Knowing the legal side of business


Starting up a new business is an exciting move; however, there are a few legal hoops to jump through to make sure that everything goes smoothly. Here are some of the basic things that you need to put in place right from the start.

Business status

Your first port of call will be to a solicitor or legal adviser who can help you to determine the best status for your new venture. You can choose one of the following vehicles:

  • Sole trader.
  • Limited company.
  • Limited Liability Partnership (LLP).
  • Community Interest Company (CIC).

Discuss each option with your legal adviser so that you are sure about the requirements of each one, particularly in terms of keeping financial records and your liability for tax.

Business name

If you decide to set up a limited company, you need to register the business at Companies House. If you have chosen to be a sole trader and you plan to use any name other than your own, you don’t have to register. In both cases, your business name must be displayed on all your company literature and at your registered address for a limited company or your business premises for a sole trader.

Financial obligations

The legal status that you have chosen determines how you should handle tax and National Insurance contributions. As a sole trader, you will pay taxes through HRMC’s self-assessment system. As a director of a limited company, your status is that of employee, and you will pay your tax contributions through Pay As You Earn (PAYE). A limited company is also responsible for deducting the tax and National Insurance contributions of its employees.

Companies House requires limited companies to submit annual accounts for audit (within 21 months for your first set of accounts). However, small businesses with a turnover of less than £6.5 million can submit abbreviated accounts, which do not have to be audited. Depending on your turnover, you may also have to register for VAT and pay Corporation Tax.

Best practice

As financial records are so important for your business, it’s worth checking that you have adequate systems in place to ensure that they are accurate and fulfilling the legal requirements. For example, if you are operating as a limited company, you can use the software and the online tools provided by HMRC to manage your payroll. This helps you calculate tax and National Insurance for employees so that you are paying the correct amount every month.

You can also use Invoice Home to generate your invoices. Choose a template to include your business logo and the business name and address, as per the legal requirements. There’s a facility to add VAT if you are registered and to allow your customers to pay you via a credit card or PayPal, if you have an account. You can use the same site to generate credit notes and receipts.

Contracts with customers or other businesses are important in the event of any kind of dispute, as they protect both your interests and those of the other party. Drawing up a contract is fairly straightforward, though there are specific rules differentiating between contracts with consumers and those with other businesses. You can find out more about your legal obligations and get some useful advice on the government website.


As a sole trader, you may wish to consider some form of insurance to protect your income in case illness or injury prevents you from working. As an employer who has staff, you are legally required to have employers’ liability insurance cover for a minimum of £5 million. You will be issued with a certificate, which must be displayed on your premises.

If your business deals with members of the public at your business premises, you will also need public liability insurance in the event that there are injuries or accidents on your premises involving members of the public. You will also need professional indemnity insurance to provide cover for any legal claims against the company for professional errors.

Employment law and trading


There is a range of employment legislation to be aware of if you employ staff. For example, you will need to comply with:

  • The Employment Act.
  • The Equality Act.
  • National Minimum Wage Act.
  • Working Time Regulations.

The government website offers lots of help and guidance on employers’ rights and responsibilities.


Finally, the Sale of Goods Act 1979 regulates businesses selling goods and/or services. Certain types of business require trading licences granted by the local authority, and venues providing entertainment or serving alcohol need additional licences for these purposes.


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