How to take the plunge

Setting up your own business? Sarah Jagger looks at what you should do to avoid joining the one in two start-ups that end in failure

MANY of us dream of running our own business. But setting up on your own carries a health warning: it can ruin relationships and your bank balance.

According to Dun and Bradstreet, the business information company, only half of the 500,000 people who start up a business every year are trading after four years. The most common reasons for failure are lack of planning, running out of money and not doing enough market research.

But it's still a tempting challenge. If you think you've got what it takes, spend some time thinking about how to set up the business. There's a lot of free help and encouragement available. (see box). Make the most of it before you take the plunge.

Many banks offer specialist services for small businesses and have a network of advisers. Check which of them suits you best. Lloyds Bank Business Banking, for example, offers discounted banking for three years for business start-ups, plus a selection of extras including a free bookkeeping system (worth pounds 75).

When you approach a bank for finance, it will want to see a cash-flow and profit forecast and a business plan.

At its most basic, a business plan sets out the objectives for your company and how you intend to meet them. All of the main banks provide useful start-up packs. Don't be shy about getting help with the paperwork. Show the plan to an expert - for example, an adviser at your local Business Link - before going along to a bank.

The upside of running a business is that you'll become self-employed. There are consid- erable tax advantages in being self-employed and it is usually worth calling on the services of an accountant to take full advantage of the rules. Choose an accountant carefully. Check that he or she has the the letters FCA or ACA. For tax advice, look for the letters ATII or FTII denoting members of the Chartered Institute of Taxation.

For more information and useful booklets on choosing accountants, contact the Institute of Chartered Accountants in England and Wales on 0171 920 8100.

Self-employed people do not have income tax deducted at source. Usually you produce a profit and loss account for the Inland Revenue and pay tax under Schedule D in two half-yearly instalments. The accountant's fee is normally allowed against tax. As soon as you become self-employed you should inform your local Contributions Agency and tax office. Ask for form CWF1.

You'll also pay National Insurance contributions at class 2 and class 4 rates. Class 2 is a flat- rate weekly payment of pounds 6.35. You can pay quarterly by cheque or monthly by direct debit. Class 4 is paid along with your tax bill, and is 6 per cent of earnings between pounds 7,310 and pounds 25,220 a year. You need to let the Department of Social Security know that you are self-employed. Your local office will be able to help.

Once your business turnover is more than pounds 50,000 (1998-99) you'll need to register for value added tax (VAT). Contact your VAT business centre listed in the phone book under Customs & Excise. You can also register if your turnover is lower than this; it means that you can reclaim VAT on things like phone bills, computers and stationery.

Many people start their business at home. A certain proportion of running costs such as maintenance, heating and lighting may be tax deductible. But you need to consider the effect on the rest of your family and on your life; you will have to be disciplined both in terms of getting down to work and stopping at the end of the day.

If you are using your spare bedroom as an office your council tax isn't likely to be affected, but if you are running an office and employing staff you may have to pay business rates. If you are a tenant check that there's nothing in your lease to stop you running a business from home, and if you are a borrower check the terms of your mortgage.

Your home contents insurance policy may cover your equipment and public liability if you work from home. Direct Line insurance, for example, will cover computer equipment and faxes up to pounds 5,000.

"You must tell your insurer you're working from home," says Gill Murphy of Direct Line. "Otherwise you could find that your insurance is invalid."

q Sarah Jagger is a staff writer at 'Moneywise' magazine.

Where to get help with your business idea

q Business Links & Training and Enterprise Councils (TECs) run courses for people setting up their own businesses and can help you with your finances and record keeping. For details of your nearest Business Link in England call 0345 567765; in Scotland the Business Shop Network is on 0800 787878; in Wales call Business Connect Wales on 0345 969798; and in Northern Ireland contact the Training and Employment Agency on 01232 257793. For details on TECs contact your job centre, local library or see your telephone directory.

q Enterprise agencies give advice on key areas of setting up and running a business, including business planning and training. For details contact the National Federation of Enterprise Agencies on 01234 345055.

q The Prince's Youth Business Trust/LiveWIRE. These two organisations offer help and advice especially to young people. The trust can provide advice and may give loans or grants. Telephone 0171 543 1234. LiveWIRE is supported by Shell UK and provides free local advice, information and business support to people between 16 and 30. Telephone 0345 573252.

q The Federation of Small Businesses. The FSB is the largest campaigning pressure group promoting and protecting the interests of the self-employed. It provides a 24-hour legal helpline for its members, as well as a leaflet for anyone considering becoming self-employed. Membership costs pounds 60 a year for a sole trader. Call 01253 72091.

q The Department of Trade & Industry. A Guide to Help for Small Firms (reference URN97/525) is published by the DTI and contains a helpful overview of government and other schemes designed to help small businesses. It includes information on sources of help, business services, financial assistance and useful contact addresses. You can get a copy from DTI Small Firms Publications on 0171 510 0169.