There is a wide range of different legal issues you should think about when starting a business. Getting things set up the right way from the outset can help you avoid a lot of potential problems. Areas to consider include:
Drawing up standard terms and conditions making it clear what your customers are agreeing to when they buy from you. These can provide important protections, for example if your customers fail to pay for goods or become insolvent.
Employment contracts for any employees. As a minimum, you are legally required to provide a written statement to any employee being employed for a month or longer.
Any other contractual agreements — for example, with suppliers, landlords or lenders.
General record-keeping and tax compliance, which you should discuss with your accountant.
Ensuring that you are complying with regulations in areas such as data protection, health and safety, your environmental responsibilities and so on.
There are some restrictions on which business names you can use. For example:
You cannot use a business name containing Limited or Ltd to imply that your business is a company (unless your business actually is a company or limited liability partnership).
You cannot use offensive words.
You need permission to use various sensitive words such as British, Royal and Chartered.
You can get more detailed information on the restrictions from your legal adviser or from Companies House.
More broadly, you need to be careful about using any business name that is similar to one already being used by another business — for example, as their company name, as a trade mark or as a website domain name — particularly if they offer similar products or services to you. If the other business feels that you are trying to take advantage of their reputation, they may bring a legal action against you for ‘passing off’.
To form a private limited company, you (or your advisers) need to file an application at Companies House, together with a small fee. The application includes:
The proposed name of the company, its registered address, and who the directors will be.
A ‘memorandum of association’ giving the names of the shareholders who are forming the company.
The ‘articles of association’ setting out how the company will be run (for example, how decisions will be made).
Unless you are going to be the only shareholder and the only director, you need to think carefully about how the company will be run and what rights each individual will have.
If you are setting up the business with someone else, you need to anticipate how decisions will be taken if you disagree and what you will do if you no longer want to work together.
If you are looking for outside investors, they will normally want protections to ensure that they are treated fairly: for example, restricting how much you can pay yourself and what decisions you can take without their agreement, and giving them the right to nominate a director. But at the same time you will not want to accept unreasonable limits on how you manage the company.
You should talk through the key issues with any business partners or investors, and take advice on what agreements you need. While some restrictions can be included in a company’s articles of association, you may well want a separate shareholders’ agreement as well.
This can cause problems, so you should take immediate steps to put things right.
By simply starting a business, without for example setting up a private limited company, you automatically become a sole trader or a partner in a traditional business partnership. Amongst other things, this means:
You need to make sure you are keeping proper business records. You also need to register with HMRC so that you can complete the right tax returns and make the right tax and National Insurance payments. You may also need to register for VAT if your turnover is above the VAT threshold.
If you are working in partnership, then you are doing this without any formal agreement between the partners. In particular, each partner is entitled to an equal share of the profits whether this is what you intended or not.
You are personally liable for any business debts.
It is possible to change your business form — for example, forming a private limited company to take over your business — though there may be tax consequences. You should take advice on what the best options for your particular circumstances are.
Setting up a private limited company is not the only option for starting a business.
If you are starting a business on your own you can consider setting up as a sole trader. This means that you personally are in business, without needing a separate business structure like a company. Setting up as a sole trader is an option even if you have employees, as long as you are the only owner of the business.
Or, if you are starting a business with other people, you can set up a traditional business partnership. Each partner is self-employed and is entitled to a share of the partnership’s profits — but also responsible for any business debts.
Alternatively, you can form a private limited company or a limited liability partnership (LLP). LLPs operate in a similar way to a business partnership, but the individual partners have more protection against being liable for business debts.
Each type of business structure involves different costs, paperwork, tax implications and levels of personal risk. For example:
Self-employment is a common choice for small businesses, often with no other employees. Setting up as a sole trader (or business partnership) is relatively inexpensive and straightforward. But you are personally liable for business debts if the business goes badly.
A private limited company is the easiest business structure to use if you want to raise money from outside investors. Forming a private limited company does incur some costs and additional paperwork. But a company provides some protection against personal liability and can offer tax planning opportunities at higher income levels.
LLPs tend to be more expensive to set up, and have the same sort of paperwork requirements as private limited companies. LLPs are usually used by businesses that are legally required to operate as partnerships (such as accountants and solicitors) or for more complex tax planning strategies.
You should take advice on the right choice for your particular circumstances and business plans.
Setting up as a sole trader is the simplest way of starting a business. You simply advise HM Revenue & Customs that you have decided to start a business as a self-employed sole trader.
For relatively small businesses, particularly if you will be working on your own, setting up as a sole trader helps you keep administrative costs and paperwork to a minimum. Being self-employed can also help minimise the total National Insurance contributions you have to pay.
Against these advantages of being a sole trader you need to be aware of several potential drawbacks:
You are personally liable for your business debts. If the business runs into difficulties, your personal savings and assets could be at risk.
Some business customers are reluctant to deal with sole traders in case of tax complications — for example, if HMRC decides that the sole trader should be treated as an employee of that business.
Some customers prefer to deal with private limited companies, as they perceive them as being more substantial than a sole trader.
Your options for raising money to finance the business are relatively limited. You cannot sell shares in the way that a private limited company can.
It can be more difficult to sell your business as a sole trader, particularly if it is heavily reliant on you.
If you do decide that setting up as a sole trader is right for you, you have the option to form a private limited company later — as your business grows and your circumstances change.
The costs of simply forming the business are low. For example, setting up as a sole trader can be done without any costs just by informing HM Revenue & Customs. If you want to form a private limited company (or a limited liability partnership) you can choose to do this yourself on payment of a small fee to Companies House, or ask your solicitor or accountant to do this on your behalf.
In a wider sense, of course, starting a business can involve wide-ranging costs. Initial costs may include premises, equipment, furniture and fittings, vehicles, insurances, raw materials or stock, professional advice and so on. You are likely to need to pay overhead costs such as salaries and utility bills, while it may take some time to build up sales (and receive payment for them).
If you need to raise money to help cover the costs, you should take advice on the best options and implications. In particular, you should take advice if you are asked to give a personal guarantee for any loan (or other contractual agreement).
If you form a private limited company or a limited liability partnership (LLP), the new business is registered at Companies House as part of the process. You will then need to keep up to date with various requirements, such as filing annual returns and letting Companies House know about any change of directors. There isn’t a similar registration process for sole traders and traditional business partnerships.
Whatever form your business takes, you will be responsible for ensuring that you are registered with HM Revenue & Customs, are keeping proper records, filing the required returns and paying taxes. You should take advice from your accountant on the requirements in terms of self-assessment or corporation tax, PAYE and VAT.
Depending on what your business does, there may also be additional registration requirements. For example:
Food businesses need to register with their local authority and businesses supplying alcohol need a licence.
Businesses that pose particular health and safety risks may need to register with their local authority or the Health & Safety Executive.
Businesses involved in potentially polluting activities may need a permit from the Environment Agency.
You can get guidance on registration requirements for your business from your trade association or legal adviser.
While it is not required, you may also want to consider how to protect any intellectual property. For example, registering a trade mark covering your business or brand name helps protect you against other businesses using the same or similar names for related products. Registering a design helps prevent competitors from selling products with the same look or appearance.
Before buying a business or taking on a franchise, you need to be absolutely clear about what you are getting. For example, you need to know:
What equipment, premises or other assets you are buying.
What business debts and other liabilities you are taking on — for example, if any equipment is leased — and what you will need to do about transferring these.
Whether you will be taking on any employees as part of the business, and what their contracts and rights are.
What other contracts the business has — for example, with suppliers — and how these might be affected by the change of ownership.
Any restrictions or responsibilities you are agreeing to as part of a franchise agreement.
It is essential to have a properly drafted contract setting out exactly what you are buying, for how much, and what responsibilities you are taking on. You may well also want an accountant’s report to ensure that the business assets and liabilities are clearly detailed.
In terms of choosing whether to trade as a private limited company or another business structure, this will depend on the circumstances. For example, you might be buying the shares of a private limited company, buying particular assets from a business, or starting a new business to take on a franchise. You should take advice as there can be important tax and legal implications.
A traditional business partnership. Each partner is self-employed and entitled to an agreed share of the partnership’s profits. Each partner is also potentially liable for the business debts of the partnership.
A private limited company. Each of you can be a shareholder and/or a director of the company. This is a flexible option, as you can decide whether to have equal shareholdings or not, how decisions will be taken, and so on. It also provides some protection against liability for business debts (unless you personally guarantee them).
A limited liability partnership (LLP). Like a limited company, this needs to be registered at Companies House and offers some protection against personal liability. But partners are generally taxed on their share of the partnership’s profits as self-employed rather than employees.
Whatever form you choose, you should have a formal, written partnership agreement (or shareholders’ agreement for a private limited company). Among other things, this should cover:
How much capital each partner will contribute, and what share of the profits they will be entitled to.
What each partner’s duties and responsibilities will be, and how decisions will be taken.
How new partners can be brought into the business partnership.
What will happen if a partner becomes ill, dies or wants to leave the business.
It makes sense to think through all the practical issues in advance, to minimise the risk of disputes and make it as easy as possible to resolve them.
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