The prospect of setting up and running your own business is more than a little scary. There are so many things to understand so you can meet your legal obligations. The reality is, however, that in most cases the legal requirements to start a business are quite straightforward.
The legal requirements to start a business can seem quite rigid. But they must be followed to avoid time consuming and possibly expensive complications once you are trading. If you get sorted from day one, you can focus on building your revenue streams.
Business Start Up Rules Are Not Complicated
First things first, don’t assume the business start up rules are complicated – they aren’t.
It can be very overwhelming when trying to comprehend all the legal requirements for start ups. However, once you start tackling things in a logical order, you will quickly understand it’s not difficult.
Whether you are running a modest business or plan to go big, following our start up checklist will ensure you can start trading and be fully compliant.
Lets run through the main points of setting up a business from start to finish:-
Your Business Idea
You might have your business idea and all the details ironed out. Or, you may still be at the planning stage.
Either way, its important to review your business plans with an eye on potential legal issues. If you are new to running a business, there’s a few pitfalls that are all to easy to encounter.
If you don’t know what type of venture you’d like to run, check out our handy guides for some inspiration:-
Business Names
It can be hard to find the perfect name for your business. Once you have found a name you are happy with, it is important to check it won’t cause you any legal problems.
You might not think that your new local business could encounter trademark issues, but it’s important to check your name is not too close to a trademark. Particularly if it’s held by a large brand. The UK Gov Trademark Search will help.
Even something that sounds a little like a well known trademark can create legal headaches. Darlington based business owner Amber Kotrri found this out to her cost. Her boutique, House of Zana, was taken to court by large retailer Zara.
Ultimately Ms Kotrri won her case, but she had to represent herself through a hugely stressful process.
Choose Your Legal Structure
You need to work out how you want to register your business from the start. Changing trading structures too soon after start up will cost time and money.
Your legal structure will affect things such as how you pay tax and VAT, so this is something to consider first. You need to make this decision before you register your business with HMRC.
Here’s the business structures you will need to consider:-
Setting Up a LTD Company
Limited Companies are a popular legal structure in the UK for small and large businesses. It is often chosen due to the professional status it offers but there are many other important benefits.
- Financial security in the event of running into difficulty. The business is considered separate from the owners which offer a great deal of financial protection. Any legal action or debts will only affect the company rather than its directors.
- Being a Limited Company sounds professional. Often, people running an Ltd company do so purely for their professional status. However, do be aware that as a LTD company your accounts and director information will be publicly accessible. This is because of reporting responsibilities to Companies House.
- LTD companies offer more flexibility when it comes to paying taxes and NI contributions. The ability to pay yourself a combination of salary and dividends is a more tax efficient business structure. It will also allow you to offset pension contributions against tax.
Setting Up as a Sole Trader
The term “sole trader” describes a self employed individual who has registered with HMRC.
This means you are responsible for your taxes and for producing an annual tax return. You need to keep a record of all your expenses.
Again, being a sole trader has its advantages.
- It is simple and you are in charge of your private finances.
- Once you have paid tax and NI, you keep all the profits.
- This is a good way of keeping start up costs low.
- You have the opportunity to change your legal structure at any point.
See Also: Sole Trader Vs Self Employed – What’s the difference?
Setting Up a Partnership
You can opt for a partnership, which means you go into business with a chosen business partner.
It is a popular option because it offers many benefits without the legal formalities associated with a limited company. There is less paperwork and it is less stressful to set up a partnership where a business is being run by more than one person.
Many people wish to set up a partnership because:-
- There are fewer legal hoops to jump through to get up and running.
- You do not need to register with Companies House.
- All profits are shared between the partners.
- Responsibility for debts is also shared between partners.
Registering With HMRC
Once you’ve decided which business structure you’ll use, registering your business with HMRC is the next step.
This can be done online and is not difficult at all. Once you know the legal structure of your business, you can begin this process with HMRC.
You need to know, at this point, whether you want to be a sole trader, a Limited Company or a partnership.
This is a necessary step for all new businesses due to the legal requirement to submit tax returns. Even small businesses that are under the tax threshold will still need to complete one annually.
When to Register with HMRC
A limited company must be set up as soon as your business starts trading. However, sole traders and partnerships do not need to register their business until 5th October in their second year of trading.
See Also: HMRC Business Registration Page – online portal where you can register all types of new businesses.
Setting Up a Business Bank Account
Although not a legal requirement, setting up a business bank account makes good financial sense.
The last thing you want is to mix personal finances with those of your business. This will make completing and submitting your tax return more difficult.
Keeping a separate business account means everything that comes in and goes out is relative to your annual return. It makes keeping on top of your income and expenses far simpler.
If you are setting up a LTD company, it’s preferable to have the bank account in the company name.
Getting Business Insurance
Business insurance offers vital protection against day to day risks that can impact your finances. Working out what type of cover you need can feel a little overwhelming.
Your business insurance needs will depend on how you trade and the nature of your business. Before looking into insurance policies consider:-
- The value of any equipment essential to running your business.
- Whether you’ll be holding large amounts of stock.
- What type of business premises you will have.
- If you will be employing staff members.
Even if you have a home based business and you are the sole employee, it’s still advisable to have some sort of insurance cover.
Many home business owners are unaware their domestic policy will not cover them for any loss or legal action relating to their business activity.
Here’s some common policy types you may wish to consider.
Public Liability Insurance
Public liability insurance is advisable for both large and small businesses.
This type of policy covers you in the event a client or member of the public takes legal action against you for damage, loss, or injury they have suffered as a result of your business activites.
Having public liability insurance will cover legal costs and any compensation you need to pay out.
Employer’s Liability Insurance
You only need to consider the employer’s liability insurance if you plan to hire staff.
Whether it is one member of staff or an entire team, you must take out the employer’s liability insurance.
This protects your business in case a staff member tries to make a legal claim and will cover such costs. You do not need this insurance if you are a sole trader.
Product Liability Insurance
Should you design, repair or sell products then you might want to consider product liability insurance.
It isn’t a legal requirement but if you plan to attend sale events or sell your products to businesses, you may need this insurance.
It means that you are covered for all the products you sell, such as candles, in the event of an accident.
FAQ
Depending on the type of business, you may need certain legal documents before starting. These include registering with HMRC, company registration or vat documents, compliance with data protection, any online courses, insurance documents and risk assessments.
You need to register your business with HMRC before you begin operating. You may need to register with other avenues, depending on your business venture.
As a sole trader, you do not register with Companies House. This is purely for those choosing a limited company as their business structure.
