Why forming a Company shouldn’t be a priority for a new Business

by Startacus Admin

It can be very tempting to register a company as one of the first tasks under your startup business plan. After all, incorporation gives a legal presence to your business and helps secure a brand name.

However it is a red herring to think that in the very early days you need your business to be in this structure before you can do anything else. Setting up your business as a company should be one of the first tasks of growing rather than the first tasks of launching.

Operating through a company gives you two main benefits. The first is that it makes your fledgling business look bigger than it actually is, and certainly appears that you are “ready for business”. The second is that a company caps the liability of the owners and therefore provides a level of protection if you are unable to pay debts or deliver work.

It's important to remember though that registering a company has a cost. You pay the registrar, Companies House between £15 and £100 upfront, and perhaps additional fees to a company incorporation agent. Filing an annual return to keep the company registered costs another £13. The greater cost though, is the cost in your time. Companies require administration – arranging and attending meetings and filing paperwork. These costs are well worth the benefits once you are trading, but while you are developing your ideas and model, testing the waters, and refining, arranging service contracts for directors and organising board meetings to discuss bank withdrawal limits are tasks that you can do without.

So what should you do instead?

It is common for a new business to operate under a trading name first, when owned by an individual - a sole trader – or by several people in a working partnership. (Note: if you do work with someone else, record who contributes what in a partnership agreement).

You can use your business name as normal on letterheads and e-mail messages, provided you make clear that you are “trading as” that name elsewhere. So you might sign off letters “Joe Smith, trading as Lion Biscuits”. You’ll still look professional and ready for business. Other people and organisations will deal with you especially if you are buying small quantities of goods or services such as web hosting from them.

You can still deduct (valid tax-deductible) business expenses from taxable income. The business’ income and expenses are just accounted for as your other income and expenses.

You can also still protect your brand name somewhat. Since the Internet is so important for most new businesses, most people won’t register a company before making sure that a matching domain name is available. By registering a domain name to yourself personally, you can make sure that your company (when you do incorporate) can use it and you reduce the chance of anyone registering a company in that name. Even if they do, note that your domain name and your company name do not need to be the same – you might own the domain lionbiscuits.com but the company name might be Lion Biscuits & Confectionery Limited.

When the time does come when you need to be operating through a company, you can transfer the business into the structure (literally incorporating the business assets and debts), by “selling” it to the newly registered company.

By not rushing to form a company, you’ll buy yourself time to develop your ideas. If you pivot, or significantly change your plans, you won’t be committed to running a company that you might not really benefit owning. Don’t scrub off company formation from the to-do list, just make sure it isn’t one of the first items.

About Thomas

Thomas Taylor a director of Net Lawman, an alternative for small and growing businesses to using a solicitor to obtain legal documents. He is a qualified accountant (FCCA, FPA/FIPA).

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Published on: 3rd January 2016