To lay the foundations for a successful business it is important to give due thought and consideration to the legal decisions you make when starting a business. Read further for legal advice on all the business law issues that arise when setting up a new business.
Establishing a structure for your business
Sole trader, partnership or limited company?
Under business law, one of the first things you need to do when establishing your own company is to decide the on the structure of the business.
There are essentially 3 structures to choose from and each has its own advantages and disadvantages.
- sole trader
- a partnership with one or more people
- a limited company
This is the simplest form of business model. There are no legal formalities required to set yourself up in business as your own boss. The downside is that you also carry the can if things go wrong. You are personally liable for all the debts of the business, and creditors could look to your house, car, savings etc. to settle any money owed to them. You do not have to produce audited accounts, but you will need to keep records for the taxman. If you do set up in business on your own in this way you should advise your tax office, as you will now be taxed as a self-employed person.
If you set up your business with one or more people, then you will be in partnership, whether or not you actually get anything down on paper – even if the partners are other members of your family. Your partnership will be governed by the Partnership Act 1896 but generally this is not what you want or need. Anybody working together in partnership (including families) should get a Partnership Deed drawn up by a solicitor, which covers how the partnership will work on a day-to-day basis, how it can develop and how it can be ended. Generally each of the partners is personally responsible for all the businesses liabilities, whether they knew about them or not. Therefore choose your partners carefully. Partners remain self-employed and only need to prepare accounts for tax purposes (although we’d recommend you prepare them properly anyway).
This is the most formal way to run a business, but it has the added advantage of limiting your liability to the amount of share capital you have invested in the business. Note that banks and others will therefore ask you for personal guarantees for loans etc. The disadvantages are that there is a cost involved in setting up a company – you can buy one off-the-shelf for as little as £125 and that you have to comply with Companies Act legislation – accounts, records and returns at Companies House. As a Director you are no longer self-employed, but employed by the company, so you are likely to have to deal with National Insurance and PAYE Income Tax matters.
Registering your company name
Business names no longer need to be registered with any Government Department. They are now governed by the Business Names Act 1985. You’ll find an excellent guide to the Act on the Companies House website. You will need to display your trading name in accordance with the Act at your place of business, and on stationery and invoices etc.
Basically, when starting a business, you need to check, as best you can, that the name you choose to trade under is not the same or similar to any other business, particularly in your locality. If it is then you may find yourself being sued for “passing-off” i.e. trading on the back of someone else’s reputation, or even in breach of a trademark
If you set up a limited company then you will only be able to register a name which is not already on the register. You can search the Companies House Register online here.
If you are going to be supplying goods and services to the public then you are going to need to know about certain bits of consumer legislation – such as the Sale of Goods Act (they must correspond with their description, be of satisfactory quality and be fit for the purpose) and the Trade Descriptions Act.
Terms of Trading
If you are going to be dealing with the public and other businesses then you need to get your Terms of Business sorted out. These deal with your contractual relationship with your customers and suppliers. They should cover such items as estimates for work, payment terms, transfer of title to goods, failure to perform contractual duties etc. The terms on which you trade should be as beneficial as possible to you (without putting your client or supplier off), and are unique to you and your business. It is worth getting them professionally drafted by a commercial solicitor.
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