If you’re starting a business in the UK, your company will likely be an SME. According to The Federation of Small Business, there were 5.5 million small or medium-sized businesses in the UK in 2022, accounting for 99% of UK businesses.
But SME is one of those acronyms you often hear and might not know what it stands for. And even if you know its definition, it can be tricky to determine what constitutes a small and medium-sized enterprise or why they’re important.
Luckily we’re here to help. We’ve compiled everything you need to know about small and medium-sized enterprises, from unpacking the meaning of SMEs and their importance to the UK economy to a step-by-step guide to starting your own UK business. Plus, we’ve thrown in some tips and resources for good measure.
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What is an SME?
SMEs are small and medium-sized enterprises that exist across many sectors. It’s an umbrella term that covers a wide range of businesses that differ fairly vastly in scale. An SME can be a single-person business up to companies that employ hundreds of staff.
SMEs are sometimes referred to as SMBs (Small and Medium-sized Businesses), but the preferred and more commonly used acronym is SME.
There are a couple of official definitions from different governing bodies and legislatures in the UK. The good news is that the definitions are pretty straightforward.
UK and EU Official Definition of an SME
The UK and EU SME definitions are broadly the same and only differ in the number of paid employees an SME can have (EU 250, UK 500). Beyond that, both bodies break SMEs down into three categories: micro-businesses, small businesses and medium businesses:
| Size | Number of Employees | Turnover/Balance Sheet |
| Micro Business | 0-9 employees | Less than or equal to *€2 million |
| Small Business | 10-49 employees | Less than or equal to €10 million |
| Medium Business | 49-249 (EU), 49-499 (UK) employees | Turnover less than or equal to €50 million or a balance sheet of less than €43 million. |
*The UK still uses euros to determine turnover.
Companies House Act 2006 Definition of an SME
While the EU/UK SME definition is generally accepted, it differs from the Companies House Act 2006. Knowing and understanding both definitions is important as your business definition dictates how you file your annual accounts with Companies House.
The 2006 act breaks SMEs down similarly to the EU definition: micro entity, small company and medium-sized company. Here are the parameters for the different types of businesses:
| Size | Employees | Turnover | Balance Sheet |
| Micro Entity | No more than 10 employees | No more than £632,000 | No more than £316,000 |
| Small Company | No more than 50 employees | No more than £6.5 million | No more than £3.26 million |
| Medium-sized Company | No more than 250 employees | No more than £25.9 million | No more than £12.9 million. |
Why are Small and Medium-Sized Enterprises Important?
SMEs are always in the news. Almost every day, there are stories about the number of SMEs starting or receiving funding. So why is there so much focus on SMEs?
The simple answer is that they are integral to the UK’s financial fabric and economic development. SMEs account for 99% of the nation’s business population and are key economic growth drivers.
Here are just some of the ways that SMEs drive the economy:
- Employment generation — SMEs create diverse job opportunities across various sectors.
- Spur innovation — SMEs often introduce novel products, services and business models.
- Regional development — Small and medium-sized businesses are often local businesses and contribute to local growth
The importance of SMEs goes beyond just their economic distribution. They are also crucial for boosting the variety of the UK’s business landscape and encouraging competition.
Examples of UK Small and Medium-sized Businesses
Given the UK’s diversity and number of SMEs, it can be tricky to picture what an SME is. SMEs operate in various sectors, from tech and manufacturing to hospitality and retail. To illustrate, here are a couple of examples:
- Brewdog — Brewdog is a craft beer company that began as a small enterprise in Ellon, Scotland. With its unique and flavourful beer, Brewdog has transformed into a global brand and completely changed the UK beer market. Brewdog is a fantastic example of an SME that scaled quickly and competes with larger businesses.
- The Cambridge Satchel Company — This company was founded by Julie Dean and her mother, Freda Thomas, at their kitchen table with a tiny budget of £600. The company’s handcrafted leather satchels became a sensation with celebrities and influencers among their customers. It’s a brilliant example of the power of digital marketing and e-commerce for SMEs.
These are just two examples of the 5.5 million SMEs in the UK. They both show the massive potential for small and medium-sized businesses to break boundaries and succeed.
How to Start a Small or Medium-Sized Business in 5 Steps
Now that you’re up to speed with everything you need to know about SMEs, you might wonder how to start one. The good news is that starting an SME is no different to starting any other business. Most people who register a company are starting an SME even if they don’t realise it.
Starting your own small business is an exciting journey. You’ll find new opportunities and face challenges along the way, but it’s an incredibly rewarding experience. Here are the five key steps to starting an SME in the UK:
Step 1: Develop Your Business Idea
Every business venture starts with a spark of an idea. It could be something you’ve been thinking about for a while or something that’s recently sprung to mind. Your business idea will form the backbone of your business, so it should address a need or gap in the market.
If you want to start an SME but don’t have an idea yet (or you’ve got loads), think about your passions and strengths. What makes you tick? Starting your own small business is exciting but not without its challenges, so passion is crucial. Think about how you can translate something you’re passionate about into a thriving business.
Once you’ve got your business idea, you need to ensure it’s a good one. Research your market and look at market trends to validate and gauge your idea’s potential.
Step 2: Create a Business Plan
Once you’ve got a solid business idea, you must start developing it and strategising for success. There are so many businesses that have an amazing concept but still fail, and often, it comes down to a lack of planning.
Unsurprisingly, this is where a business plan comes in. A well-constructed business plan is a blueprint for your success. It will cover the following:
- Your business concept
- Market analysis
- Organisational structure
- Marketing and sales strategies
- Financial projections.
Your business plan will serve as a roadmap for success. It will guide your business’s growth and help you to navigate potential challenges. It also comes in pretty handy if you’re looking to attract potential investors.
Step 3: Choose Your Business Structure
Picking the right business structure is a vital decision that will impact how you run your business. The structure of your business will affect the following:
- Your tax obligations
- Personal liability
- Regulatory requirements.
There are lots of different business structures in the UK, but there are three primary structures:
- Sole traders — As a sole trader, you’ll have complete control of your business, but you’ll have total personal liability for any business debts.
- Partnerships — Partnerships give you the chance to start a business with someone else and share the responsibilities and rewards
- Limited companies — A limited company is a separate legal entity which provides you with legal protection against personal liability.
Each structure has its pros and cons, so it’s crucial to research each and determine which one aligns with your business goals.
Step 4: Register Your Company
Once you’ve picked your business structure, you must register your company. This registration process varies depending on your chosen structure, but generally, it involves registering with either Companies House or HMRC (or both).
For example, if you’re setting up a limited company, you’ll need to register your company with Companies House. This is a relatively straightforward process, and you’ll need to provide the following:
- Your company name
- Business address
- Details of directors and shareholders (this can just be you).
Once you’ve registered your company, you’ll need to personally register for Self-Assessment Tax returns.
Step 5: Build Your Business
With a solid plan in place and the official paperwork all sorted, you’re now ready to start building your business. This is where the fun and the hard work begin. It involves a lot of activities, from building a strong team and developing a brand identity to implementing your marketing strategy and developing new products.
You’ll undoubtedly face challenges as you grow your business, but if your business idea is good and your plan is thought out, you’ll be well placed to face them head-on.
Tips and Support for Running Your SME
Few experiences compare to being a business owner and running your own SME, but it can sometimes be challenging. There’s no way to prepare for absolutely everything, but there are some things you can do:
- Keep learning — The business world is ever-changing, so stay ahead by learning about industry trends and developing your skills. You can do this by attending workshops, reading industry publications and networking.
- Build a strong team — Initially, your team will be small, but as you grow, they’ll become your biggest asset. Hiring the right people, helping them to grow and developing a positive work culture can be a massive boost for your business.
- Seek support — When you’re running a business, it’s easy to feel like it’s you against the world. But it’s not. Don’t be afraid to seek help when you need it. There are tonnes of resources and support available for SMEs. Whether it’s advice on managing your finances, help navigating regulations or assistance securing finance, a huge amount of support is available.
Start Your SME Today with Mint Formations
Starting an SME is an exciting adventure, and here at Mint Formations, we can’t wait to help you get started. Alongside helpful guides like this one, we provide a huge range of business services perfect for SMEs, from VAT registration to virtual office addresses.
But our main focus is helping business owners register their companies. Registering with Companies House can be complicated if you’ve never done it before.
Our company formation services make it simple.
From just £12.99, we can register your company correctly and ensure you start your SME journey the right way.
Explore our company formation packages today and take the first step to starting your SME. If you have any questions along the way, feel free to get in touch with us. We’re always happy to help.
