Enterprise Ass 1

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James Whittlesea BA Hons Enterprise Assignment 1 January 2011

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BA Honours in Creative Music Production

Enterprise

Introduction

This is a report into the start-up of a recording studio and record label

business. There are already pre-existing premises for the business and

10,000 in the bank but another 5,000 is needed.

Relevant European and UK legislation related to the setting up and

running of a business

When setting up a business one of the first things you need to do is to choose

your legal structure. This means you have to have to decide which type of

business you are going to be in the eyes of the law and tax office. Stokes and

Wilson (2006) give the four main legal forms possible for a small firm as sole

trader, partnership, limited company or co-operative (Stokes and Wilson,

2006 pg.239). When starting a business on your own you can start it as a

limited company or as a sole trader. When starting the business with other

people you can start it as a limited company, partnership or a co -operative.

It is relatively easy to set up a business as a sole trader as you dont need to

pay any registration fees but you do need to register with HM Revenue &

Customs (HMRC) as being self-employed. Being a sole trader means you get

to make all the decisions and run the business how you want to run it. One

positive of being a sole trader is that you get to keep all of your profits; profits

are taxed as income and national insurance contributions have to be paid on

them too. One of the disadvantages is that you are personally liable for the

business. This means that any debt run up by your business is your debt and

you can lose your home and other assets if you r business is failing (Business

Link http://goo.gl/LYG6A accessed 20 /1/11). Annual self-assessment tax

returns must be completed and sent to HMRC and records of income and

expenses must be kept. If the business name is different from your own then

you should show your full name and address as proprietor on all of your


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business stationery (Baxter, 2010 pg.2). Appendix 1 shows advantages and

disadvantages of being a sole trader.

Entering into a partnership is similar to that of the sole trader but there is more

than one of you. Liability is now shared between each partner and creditors

can take any partners personal assets to pay off the company debts, even if

another partner runs up the debts. Self -assessment tax returns should be

completed for each partner as well as the partnership itself. In partnerships

exist the two terms jointly and severally liable. Jointly liable means each

partner is equally responsible for paying off the whole debt and severally

liable means that each partner is responsible for paying the whole debt. In

England, Wales and Northern Ireland partners are jointly liable; in Scotland

they are jointly and severally liable (Business Link http://goo.gl/s21Hf

accessed 20/1/11). Appendix 1 shows advantages and disadvantages of

forming a partnership.

If you wish to protect your self from liability you can set the business up as a

limited company. This means that the company is the legal entity and the

finances of the company are separate from that of the owners. This doesnt

mean that you are entirely safe though as you can still lose a ny money

invested in the business and directors may have to give a personal guarantee

to secure external finance (Business Link http://goo.gl/OjzKAaccessed

21/1/11). There are three main types, private limited companies, public limited

companies and private unlimited companies. Limited companies are not as

easy to set up and you need a solicitor to help you set it up. The setting up

involves registering the company with Companies House and drawing up a

memorandum and articles of association. This is basically the details of the

business including the company name and address, objectives of the

business, nominal capital, limitation of liability, names of members and their

share of equity, powers of directors and the voting rights (BAXTER, 2010

pg.4). The accounts for the company have to be externally audited and th ese

too have to be sent to Companies House where t hey are kept on public

record. People can be put off starting a limited company because of the

amount of administration that there is to do and the cost. This can be


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lessened though by buying a business that has already been registered and

set-up legally. Appendix 1 shows advantages and disadvantages of forming a

limited company.

The final business type mentioned above is a co-operative. A co-operative is

a business that is owned and controlled by the employees who work in it.

Because it is owned by the people working in it it is often found that the

emphasis is on the work environment and not the accumulation of individual

wealth (Stokes and Wilson, 2006 pg.307). There has to be a minimum of

seven people to form a co-operative so it is not of any use to this business.

Currently the plan is to have just one person working for the business but this

is likely to change with growth. When employing people there is employment

legislation that should be conformed to and this will include pay, minimum

wage, employment contracts and conditions, flexible working, sickness

absence, time off and holidays and working hours

(http://www.direct.gov.uk/en/Employment/Employees/index.htm accessed

23/1/11). Once you start employing people you need to inform the HMRC if

they are earning enough to pay tax or National Insurance, have another job or

are receiving employee benefits, so that the correct tax is being paid. You

also need to register if you are running a one -person limited company, as you

are an employee of the company (http://goo.gl/4bk64 accessed 23/1/11).

Current and relevant government policies and initiatives supporting

SMEs

Small and Medium Enterprises are enterprises that employ 249 people or

less. This can be broken down further into further categories as shown by this

table produced by the European Commission (EC).

Enterprise category Headcount Turnover or Balance sheet total

medium-sized < 250 50 million 43 million

small < 50 10 million 10 million


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micro < 10 2 million 2 million

(http://ec.europa.eu/enterprise/policies/sme/facts -figures-analysis/sme-

definition/index_en.htm accessed 7/1/11 )

Figures published by the UK Department for Business Innovation and Skills

(BIS) in 2010 show that in 2009 there were in excess of 4.9 million enterprises

in the whole UK economy and SMEs accounted for 99.6% of them. SMEs are

extremely important for the economy as there are so many of them and they

constitute 48.5% of the UKs employment. Stokes and Wilson (2006) state,

the small business sector has become of such economic and social

significance internationally that its development can no longer be left to

chance (Stokes and Wilson, 2006 pg.154). The government has many

different policies and initiatives to encourage growth in this sector because of

the importance of them. These are categorised into three main areas by

Stokes and Wilson (2006 pg.154):

y Financial Assistance

y Lightening of Tax and Administration Load

y Information and Advice

Financial assistance includes helping businesses start -up as well as develop.

One such initiative that is relevant to this is the Enterprise Finance Guarantee.

The EFG is a loan guarantee scheme aimed at facilitating additional bank

lending to viable SMEs with no or insufficient security to secure a normal

commercial loan. (www.bis.gov.uk/policies/enterprise-and-business-

support/access-to-finance/enterprise-finance-guarantee accessed 7/1/11).

This scheme is relevant to this business as it is a viable business but neither it

nor the owner lack collateral that a bank would require to enable them to lendmoney. Commenting on the EFG in Music Week - Government Helps

Companies Access Finance, Ashton (2011) reports that the business minister

has put in place a series of new features which will help music companies

access this finance and other kinds of incentive packages


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(www.musicweek.com/story.asp?sectioncode=1&storycode=1043744

accessed 12/1/11)

To encourage entrepreneurship and support SMEsthe government has a

variety of tax reliefs and allowances. Business Link

(www.businesslink.gov.uk/bdotg/action/detail?itemId=1073791420&lang=en&

site=101&type=RESOURCES accessed 12/1/11) lists these as:

y Regional Employer National Insurance contributions (NICs) holiday for

new businesses

y Capital allowances available to all businesses

y Equipment lent to employees

y Tax relief and credits for research and development

y Enterprise investment scheme providing tax relief for investors

The most useful of these is the ability to claim for capital allowances. A capital

allowance means that you can claim money back against equipment that you

buy for use in your business. This is extremely useful for setting up a

recording studio as you will be able to claim money back on essential

equipment such as microphones, and mixing consoles. It also allows you toclaim back money on equipment for your business that you already own. The

advantage of this is that when setting up a recording studio you are likely to

already own some of the equipment needed. Currently the main rate for

capital allowances is 20% but this will reduce to 18% from April 2012 in

accordance with the Government Budget 2010(appendix item 2). The budget

also outlines a reduction in corporation tax from 28% to 24% over 4 years

from April 2011, although this would only be useful for this business if it is

decided to set it up as a limited company.

Another of the above allowances that could be useful is that tax and NIC are

not payable on equipment that is lent to employees. This allowance could be

used, in the case of the recording studio, to equip staff (if or when any are

hired) with computers to enable them to do some work at home.


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The NIC holiday is aimed at certain regions of the country to encourage

businesses to start up there. Unfortunately the South East is not one of these

regions and so it is not of much use to this business.

Bureaucracy and red tape is a problem to SMEs so the UK Government policy

is to try and remove as much as this as possible.One such policy is the Better

Regulations Policy, which the BIS states as being the governments

commitment to simplifying existing regulations in the UK and reducing the

administrative burden they place upon businesses

(www.bis.gov.uk/policies/better-regulation/policy/simplifying-existing-

regulations accessed 11/1/11). Administrative burdens can be something as

simple as having to fill in lots of forms for a simple task, which may end up

costing the business money. Another policyis the Think Small First policy.

This policy aims to cut red tape by making sure that any legislation takes into

account the interests of SMEs early in the process so that the legislation is

SME friendly. The Think Small First policy also encourages government

bodies to utilise SMEs to get value for money. In 2005 the Office of

Government Commerce published a booklet entitledSmaller Supplier Better

Value?giving guidelines as to how to make use of SMEs in areas such as

public sector contracting. As well as red tape from the UK Government there

is also worry over legislation and regulations f rom the EC. To combat this the

EC set up the SME Task Force to scrutinize EC measures for any adverse

effects on the small business sector(Stokes and Wilson, 2006 pg.158).

Stokes and Wilson (2006) give examples of how legislation is adapted for

small businesses; being exempt from some responsibilities of the Disability

Discrimination Act (DDA) (1995) if they have less than 15 employees and

businesses with less than 5 employees do not have to have a written safety

policy for the Health and Safety at Work Act (HASWA) (1974). These policies

are relevant to setting up a recording studio and record company as in a

recording studio you have to work with the public and they will be on your

premises so you must comply with a lot of regulations including fire

regulations and those already mentioned above.


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The final area of the three specified by Stokes and Wilson (2006) is

Information and advice. The foremost service for this is Business Link, which

is a government-funded service that offers advice and guidance to businesses

in England. The service provided by Business Link is extremely

comprehensive and covers every aspect of business but they also have

specific sections of knowledge for starting up or growing a business. Scotland,

Wales and Northern Island each have their own equivalent of Business Link.

The personal qualities and qualifications needed to succeed as an

entrepreneur in the music sector

When starting up a record label and recording studio there arent any

particular qualifications you need although having studied the music industry

will be a huge advantage to you. What are more important are your personal

qualities.This is a list of traits that are thought of as useful/essential for

becoming a success entrepreneur:

y Energetic y Resourceful

y Creative y Likeable

y Competent y Innovative

y Shrewd y Positive

y Ruthless y Diplomatic

y Likeable y Charismatic

y Self Belief y Visionary

y Opportunistic y Practical

y Bold/Brave y Responsive to criticism

y Determined y Decisive

y Adaptable y Confident

y Good timekeeper y Risk Taker

Although the above are widely regarded as being vital to be a successful

entrepreneur Delmar (2000) does not think this is 100% accurate.


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A large number of traits or characteristics have been proposed to

describe entrepreneurs. With the exception of the need for achievement, the

results have been poor and it has been difficult to link any specific traits to

entrepreneurial behaviour.(Delmar, 2000 pg.145)

The above list is a list that is meant to be general to all businesses. One that

should be added to the list with the music business in mind is to be thick

skinned. The music industry, like most industries, can be extremely

competitive and it is also notoriously fickle. Pattenden (2004) notes,

The idiosyncrasies and foibles of the music industry are legion. It wont

take you long to notice that, at parties, far more people than is healthy will call

you mate or babe while simultaneously craning over your shoulder to see if

theres anybody more famous or interesting for them to talk to (Pattenden,

2004 pg.2).

The planning process for starting a new venture

When starting out on a new business venture the first thing you s hould do is

to start planning. You should create a business plan and a strategic plan. A

business plan should contain information about the business including its

objectives, the market for your business, development of the business and

financial forecasts. It is effectively research into your business idea. Most

often people will create a business plan so that they have something to show

the bank manager or potential investors so they can get finance but they

should also be used for the owners benefit to h elp them focus on certain

aspects of the business, structure the business correctly and spot any

problems and pitfalls before they arise. The business plan should also

highlight risks and liabilities and the potential profit and success. The strategic

plan is geared more towards the long-term aims of the businessand where it

is heading. A SWOT analysis should be included to ascertain the Strengths

Weaknesses Opportunities and Threats to the business.

How small businesses can be funded


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Small businesses such as this one can be funded by the following means,

Internal Finance External Finance

y Personal investment y Debt finance

y Business profits y External equity finance

y Leasing/Hire purchase

y Invoice Finance

Internal finance is funding put into the business by the entrepreneur/owner.

Internal finance is nearly always needed especially if you are also going to try

and persuade others to invest money in you. They will want to see you put

your money where your mouth is and show that you have an incentive to

make the business work. Some of the profits from the business will also have

to be invested back into the business for growth.

External finance is finance accessed from outside the company. Typically,

debt finance would be a loan from a bank or an overdraft. Banks normally

require you to have some collateral or assetsto use as security for you to take

a loan out. Proper business plans and cash flow projections are usually also

needed. If the business doesnt ha ve enough security or no financial track

record this is where the Enterprise Finance Guarantee explored previously

would be needed.

For low-level investment such as this business external equity finance can be

acquired from friends, families or other people such as business angels.

Smith (2006) describes these as typically wealthy individuals who have run

businesses of their own and are looking to invest their own money(Smith,

2006 pg.62). For their investment the investor would expect a relevant or pre-agreed share of profits.

Instead of purchasing equipment they need, small firms may prefer to hire or

lease the equipment. This is useful if the initial cost of equipment neede d for

start-up is too high.


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This business has two parts to it, the first being the recording studio and the

second being the record label. When people use the recording studio facilities

the business is going to get a return quite quickly, usually on the same day as

the invoice is issued if paid in cash, but the record label side of the business

will have to wait to see a return as the process of releasing a song and waiting

for any royalties to come back form the various collection societies can be

months.This could be a problem so internal finance is probably going to be

needed by using profits from the recording studio to finance the label.

Barriers to growth and development

Small businesses face constant barriers to their growth. The barriers

themselves change during the life cycle of the business. The report Growing

Pains: What Is Holding SMEs Back? (appendix item 3) published by the

British Chamber of Commerce (BCC) outlines barriers to growth throughout

the life cycle of the business and at certain stages of its life.

Problems faced across the life cycle:

y Risk Businesses constantly take risks from the initial start-up to

employing people. Risk is proportionate to size of business and so

provides a strong disincentive for growth (BCC, 2008 pg.6)

y Access to finance

y Debt finance

y Business support

y Skills

y Tax

y Regulation

(BCC, 2008 pg.6-9)

First 12 months:

y Difficulties accessing business advice

y Availability of premises

y Marketing Skills


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y Availability of credit

(BCC, 2008 pg.10)

Three years in:

y Employment law

y Recruitment difficulties

(BCC, 2008 pg.12)

Expansion Stage:

y Managing expertise

y Cash flow

y Tax and regulation

y Strategic direction

(BCC, 2008 pg.15)

The government policies mentioned earlier in this report are d esigned at

tackling all the above problems to growth but they do not always work. Failure

rates for businesses are high. Viney (2010) tells us one in eight businesses

closed in the UK, last year. A total of 1,100 businesses failed each trading

day, with a total of 279,000(http://goo.gl/4rX6J accessed 23/1/11). He also

states that of businesses that started in 2004 less than half of them were still

operating at the end of 2009. These businesses would have all faced the

barriers highlighted above and the f act that these barriers beat over half of

them shows that there still needs to be more done to help small business es

survive.

Strategies for surviving the early stages of business development andhow management may differ between small and larger organisations

As mentioned above, some of the barriers of development are managing

expertise, cash flow, and strategic direction. These points can be affected by

each other both positively and negatively; get one sorted and it could ease the

load on the others, leave it and it could make the others worse. Getting the


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cash flow sorted out should be a priority as without cash it is extremely hard to

survive.To survive business development it is important that the business is

running well, if the business is struggling then it is best to fix the problem

before expanding as you are just making the problem bigger. One way of

improving cash flow would be to hire a manager. An experienced manager

should be able to help sort out the cash flow and provide management

expertise and strategic direction, all three problems sorted out in one tidy,

albeit at a monetary cost, package. If the cash flow does not allow enough to

employ a manager it may be more cost effective to hire a consul tant who can

set you on the right path to being able to afford a full -time manager. This type

of outsourcing could also be used in other areas of the business,which would

help the business develop without necessarily hiring more staff.

The main difference in management between a small firm and a large firm is

that in a large firm the manager or managers are likely to be in charge of

certain areas of the business and they focus on their own tasks. There will be

a clear distinction between those planning the future of the business in the

longer term, and those implementing the strategy on a day -to-day basis

(Stokes and Wilson, 2006 pg.328). A manager in a small firm, typically an

owner-manager, has to deal with everything behind the scenes and still deal

with customers at the same time.

Political and ethical dilemmas and possible advantages of starting a

business during times of economic uncertainty

Although it may sound counter-intuitive, one of the best times to start a

business is in a recession or time of economic uncertainty. The first of the

reasons is because there is plenty of government help. The government has a

dilemma because when times are hard there are redundancies and this

means more people out of work and needing benefits from the state. To

encourage these people back into work they offer grants and loans for people

to start their own business. This is hard if the government is lacking money,

such as the current deficit of the UK Government,but in the long term it is

better to help people into work than to support them whilst they are not


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working. An advantage of starting a business in a recession is that other

businesses are failing and leaving customers that need to find new places to

buy products and services and people are looking to sa ve money buy perhaps

switching from their old service providers to new ones that can offer better

value for money. It is also easier to get staff to work for you in times of

economic hardship as there are more people looking for jobs and you can pay

them the minimum wage. This is an economical dilemma as it makes

business sense to have low costs but it means your staff may be struggling to

get by on low money.

Conclusion

This report has covered a lot of important topics that should be looked at

when starting a business. It is geared towards the setting up of a recording

studio and record label business and as such I have tried including only

information that can be interpreted as being relevant to this particular

business model. All of the topics could be the subject of individual reports

themselves and as such there may be some information missing that could

not be included within the scope of this report. Where further or more detailed

information is needed I have tried to include it as an appendix. For so me

topics, such as the legal structure of a business, I have only included the

details and possible advantages and disadvantages, as only the entrepreneur

setting up the business knows what may best suit their personal situation.

Bibliography


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Stokes, D. and Wilson, N., 2006. Small Business Management &

Entrepreneurship. 5th

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Business Link, N.D. Register As An Employer[online] Available at: [Accessed 23 January 2011]Business Link, N.D. Tax Advantages For Those Starting Up In Business

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Unpublished

Documents

Enterprise Ass 1