Starting Out – Putting The Framework In Place

If you intend to start earning your income online then there are a few things that you need to consider. These are mainly technicalities but you need to get them right.

The first thing to consider is how you are going to trade. By that I mean are you going to form a company or operate as a sole trader.
The easiest thing is just to trade under your own name, but that will depend on your plans going forward. I have operated as a sole trader for some years but for this exercise I am forming a limited company.

In the UK it’s very easy to do. As I don’t want to use my own address as the registered office I chose to use a company called 1stChoice Formations.
You pay £20 up front and then after a year  it will renew at £39 + VAT each year to keep using their registered office service.

The reasons I chose to use a limited company are as follows:
1. It’s a separate legal entity so if I choose to sell at a later date then it has it’s own bank account, Paypal account etc and all I have to do is transfer the shares to the new owner.
2. If it’s as profitable as I hope, there are distinct tax advantages. You don’t need to pay your self all the profits as salary, and you can keep cash reserves so you are in far better control of your income.
3. It looks much more professional, important if you are hoping to JV with other people, and many suppliers will only give wholesale prices to companies.
4. Trading as a limited company provides protection of your personal assets so anybody suing you can only go after business assets.
We are living in an evermore litigious society and people are more inclined to use the legal system than ever before, particularly if you are trading with customers in the USA.
5. If you need support from your bank, if you trade as a limited company the bank can take what’s called a Floating Charge. This means the bank gets paid before any unpaid PAYE or VAT which can
improve the chance of bank support. They will almost certainly ask for a directors guarantee as well, but that can be negotiated. You haven’t much chance of bank support until you have two years figures, but you should be planning ahead.
6. If you are raising cash from investors, you just issue shares.
7. You can register for VAT voluntarily which makes you look more established. (You can also do that as a sole trader but why?)

The one downside is that there are extra costs, like you really do need to use an accountant, but they should pay for themselves.

Whatever you decide, you really do need a business bank account to keep business expenses separate from your own living expenses and any wages you may be earning.

The second thing you need to do is set up at least a basic form of book-keeping. Even if all you have is two spreadsheets showing income and expenditure. Get used to filing invoices/receipts for everything you buy for your business, from the stationary to the drawing pins.
It’s very easy to buy things without thinking, but you need to get into the habit. Often it’s just a few pounds here or there but it quickly adds up to a substantial amount. £20 a week is £1000 a year. Taking that off your profits reduces your tax bill by at least £180. If you are a sole trader it would be at least £290 and could be as much as £470 by the time you take tax and national insurance into account. The last thing you want to do is pay more tax than you have to. You really should take advice from an accountant.
It needn’t be extortionate, for example Cheap Accounting offer plans from under £30 a month, and that includes your accounting software. (None of the resources mentioned come with any recommendation.They are provided as examples only.)

Thirdly, Check whether there are any restrictions or licenses required for what you want to do. For example, do you need to register as a Data Controller with the ICO if you are building a mailing list? If you are processing data probably. It’s only £40 a year so you would be silly to risk a criminal record and an unlimited fine.

As part of this you should check what info you are required to give out. If you are in the UK and use a limited company, then the registered office and registration number need to be on all business communications and case law already says that includes any emails. If you register for VAT, you must have a contact address and VAT number on your site. Everyone outside the EU is breaking the law if there is no contact address.

Equally anyone selling digital goods to any consumer in the EU should be charging VAT unless you are in an EU country where there is a threshold.
In the UK It’s £85,000 a year, so no need to register for UK VAT under that, yet bizarrely you need to register, charge and account for VAT on sales to anyone in any other EU country. They have recognised the stupidity of that and intend to reform it but it could be years before that happens.

Currently most people from outside the EU don’t bother about VAT, but every OECD country, that’s every developed country in the world basically, signed a treaty in March 2014 that they would enforce each others taxes, so they should.

What else will you need on your site? In the EU you need a cookie notice that tells visitors about cookies. You will probably need terms and conditions that cover how people use your site, a disclaimer that nothing on your site should be regarded as advice, a notice about spam, a privacy policy and a DMCA form to protect against copyright problems.

Depending on what you are doing there may be other things as well such as refund and returns policy etc etc.
You also of course have to comply with spam legislation. This is the USA legislation. This is where it can get tricky. US law requires your mailing address, UK law requires a limited company to include Registered office and company number, Canadian law is even stricter meaning if you sell to a Canadian customer you must get them to opt in to get further mailings if they use a .ca address. It also requires a phone number . Unsubscribe links also must work for at least 60 days. If you always seek express consent then you won’t go far wrong.

After you have got your head round that lot, the next thing is to get yourself organised and I’ll deal with that in my next post.

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