ESSENTIALS

A legal checklist for starting a small business

A legal checklist for starting a small business
Enterprise Nation
Enterprise NationEnterprise Nation

Posted: Mon 14th Jun 2021

Starting a business is an exciting time. It’s natural to want to dive right in and start selling to customers straight away.

But before you launch, you need to make sure you’ve checked off all the legal requirements for your small business. You don’t want to get a year down the line and discover you aren’t properly insured or you have to change your business’s name.

It’s best to spend extra time now checking that your business meets regulatory requirements. That way, you can feel confident that you’re starting your business on solid ground – and avoid expensive mistakes in the future.

We’ve put together a checklist of legal requirements for starting a business in the UK. This includes how to choose a business structure, where to find out which licences you need and the health and safety rules to be aware of. We’ve also included comments from Enterprise Nation members who are experts on these processes.

This article is only meant to provide an overview. Please consult government guidance or seek legal advice when you need support.

1. Choose your business structure

Deciding on your structure is a crucial legal requirement because it dictates whether you’ll have sole control of the business or share ownership.

It can also have an impact on how much profit you make and how much time you spend on paperwork. If you aren’t sure what’s best for you, speak to an accountant.

There are lots of different business structures, but early-stage businesses will likely choose to either set up as a sole trader or limited company.

Registering as a sole trader

A sole trader is the simplest business structure, which is probably why it’s the most popular – there are currently around 3.5 million sole traders in the UK.

Being a sole trader gives you full ownership of the business. That means you can keep all profits after tax is paid, but you’re also personally responsible for losses. Essentially, in the eyes of the law, the business and its owner are the same.

As a sole trader, you’ll need to:

Is being self-employed and a sole trader the same thing?

Yes and no.

The moment you start working for yourself, you’re self-employed. You can be self-employed and not registered as a sole trader, providing you haven’t earned more than £1,000 from self-employment in the last tax year.

If you earn more than £1,000, you need to register as a sole trader.

Forming a limited company

A limited company can be set up by one person or multiple people, so there’s more flexibility if you’re starting a business with other founders.

If you form a limited company, your business exists as a separate legal entity. That means you aren’t personally liable for business debts, other than what you’ve formally put into the company.

Bear in mind there are more reporting and management requirements with limited companies.

There are a number of situations where directors can become personally liable, including if the directors loan account is overdrawn when a business becomes insolvent, if you sign a personal guarantee and if there’s director misconduct.

Finally, directors normally have to file a Self Assessment Tax Return alongside the company accounts. You can read more about your responsibilities here.

Setting up a community interest company (CIC)

A CIC is a type of limited company that aims to benefit the community instead of private shareholders.

There’s lots of useful guidance on setting up a CIC here, but you’ll need:

  • A community interest statement that explains what you plan to do with your business

  • A legal promise known as an ‘asset lock’, which states that the company’s assets will only be used for its intended purpose

  • A CIC constitution – there are examples here

  • To be approved by the CIC regulator

“If you’re choosing an accountant to help, bear in mind that all accountants are not suited for every business. It’s important to find out whether an accountant works with small businesses and has expertise in the relevant sector.”

Muhammad Solaiman, managing partner of Stan Lee Accountancy

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2. Pick a business name

Most people don’t realise how tough it is to choose a business name until they attempt it. You can end up sifting through hundreds of possibilities before you whittle it down to your final favourites.

A lot of sole traders trade under their own name – after all, what better way to show you believe in your business than by putting your name to it?

However, if you want to go with something more general, it’s important to check that you can legally use the name. That way, you’ll avoid the time, expense and inconvenience of having to change it at a later date.

Make sure your name isn’t too similar to another registered company’s name by checking the Companies House register and searching for brand trademarks.

Watch out for ‘same as’ names too, where company names only differ by adding punctuation or certain characters. For example, ‘Innocent’ and ‘Inno-cent’ would both be deemed the same company.

There’s more useful guidance on choosing a name and your legal requirements here.

Discover how to come up with a unique name for your business >

3. Check you’re meeting regulatory requirements

For some small businesses, a licence or permit is legally required to trade. They’re most commonly needed if your business could pose a risk to members of the public or if you’re dealing with hazardous materials.

For example, a new food start-up might need licences to sell alcohol, put tables and chairs on the pavement and display advertising signs on the street.

The government has an online tool that will inform you if you need a licence.

There are other legal requirements that you might need to comply with, so do your research on your specific sector. For example, the food start-up would also need to meet the standards set out in General Food Law. This sets rules for:

  • Food safety

  • Presentation and labelling

  • Traceability

  • Imports and exports

4. Follow health and safety guidance

As a business owner, you have a legal duty of care for anyone who could be affected by your business. This duty of care extends to employees, customers and visitors.

The Management of Health and Safety at Work Regulations 1999 dictates what business owners should do to protect employees and others from harm. This includes:

  • Identifying what could cause injury or illness in your business

  • Deciding how likely it is that someone could be harmed (and how seriously)

  • Taking action to eliminate the hazard or control the risk

Not all self-employed business owners are required to take steps to assess and manage risk. If you don’t employ anyone and your work doesn’t pose a risk to anyone else, you might not need to do anything.

The Health and Safety Executive (HSE) has a useful page that illustrates who the law applies to.

For example:

  • A hairdresser who works with bleaching agents or similar chemicals would need to comply with this law

  • An artist who produces cards and gifts for sale at markets isn’t required to do anything

Of course, it’s good practice to be aware of health and safety – whether it’s a legal requirement for your small business or not. The HSE provides a good breakdown of potential risks in its health and safety toolbox.

“Everyone who works for you needs to know how to work safely and without risk to their health. This includes contractors and self-employed people. Business owners should give any employees clear instructions and information, as well as adequate training”

Ebenezer Anjorin, director of Imago Health and Safety Consultants

5. Get insurance to cover your business

Insurance. It’s not the most exciting way to spend your start-up funds, but it can provide valuable protection if a dissatisfied customer wants to claim compensation or if someone injures themselves on your premises.

Here are some of the most common types of insurance for small businesses.

Public liability insurance

Public liability insurance is something you should consider if your business involves interactions with members of the public. It can cover you if someone claims compensation for injury or damage.

A lot of small businesses take out public liability insurance, including retailers, restaurants, hairdressers, builders and other tradesmen.

Professional indemnity insurance

Professional indemnity insurance is a common choice if your business will provide advice or offer professional services to another business.

This type of insurance protects you against claims made by clients for any financial losses they’ve experienced after taking your advice or using your service.

Businesses like accountants, architects or surveyors tend to have this insurance.

Employers’ liability insurance

You might not be employing someone straight away, but if it’s on the horizon then you need to think about employers’ liability insurance.

Employers’ liability insurance covers compensation claims made by employees if they’ve suffered injury or illness as a result of their work.

Bear in mind you might need this type of insurance if you’re working with a freelancer or contractor too. If you’re treating them like an employee – say, you’re supplying their work materials or controlling where they work – then the HSE might deem them an employee. As a result, it would be a legal requirement for you to have this type of insurance.

Read more on the HSE website or get professional advice if you’re still unsure.

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6. Make sure you’re GDPR compliant

The final step in our start-up legal checklist is to make sure you’re GDPR compliant.

Most businesses will hold some form of personal information about customers. When you’re first starting your business, you might be collecting customer email addresses to build up a newsletter list.

It’s essential to put good data practices in place early on, so you don’t have to go back and unpick who has consented to what. You should:

Decide how much data you need

Customer data could include names and addresses, financial records and dates of birth. GDPR dictates that you should only hold on to necessary data and for a short period of time.

In short, don’t stockpile lots of customer information if you don’t need it.

Obtain clear consent

To collect and store customer data, you need to make sure you’re getting clear consent from that individual. That means explaining what information you’re collecting and how it will be used.

For example, you’ll often see checkboxes on newsletter sign-up forms that ask you for permission to be added to the mailing list.

Don’t be tempted to use pre-ticked checkboxes either – these are in the murky grounds of consent and likely won’t hold up if your data practices are scrutinised.

Get a privacy policy

It’s important to include a privacy policy if your business will be collecting data. Privacy policies explain how data is collected and stored by your business, and what customers can do if they want to remove their data. There’s a useful privacy policy template here.

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Enterprise Nation
Enterprise NationEnterprise Nation
Enterprise Nation has helped thousands of people start and grow their businesses. Led by founder, Emma Jones CBE, Enterprise Nation connects you to the resources and expertise to help you succeed.

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