Although starting your business is an exciting prospect, there are a number of tax and legal issues that you have to consider. This section explains how to choose the right legal structure to suit your circumstances, highlights your legal obligations, and outlines other rules and regulations that may be relevant to you.
2. Choosing your legal status
Although starting your business is an exciting prospect, there are a number of legal issues you have to consider. The first is to define the legal status of your business. Your decision affects things like:
- who you have to notify that your business exists
- the amount of tax and National Insurance you pay
- the records and accounts you keep
- the way you make management decisions about the business
- your personal financial liability if the business runs into trouble
Please Note: For any type of business, it is important that you receive professional advice before deciding on the best option for the structure of your business.
If you need some help in working out what type of business you are, this BOSS course should help define the different types.
Sole Trader is where just one person is the owner - the business can, however, also employ other people. There is no (business) registration. Keeping records and accounts is straightforward. And you, the owner, get to keep all the profits.
The disadvantages are that the sole trader is personally liable for any debts that the business has, which can make it difficult to get funding from banks. Also, as a self-employed person, a sole trader is entitled to fewer social security benefits than an employee.
This is when two or more people own the business together and share the risks, costs and responsibilities. Shares do not have to be equal and liability is proportionate.
The disadvantages are that the partners have no financial protection if the business runs into trouble - and you may be liable for your partner’s share of the debts. It is recommended that you consult a solicitor to draw up an agreement so everyone knows where they stand.
A Limited Liability Partnership (LLP) shares many of the features of a partnership but the LLP, not the partners, is responsible for the debts.
In a Limited Company, the business is a separate legal entity and the company’s finances are separate from the personal finances of the owners. This guarantees more protection for the owners and other shareholders who are not liable for the company’s debts.
The business must be registered with Companies House.
Whilst there are a number of advantages, including tax, access to finance etc, there are strict requirements on registration, record keeping and submission of accounts and annual returns to Companies House. Full information is on the Companies House website – follow the links to Start a New Company.
A Social Enterprise is a business in which surpluses are reinvested in the business or in the community. A Social Enterprise can take a variety of legal forms. For more information see our guide set up a social enterprise or ask your business adviser for advice.
3. Your legal obligations
Everyone starting a business has a range of legal obligations. Some of these legal obligations apply to every business, whilst others may be dependent on the nature of your business.
A WORD OF WARNING: Failure to meet these legal obligations could result in a fine or even court proceedings.
Tax, National Insurance Contributions and VAT
- everyone starting a business must comply with all tax assessment, National Insurance contributions and VAT laws
- all relevant information is available from HM Revenue & Customs
- HM Revenue & Customs also provide advice and support. You can register and complete all requirements online
- further information is also available from your accountant and social security office
My “MUST-DO” List
- TAX, including National Insurance Contributions (NIC)
Register online with HM Revenue & Customs as soon as you start your business
- Value Added Tax (VAT)
You must register your details if you exceed the VAT threshold. Visit HM Revenue & Customs for full details and the current threshold levels.
All businesses need to be protected against a range of potential risks by having the correct insurance. The different parts of your business that may need insurance include:
- your premises
- your employees
- your products and services
- your business idea
- your vehicles and equipment
It is up to each business to decide which policies to consider, however, some insurance policies are a legal requirement.
- Employer’s liability – for businesses with employees.
This protects your business from employee claims for costs for any injuries or illness they suffer as a result of working for you.
- Motor insurance – for businesses that use vehicles.
You must make sure you have at least third-party motor insurance. This covers your business’s liability for any damage to property or injuries. You may want to extend your policy to include damage or theft of your vehicles.
- Professional indemnity – protects your business against legal liability for losses suffered by your customers as a result of your mistakes or negligence.
It is a requirement for certain professions such as architects, lawyers, solicitors, accountants and financial advisers, whilst consultants and other professional advisers often choose to take out cover.
Depending on the nature of your business, some other insurances you may wish to consider are:
- public liability
- buildings and contents
- product liability
- employment protection
- goods in transit
- shop insurance
- key man insurance
- money in transit
See our guide insure your business and assets - general insurance for more information and to assess the insurance needs for your business.
Insurance can be a complex area and it is a good idea to speak to an insurance broker to advise you on the right level of cover for your specific business.
To find an insurance broker, visit:
Licences and Regulation
To operate certain types of business you need a licence from your local authority. Businesses that require licences include:
- taxi firms
- street traders
- boarding kennels
- pet shops
- food outlets
- anyone selling alcohol
Many other types of business may also require licences, so check if you need to register or get a licence before you can legally start to trade. Failure to obtain a licence or register with the relevant body may be a criminal offence, so make sure you get advice as early as possible.
Contact your Local Planning or Building Control Office at your local authority for more information.
Depending on the type of business you are starting, you may need to apply for planning permission before you start trading. Changing the use of a building or working from home could both require planning permission, even if you are not changing the physical structure of your premises.
It is always a good idea to check with your Local Planning or Building Control Office for more information.
Remember, it can take some considerable time to get planning permission, so make your enquiries as early as possible. Planning permission may also incur some costs, so make sure you include these in your Business Plan.
Other legislation, rules and regulations
Depending on the nature of your business, there are many other legal guidelines and regulations that you must adhere to. It is strongly recommended that you seek professional advice to make sure you have not missed anything as the penalties can be severe.
Here are some examples of legislation that may affect your business:
- employment law
- Consumer Protection Act
- Financial Services Act
- health and safety law
- Sale of Goods Act
- WEEE Regulations (Waste, Electrical & Electronic Equipment)
- property law
- Trade Descriptions Act
- COSHH Regulations
- food safety law
- Data Protection Act
- environmental laws
- advertising regulations
- trade marks/copyright law
- equality and diversity regulations
- Price Marking Order
- patents/design registrations
- Business Names Act
- electronic commerce regulations
- General Data Protection Regulation
Find out more about GDPR with this handy BOSS course.
Protect your Intellectual Property
Intellectual Property or IP is extremely valuable, but it can be difficult to protect. Like all property, IP can be bought and sold, leased and licensed. IP, however, can’t be seen or touched - it comes from your creativity or intellectual brain-power and is what sets you apart from your competitors.
Protecting your IP is important for your business success.
Some examples of IP include:
- the trade mark – distinguishes goods and services and gives the owner an exclusive right to use the mark to identify their product in the marketplace. It includes logos, business names and straplines
- copyright - protects creators and owners of music, writing, art and photography against unlicensed copying of their works
- patents - if you have an inventive idea, either for a product or a process, you can apply for a patent. A patent protects your idea for up to 20 years and prevents others from making, selling or using your idea without prior permission
- design registration – protects the outward appearance of a product or part of a product, as opposed to its technical function
Remember, you should always get independent professional advice if you are in any doubt about any aspect of your intellectual property.
For detailed information on IP, visit the UK Intellectual Property Office website.
For more information see our Intellectual Property page.
If you haven't already taken this BOSS course about the different types of IP, then you may find it useful to look at now.
4. Legal Action Planner Checklist
It is vital that you meet al your legal obligations when starting a business. Remember, failure to do so could result in a fine or even court proceedings.
Use this legal action planner checklist (MS Word 12kb) to identify the legal requirements affecting your business. Note down the actions you need to carry out to meet your legal and other regulatory obligations.