Key legal considerations for starting a business in the UK
So you've decided to start a business in the UK, and you're in the process of getting started with your new venture.
To set the ball rolling, you’ve done some careful planning and execution to ensure that everything goes right.
If this resonates with you, then you know that starting a business is not as glamorous as social media paints it.
From developing a business plan to securing funding and navigating the legal requirements, it's no wonder that many businesses find it difficult to stay afloat after the first year.
In the UK, some of the legal requirements include choosing the right business structure, registering your business, understanding tax obligations and compliance with regulations, etc.
These legal requirements differ from one business structure to the other. Let's take a look at the legal considerations you need to factor in as a new business owner.
Choosing your business structure
Before registering your business, you have to decide on the structure you’d like your business to have.
Your business structure defines your liability, tax obligations, and administrative responsibilities because these operations are different for every structure. The main types of business structures in the UK are:
Sole trader
Choose this structure if you’ll be running the business personally. As a sole trader, you’ll be liable for your business’s debts, as there will be no separation of concerns. Sole traders pay tax from their personal income from the business, which is determined through self-assessment. Sole traders register their companies with HM Revenue and Customs (HMRC).
Partnership
In a partnership, two or more people run a business together and are personally liable for the business’s debts. Like sole traders, people in a partnership pay tax on their share of the business’s profits. Business registration for partnerships in the UK is done with HMRC.
Limited company
Unlike other business structures, limited companies are separate legal entities from their owners. This makes them only liable to the company's debts up to the amount they invested.
They pay corporation tax on their profits. However, shareholders may pay income tax individually on the dividends they receive.
Limited companies are registered with Companies House, which requires them to provide details about directors, shareholders, and the company’s registered address.
Limited liability partnership (LLP)
This is a type of partnership business structure that has the features of partnerships and limited companies.
The partners here, however, don’t have unlimited liability, and members pay tax on their share of the company’s profits. This business structure must register with Companies House and file annual accounts.
The hack to choosing the perfect business structure for your business idea is to find one that aligns with your goals and purpose of doing business. You can seek professional advice from an accountant or solicitor if you need help when making this decision.
Registering your business
The next step is to register your business with the right authorities, depending on your business structure.
Sole traders and partnerships will receive Unique Taxpayer Reference (UTR) numbers for tax purposes after registering with the HMRC.
Limited companies and LLPs, on the other hand, have to apply for registration with Companies House, where they have to fill out an application form, submit the necessary documentation, and pay a registration fee.
They’ll receive a Certificate of Incorporation after the registration has been approved.
Understanding tax obligations
Taxes are the primary obligations of legal adults in the UK, and businesses are not exempted. For every business structure, there is a tax obligation that must be met. Some of the most common taxes are:
- Corporation tax
These are paid by limited companies where the rate is 19% for small businesses whose profits do not exceed £50,000 and 25% for profits over £250,000. Corporation taxes must be filed within 12 months after the end of an accounting period.
- Value added tax (VAT)
Your business is only eligible to pay this tax if it makes a turnover of more than £85,000 per year. If your business meets this criteria, you must register for VAT and submit regular VAT returns as needed.
- Income tax
Sole traders and partners pay income tax on their share of the business’s profits. The table below shows income ranges and the expected tax rate for each range.
National insurance contributions (NIC)
Businesses pay NICs based on their employees' earnings. For instance:
- Class 1 NICs are paid by employers based on employee earnings.
- Class 2 NICs are a flat rate paid by self-employed individuals.
- Class 4 NICs are paid on profits above £12,570.
Licences and permits
Most businesses need licenses and permits from relevant authorities to operate legally. These permits could be:
- General business licenses
Local councils issue general operating licenses as long as businesses comply with local regulations regarding zoning and safety.
- Industry-specific licenses
Some industries need more licensing before a business is fully operational:
- Food businesses have food hygiene regulations and must obtain permits from local authorities.
- Before selling alcohol, there must be personal and premises licenses.
- You may need relevant health and safety certifications if your business involves hazardous materials or activities.
These permits and licenses are important and required by the law. If you default in obtaining them, you could be fined or risk the closure of your business.
Employment law compliance
For businesses planning to hire employees, the following are important:
- Employment contracts
These are written contracts outlining terms of employment for all employees and include important details like the job title, salary, working hours, notice periods, etc.
- Health & safety regulations
Your employees have the right to work in a safe working environment for employees under the Health and Safety at Work Act 1974. Your employees should also have regular risk assessments and necessary training to help them do their jobs well.
- Payroll obligations
You are required by law to have payroll systems for your employees to help manage their wages and income taxes.
Data protection compliance
Data privacy is an important concern, so businesses should comply with data protection laws to protect their customers.
The General Data Protection Regulation(GDPR) is one of the data protection laws that applies to businesses in the UK, and it states that:
- There must be transparency about how data is collected and used.
- Businesses must obtain explicit consent from individuals before processing their data.
- Businesses must implement security measures to protect sensitive information.
If your business defaults on any data protection laws, you could be fined substantially.
Intellectual property considerations
Some of the ways you can protect your intellectual property (IP) and safeguard yourself and your business from infringement is by having:
- Trademarks: These are used to protect brand names and logos by registering them with the UK Intellectual Property Office (IPO).
- Patents: These protect inventions if they meet specific criteria.
- Copyrights: These protect original works such as literature, music, or art without registration.
Setting up business bank accounts
Not all businesses are legally required to open a separate business bank account, but it helps to:
- Separate personal finances from business finances.
- Clarify the accounting process.
- Enhance professionalism and increase credibilty when dealing with clients or suppliers.
Each aspect of starting a business in the UK involves strategic planning and compliance with set laws.
Adhering to the legal requirements when starting your business puts you on the right side of the law and plays an integral role in establishing a solid foundation for your venture.
This guide gives a comprehensive overview of the key legal considerations you can expect to encounter on your journey, but if you require additional help, please seek professional advice from solicitors or accountants to receive advice tailored specifically to your industry and circumstances.
Being mindful of these legal requirements is a sure way to position your business for growth without the attending risks of non-compliance.
