Sean O’Flaherty, Director, Rosscot Chartered Accountants, comments on the complexities of starting a business and how to avoid the pitfalls.
Everyone has at least one idea that could be turned into a viable business but many fail to acknowledge the importance of financial management from the outset. There is no need to fall at the first hurdle if you follow a few basic steps.
Before pursuing setting up a business you must ask yourself – am I eligible to set up a business in Jersey? The answer is ‘yes’ if you have lived in Jersey continuously for five years, or are Entitled, Licenced, or Entitled to Work. You are also eligible if you are the spouse of someone who is Entitled, Licenced, or Entitled to Work.
Your next decision is key, as you have to identify whether you should be a sole trader, partnership or limited company. They all have their own attributes and features. Operating as a sole trader has several advantages, for example set up costs can be cheaper and you can produce simple accounts. There is also growth potential as the company can be formed into a limited company. There are also disadvantages of this nature of a business for example raising capital may prove difficult and the sole owner of the business will be liable for all the business debts. To set up this type of business you will need to register with the Population Office, Taxes Office and Social Security department.
A partnership format includes two or more self-employed people who will work together as partners to share profits and accountability. A partnership agreement is advised to ensure liability, responsibility and capital investment is clear. Setting up can be simpler and cheaper than a limited company and once again you can produce simple accounts. Expanding the business by adding new partners and forming a limited company are both possible giving room for growth. Administration of setting up the company is the same as a sole trader and the partners’ names or a trading name can be used to register the company at the Jersey Financial Services Commission for a small fee.
A limited company is a separate legal entity, distinct from its shareholders, directors and employees. The amount of liability that you have in a company depends on the amount an individual agrees to invest in a company by buying its shares; this does not include personal guarantees such as the company’s bank overdraft. Directors of the company still remain personally responsible for any wrongful or fraudulent trading and will be held accountable. The credibility of this type of company is higher, making the company more attractive for investors and enabling the Directors to raise more capital from banks. Although this type of business is more costly to set up and annual costs will be higher, there are tax advantages.
If you are going to be self-employed (whether via a sole trader, partnership or company) you must register with the Social Security Department before you start trading. The next stage is to contact the Taxes Office to advise them of your change in circumstances. If you are employing staff, you will need to register for the Income Tax Instalment System (ITIS). Additionally, if taxable turnover is likely to exceed £300k per annum you will need to register for GST (Goods and Services Tax) and complete quarterly GST returns thereafter. If you are holding data on clients and even your employees you will need to notify and register your business with the Data Protection Office.
It’s vital to seek guidance from an accountant early on to ensure you have the correct advice and structure in place from day one. This will save you time and money and offer an extra supportive network to your new business that you will need from time to time.