Saying you’re a startup business has a certain appeal – it’s trendy to pop in a LinkedIn post, and an ultimate icebreaker at networking events. But being a ‘startup’ simply means your company is in its first stages of business – and it comes to a point where that’s no longer the case.
So, how do you know when you’re no longer a startup business?
While there’s no clear-cut answer, there are a few tell-tale signs that we’ll discuss in this blog – along with important things to consider as your business begins to grow.
In short, a startup is a business in its first stages of operations.
They are usually set up by diligent entrepreneurs who have found a gap in the market to develop a product or bespoke service they believe will make a difference. Or in other words, create high demand.
Founders can fund their business from a variety of sources, such as loans, crowdfunding campaigns, applying for business grants, or investment. Finding capital for a business can be tough, involving lots of hard work marketing prototypes or highlighting services as well as pitching to investors.
The initial stages are the most crucial, and unfortunately many businesses don’t make it past this point – which is why if you are a startup, you should get as much help as you possibly can.
There are some things you can measure that’ll give you a good idea as to whether you’re still a startup, such as your profitability or market awareness.
Are you still in the prototype stage?
When you first start your business, you’ll likely create prototypes (if it’s products you’re selling) or have a particular service you’re trialling.
If everything has been trialled and tested, and your products/services are out in the market – being bought by customers – it could be an indication you’re past the startup phase.
What is the scale of your company?
The ‘scale’ of your company is a vague term, but you can often break it down into:
- The amount it earns
- How many employees you have
- How long your business has been going
This can be subjective depending on how you operate and the type of industry you’re in, but if you’ve surpassed all your initial goals in terms of the size of your company and revenue, you may be past the startup stage.
What is the status of your profitability?
With this you can look at:
- Your revenue minus expenses
- Efficiency and investment returns
This then leads you to your net income, which is the amount your business has made, after deducting any costs, allowances, or taxes. If it is looking good, it’s likely you’re no longer a startup!
What does your team look like?
If you started your business alone or with a small team, but now have multiple departments (even if some of them are single-person!) – your business has gone from its ‘experimental’ stage to one with a clear structure.
This means your business is much more official, likely with policies in place, and company procedures (usually due to its size) – making you an organised bureaucracy. A structure like that could be a clear sign to drop that startup label!
If your business has grown, there are things to consider. For example, you may have new tax obligations if you earn over a certain threshold, or your current business structure may not be as tax-efficient anymore.
If you’re no longer a startup you should take a look at:
Switching from a sole trader to a limited company
If you’re no longer a startup, it could be more tax-efficient to switch your sole trader business to a limited company. Sole traders typically pay 20% – 45% income tax depending on how much profit they’ve made, whereas a limited company will pay 19% – 25% Corporation Tax on its profits.
You can then pay yourself a smaller salary as director of the company, and another portion in dividends which have a lower income tax rate than a salary would!
It’s also worth noting that operating as a limited company means ‘limited’ liability, which can be a safer option as you grow. Keeping you and your business as separate legal entities means that things like business debts won’t be seen as your personal debt if anything goes wrong.
Preparing yourself for VAT
If your taxable turnover is approaching £85,000 in a 12-month period then it may be time to start thinking about registering for VAT.
If you’re unfamiliar with VAT, it stands for Value Added Tax – a type of consumption tax added to the sale of some products and services. The VAT rate you charge on your sales depends on what you’re selling or providing, with some items completely exempt from VAT being charged. If you happen to be a VAT exempt business, you won’t need to register.
Registering for VAT is fairly straightforward, and means you can potentially claim back the VAT your business has paid on the products and services it buys. Just make sure you keep good VAT records!
If you’re past your startup phase, you’re likely now a ‘scaleup’. This means you’ve past your initial launch stage, and now have a growing business with a profitable product or service.
Your next stage will be focusing on growing your business to its full potential, which is exciting! While this next stage is still difficult, and your business may still feel completely new, you have experience behind you to keep going and focus on your goals.
Remember to ensure your business is always staying tax-efficient, and claiming expenses where it can – which good bookkeeping software can help you with!
If you need help with your bookkeeping as your business scales up, create an account with Pandle today for free!