tax returns.
Limited company - Legally, this form of business separates the organisation and the person or people running it. Any profits made are owned by the company after it pays Corporation Tax, and the company can share its profits.
The organisation has members who own a share of the company. These shares can be sold to friends and family members. A member of a limited company is only responsible for up to the value of their investment in the business. This means that if the business runs up a lot of debt, the members aren't liable to pay the sum of the debt, just for their share of the investment.
For more information about the legal difference of these companies visit GOV.UK - Choose a Legal Structure for a New Business .
As well as the above legal forms, businesses can be set up based on different trading practices. For example:
Franchises - A franchisee will buy a license from an existing business which often means that you can use the existing business' brand, image and business model. The franchiser gets an initial (and then ongoing) fee for the franchise to use its product or service.
The business is owned and operated by the franchisee but the franchiser has control over the marketing and way that the product or service is sold. Examples of current franchises include: McDonalds, Subway, some letting agents, automotive services and many more. To find out more see the British Franchise Association (BFA) .
Cooperatives - Businesses owned and run by people with the same ethos and goals.
Social enterprises - Businesses which help people, communities or charity-based organisations. Choosing this option you could run as a Community Interest Company, which is a limited company that has a community interest statement and an asset lock which is a legal promise to use the company assets for its social objectives and only give so much money to its shareholders.
Universities have started to place more emphasis on educating students about social enterprises and cooperatives.
Freelance or consultancies - You may wish to work as a freelancer or on a consultancy basis if you have skills, knowledge or a service which can be hired by companies. Commonly, this involves working from home or travelling to the different companies that hire you.
You often have to gain a great deal of experience in order to build up the reputation and networks to find frequent work. This type of work is more common in some sectors than others - see is self-employment right for you?
For finance advice, see money and tax essentials.
A business plan is where you set out what you intend to achieve and how you plan to do it. It is more important if you are planning to acquire external investment to start your business but it's good practice to do one before you start up any business. This is because it allows you to set out your ideas, plan for the future and it gives you a realistic assessment as to whether your idea is viable and worth investment.
A business plan should include the following:
Business vision - Include details of the nature of your business, when it will start, which sector your business will operate in, competitor analysis and why your business is better.
Aims and objectives - Make sure to include what you want to achieve in your first year and where you want your business to be longer-term. Make your goals measurable, so that you can look back and assess whether you've met them.
Legal obligations - Consider any particular health and safety laws you might need to deal with, and any licenses and insurances you need to pay.
Market research - Outline any market research that you've carried out, it's important that you know your market and that you have a group of buyers for your product or service.
Competitor analysis - Include who your competitors are, what their strengths are and any weaknesses. Use this information as evidence to define how you will improve on what your competitors are offering.
Sales and marketing - Show how you will use your product or service to generate an income. For example will you sell your product or service over the internet, phone, face-to-face or use a combination of channels. Your strategy should be based on your market research and your customer's preference. You will need to outline your pricing structure, your costs and what your customers are prepared to pay. Find out more about marketing your business.
Financial requirements and forecast - Include estimated costs for setting up and running your business, sales forecast for the first year, profit and loss forecast and additional finance you will require.
Business risks - Your plan should show that you understand the risks associated with running your business and where it might fail.
Executive summary - Although this is presented at the beginning of your business plan, it is better to leave the summary until the end. The summary should be brief and include the main points in your business plan.
Marketing isn't just about promotion. Marketing is about understanding the wants and needs of consumers and then meeting those needs profitably.
Creating a marketing plan will help you to:
Your marketing plan should cover one business year, although during the year you may have to amend your plan or make complete changes to it. This is due to the fact that the market environment will keep changing, new consumers may be identified or other cost factors may mean you have to adjust your pricing strategy.
A marketing plan is made up of:
Find out what each one means and what it involves:
If you're going to offer a service there are more 'P's to consider including, People, Physical evidence and Process. Information about these further considerations can be found at the Chartered Institute of Marketing - Marketing and the 7Ps.
You need to make sure that you calculate how much it is going to cost to start up and run your business to ensure that you have accurate figures in your business plan, especially if you're applying for investment from third parties.
All costs need to be recorded for reporting to HM Revenue and Customs (HMRC) or Companies House (if you are a limited company or a certain type of partnership).
Here is a guide to costs you may incur when setting up your business:
Insurance - You should have business insurance, even if you aren't employing people. If you are employing people you must have employers' liability insurance by law and, if you use a vehicle for your business, you must insure the vehicle and all users of the vehicle.
Although not a legal requirement, if you at any time invite people onto your premises you should get public liability insurance. Also, if you are making, selling or supplying products you should get product liability insurance.
Find an authorised business insurer through the The British Insurance Brokers' Association (BIBA) .
Licences - You may need to have a specific licence to be able to carry out certain business activities in the UK. Find out if you need a licence at GOV.UK - Licences and Licence Applications .
For example, you will need a PPL licence to legally play recorded music in public e.g. a gym, bar, shop, community building etc. PPL licence costs vary depending on your use of the music e.g. to play music in an independent dance class costs from £56.34 a year.
Find out more about where you can find a licence by using the GOV.UK - Licence Finder .
Depending on the type of business, you may also need to factor in costs for accountancy, legal advice, registration with Companies House (costing approximately £15) and premises.
It isn't easy to secure funding for a business, especially during or after a recession. However, the government are introducing new policies to financially support start-ups. To increase your chances of securing funding, put together a strong business plan with sound financial planning and approach the banks for start-up loans.
Some banks have pages on their websites offering advice and guidance on how to write a business plan in order to secure funding:
For tips on finding business grants visit Startups - Grants .
You may also be able to secure funding in other ways, such as through a 'business angel' which is like a partner on Dragons' Den. You could sell shares to friends and family or use your own savings to cover the start-up costs. For more on business angels and other ideas, see Startups - Top 10 Ways to Fund Your Business .
For more information on ways to fund your business, see starting your own business - what help is available?.
Depending on the type of business you have started will depend on how you register to pay tax and NI. For example, a limited company will be required to pay Corporation Tax as do some other types of organisations.
Most graduates will begin as self-employed sole traders. You must register as self-employed as soon as you can after starting your business. Starting your business can count as any activity e.g. buying, selling, advertising your business, renting a property or depositing money into a business account with a bank. You will have to send in a Self Assessment form and pay NI even if you make a loss in the first year of trading.
It's important to understand what you are required to pay and when because the penalties for not paying any monies you are responsible for are severe and you are personally liable for these payments.
You must look at the information about the type of self-employment or business you are running and your legal responsibilities and payments due to HMRC. As Self Assessment is done retrospectively, your payments will need to be factored into your business forecasts for the next year.
Registering as self-employed with HMRC
National Insurance payments
You normally have to pay NI. Most self-employed registered people pay Class 2 NI but depending on your circumstances you may be exempt from paying. To find out more, visit HMRC - Class 2 National Insurance Contributions .
You may have to pay Class 4 NI if you're self-employed and your profits are over a certain amount (profits above £7,225 as in April 2011/12). To find out more, visit HMRC - Class 4 National Insurance Contributions .
Being employed while self-employed
You can be both employed and self-employed. This is common for people working as freelance artists and designers, particularly in the earlier years of establishing a profitable business.
You need to pay Income Tax and NI for both jobs but they will be done in different ways. As an employee you pay Income Tax and NI through your employer. If you have income from your self-employment you will pay NI and Income Tax through Self Assessment.
In the Self Assessment form you should detail your employment income and tax deducted. HMRC then calculates the tax and NI you need to pay. For an example of how this is worked out see, HMRC - Employed and Self-employed Tax and National Insurance .
You don't necessarily need an accountant to manage your accounts. If you're a sole trader it is manageable on your own but, as it is important that you get your accounts right, you may wish to get advice from an accountant when starting out.
If you are a limited company you can set up on your own but the more complex your business is or high value the venture the more advisable it is to get an accountant from the outset.
Legally you have to keep a record of your accounts each business year so that when you fill out your tax return forms you can prove your figures are right.
The records you need to keep will be dependent upon the type of business you are running. You must keep your records for at least five years and ensure that you have a back-up.
HMRC recommends that you keep the following records which will help you to fill out your tax return:
For more information on record keeping see HMRC - Record Keeping .