How To Start Your eCommerce Business
Building an eCommerce site is a fantastic way to start your own business. You can start by building it alongside a regular day job or take the plunge and start full time if you have the funds to support yourself.
If the latter you'll need to budget for 12 months before you begin to factor in any income because unless you get lucky, that's the amount of time it takes to get traction with search engines.
If you have a great product and pay per click skills, then you can start making money a lot quicker than that, but more often than not PPC is a money pit for complete beginners because of the severe competition and learning curve.
This is why gaining traffic by organic SEO is such a good strategy, but it requires patience and the ability to keep producing quality content on a regular basis.
There are two ways you can trade in the UK. Each structure has its pros and cons, so it's well worthwhile the time spent to make an informed decision.
Have you chosen your domain name yet? Here's my guide to finding the perfect domain name
Limited Company V Sole Trader
Choosing to form a Limited Company is a preferable route to go down if you think you are going to make a reasonable income out of your venture.
The benefits of a Limited Company are:
Any financial claim insurance or otherwise is made against the company and not against you personally. You have an obligation as the company director to act by the rules and guidelines laid down by Companies House, but these are not stringent and are mainly common sense.
As an example, if one of the products you develop goes unexpectedly up in flames and injures someone then will not be held personally responsible. As a Sole Trader, you could be prosecuted for this.
A Limited Company can purchase “Trader Insurance” which will cover you for public liability and costs around £90 per year.
This is perhaps the main reason for setting up a Limited Company. You will pay less tax using this method because you can choose to take a small salary and pay any other earnings as dividends which are not subject to National Insurance Contributions.
As a Sole Trader, all of your earnings are subject to the NIC rules.
Once your name is registered at companies house, then it is protected by law, and you have redress if anyone tries to use a similar name.
Sole Traders are helpless if anyone else uses the same trading name.
You can choose to form your company online, and there are many websites dedicated to making the whole process very simple. Companies Made Simple have plans starting from just £13.99, and you can register your company name in the way similar to registering a domain name.
You'll probably want to pay around £40 so that you get printed certificates of incorporation. An accountant will charge you around £400-£500 for setting up a Limited company and managing the paperwork on your behalf.
It costs nothing to start trading as a Sole Trader – simply inform the HMRC that you are self-employed and off you go.
At this point, I should mention one of the pitfalls of choosing a Limited Company.
In the UK we have a system of tax credits which means that if you start your company, you can declare a zero income and claim working tax credit. This is far more preferable to claiming Jobseekers allowance when you are starting your own business.
To claim the maximum amount of tax benefit an accountant will run a payroll for you during the year which will provide you with a monthly payslip of around £916 even if you don't physically pay yourself this amount.
This is because the salary can be offset as a loan against future earnings giving you a tax advantage.
However, if you do this be aware that your earnings will be filed with HMRC even though you haven't been paid this amount and it will affect some tax credits you receive.
You can write to the HMRC and explain the situation, but it takes about eight weeks for them to sort it out so be forewarned if that is what you are planning to do.
Should you register for VAT?
If you register for VAT, then you can claim back the VAT on your expenses and capital investment. For example, all of your computer and related equipment is subject to 20% VAT which you can claim back if you are registered.
If you are making product purchases for resale, then you will need to register for VAT. Not doing so will make you uncompetitive in the marketplace because you have a 20% premium on your prices.
The easiest way to deal with VAT is to use Kashflow software which will keep track of all income and expenses and automatically file your VAT return for you. It's very simple.
Appointing An Accountant
An accountant will register your Limited Company and ensure that all the paperwork is filled in correctly. They can also assist you with filing tax returns and dealing with VAT.
If you give your accountant your Kashflow login, they can ensure that the accounts are kept up to date and that you are processing everything correctly. It's well worth the extra expense in my opinion rather than trying to manage it all yourself.
So that's how to set up your company. Want to add anything or have any questions? Ask away in the comments.