So you’ve decided to take the plunge and start your own business, kudos to you!
You’re about to embark on a bumpy and exhilarating ride that few people have the confidence to take on. Having set up a number of companies over the years and been through this process several times, I’m going to give you a step by step guide to setting up your own web design company, from scratch. I’m in the UK, so this guide will be aimed at UK readers.
Step 1 — registering your legal entity
The words “legal entity” are remarkable in that they sound both boring and scary at the same time.
When you start a business venture you need to think about the vehicle within which you carry out your work. In the UK, two common options for setting up a web development business are:
- Self-employed sole trader
- Ltd company (limited by shares)
The key distinction between these models is that when you are a sole trader, you are the business, but a limited company is a separate entity.
In practice it means that self-employed people simply invoice clients under their own name (or a trading name) and pay their tax through self-assessment.
If you operate a limited company, you will technically be an employee of that company, as well as being the director of the company. The company itself will need to pay tax (corporation tax), the responsibility of which will fall to you as director.
How to choose between self-employed and limited company
When I started out in web design, I was a self-employed sole trader to keep things simple. But over time, I wanted to create more of a separation between myself and the business, so I incorporated a limited company. In short, limited companies are useful if:
- You want to take out a loan for the business, and keep it separate from your own personal finances
- You want to take a salary and dividends, and receive the tax benefits of this (many company owners take salaries below the income tax threshold, which IMO is morally questionable)
- You want to grow the business to have employees or multiple directors
- You want to be seen as something bigger than a “one man band”.
Self-employed web designers are common, and the model works just fine for most. But if you feel like you’re about to outgrow this, you can always incorporate a limited company. Doing so is relatively quick and simple, and can be done online using a service like 1st Formations.
Step 2 — setting up a business bank account
When starting any business it’s important to create an account to store your business transactions.
When I started as a freelance web developer back in 2009, I was a sole trader and used my personal bank details to invoice clients. Big mistake.
I also had no proper invoicing software, so can you imagine what it was like trying to work out my expenses to submit a tax return? I think my mind has wiped any memories of this time as a self-defence mechanism!
Business banking options have massively improved since that time. Where it might have taken up to 6 weeks to open a business bank account a decade ago, flexible app-only options exist now meaning you can usually be up and running within 48 hours. I recommend exploring any of the following app-only business bank accounts:
These apps also sync with finance management software, which is handy for tracking and explaining transactions.
Step 3 — managing your finances
It’s tempting to take client payments into your personal account and keep invoice records in a spreadsheet. And as for keeping receipts? Ha!
But this is not the way to run a successful business. Trust me — working like this will come back to bite you. You won’t know what you’ve earned or who’s paid you and when it comes to filing your tax return you’ll find yourself in a real mess. This is not just stressful, it can carry legal consequences if you declare incorrect earnings.
But there is a way to take the pain out of it!
We’ve covered business banking, and touched on how these banks can link up to your accounting or bookkeeping software, but which accounting software to choose?
Personally I use FreeAgent, which has been a fantastic solution for me. It has enabled me to truly keep my business finances separate from my personal, manage my cashflow and help with filing documents with HMRC.
There are other popular options such as Xero and QuickBooks, as well as lesser-known services such as Crunch that combines accountancy software and service.
Starting a web design company from scratch: let’s recap
In step 1 we set up our legal entity. That is the vehicle through which we conduct our business. It could be a company, entirely separate to yourself, or it could be yourself: a sole trader.
In step 2 we set up our business bank account in order to store our funds. Don’t make the mistake of using your personal/current account for this: separating your business from personal cash is critical.
In step 3 we looked at some options for managing our finances. It’s tempting to forgo this and use a spreadsheet, but it will become unmanageable. Use proper software.
Running a successful business means planning for success. Getting your ducks in a row. Hopefully this step by step guide to starting a web development company from scratch has given you the tools and confidence you need to get going. Cheers! 🍾