There are lots of things to consider when it comes to setting up a new business, however, it is vital to set aside time to ensure all of the legal obligations have been met.
That’s why we’ve put together this handy guide to help you make sure you’ve got it all covered.
Choosing Your Business Structure
There are several legal aspects which you must consider during the business planning process. These can be influenced by the type of business structure you opt for, so this should be your first step.
There are two main ways in which you can set up your business; either as a sole trader or a limited company.
Limited Company
A limited company is a business structure that is registered at Companies House. It is a legal entity and is completely separate from its owners, meaning it is responsible for its own finances and debts, so owners can benefit from less financial responsibility (limited liability).
Sole Trader
A sole trader operates as a self-employed person who registers a business with HMRC. Sole traders can work on their own, or employ other people to work for them, however they will be entirely responsible for the business and its liabilities as there is no legal distinction between you and your business.
While you don’t need to register with Companies House, you are still required to register for Self Assessment with HMRC to report your earnings and expenses so you can accurately pay Income Tax and National Insurance contributions.
Which is Best for My Business?
There are pros and cons to both, so it’s important to think carefully about your own needs and the needs of your business. Here is a list of advantages and disadvantages you should consider before choosing your business structure.
Advantages of Being a Sole Trader:
- You can register online in minutes.
- There is no need to incorporate the business at Companies House.
- No cost to register the business.
- Less bookkeeping, accounting and filing requirements compared to limited companies.
- Lower accounting costs.
- Full ownership of the business and therefore full control.
- Quick and easy to make decisions.
- All profit after tax belongs to the sole trader.
- No business or personal details are disclosed on public record.
Disadvantages of Being a Sole Trader
- Sole traders are responsible and liable for all business debts and claims as there is no legal distinction between the individual and the business, therefore there is no distinction between personal and business finances.
- Can be trickier to raise capital.
- All taxable income is liable for Income Tax and National Insurance contributions.
- Less tax-efficient than a limited company.
Advantages of a Limited Company
- A distinct legal entity separate from its owners.
- Limited liability, meaning members’ personal finances and assets are protected beyond what they agree to invest in the business.
- Often viewed as larger and more established businesses, even if they are run by just one person.
- More tax-efficient.
- Directors are able to pay themselves a salary and dividends.
- Limited by shares companies can sell shares in exchange for capital investment.
Disadvantages of a Limited Company
- Must be incorporated at Companies House, though it doesn’t take long or cost much.
- Must register with HMRC for Corporation Tax.
- Can cost more to set up and operate.
- It isn’t possible to register a limited company if you are an undischarged bankrupt or disqualified director.
- Information about the company is on public record, including the registered address, service addresses, director details, shareholder details, filing history and financial activity.
- Accounting and filing requirements are often more complicated and time consuming than sole trader admin.
- You can’t remove money as and when you please as you must have enough profit left after the deduction of tax and other expenses before doing so and must follow strict procedures to remove money and pay yourself.
Setting Up Your Business as a Limited Company
If you have decided to set up a Limited company, you must register with Companies House and submit a number of documents, including:
- Form IN01, providing information about your company name, names of directors, company secretary and identities of shareholders
- Memorandum of Association
- Articles of Association
Setting Up Your Business as a Sole Trader
If you have chosen to set up as a sole trader, you must notify HMRC of the fact and register for self-assessment so that you can file an annual tax return.
Choosing a Business Name
When choosing a name for your company or brand, you must consider the following:
Is Your Company Name Taken?
Make sure your proposed company name hasn’t already been taken by using the company name availability checker prior to submitting your application.
Does Your Company Name Contain a ‘Sensitive’ Word?
There are a number of sensitive words and expressions which may require additional supporting documentation when reporting to HMRC or Companies House.
These controls are in place to ensure a name doesn’t mislead or harm the public. For example, it may not be appropriate to use a certain word if it:
- Suggests business pre-eminence, a status, specific function or names that include ‘British’. ‘Institute’ or ‘Tribunal’.
- Implies a connection with the UK government, a developed administration or local/specific public authority.
- Includes a word that represents a regulated activity.
- Includes a word whose use could be an offense.
Protect Your Intellectual Property
When you start a business or launch a new product, it is important to protect your intellectual property. This is defined as any type of design, invention, logo, symbol, image or name used in commerce.
Some of your intellectual property is automatically protected, meaning nobody can use or copy your work without your permission, and if they do so, you are able to take legal action against them.
Any piece of writing, art, photography, film, music and web content you produce are automatically protected under UK Copyright laws. However, it’s important to note that Copyright only protects the form of expression of an idea, not just the idea itself.
Protections You Should Apply For
There are 3 types of intellectual property protections that require the owner to register their work.
It is usually enough for small businesses to register for trademarks and registered designs, unless the idea is an invention potentially worth a significant amount of money, in which case you would need to apply for a patent.
Trademarks
It’s always a good idea to register your company or brand name, product names, logos and jingles when setting up your business. It typically takes around four months for applications to be registered, so it’s best to apply as soon as you set up.
Digital Trademarks
Make sure to secure any domain names and social media handles for your company or brand’s website. This prevents opportunists from sitting on URLs and social media accounts and demanding significant amounts of money to release them to you.
Registered Designs
Registered designs protect the appearance of a product, including the shape, packaging, patterns, colours and decoration. Unless your design has been registered, there is nothing to stop another business from making and selling a similar looking product.
Patent
Patents are designed to protect inventions and products and the way in which they work. For example you may wish to patent a machine, machine parts, tools or medicine. You can only obtain a patent if the invention is new, involves an inventive step, is capable of industrial application and isn’t an excluded item.
Please note that it often takes around five years for the IPO to make a decision on whether to grant the patent. Whilst a patent is pending, it is advised to keep your invention a secret and ensure that anyone you discuss the idea with signs a non-disclosure agreement (NDA).
Professional Help with Business Startups
If you’ve had a fantastic idea for a new business, but aren’t quite sure where to start when it comes to setting up, our team at Ryans can help you bring your idea to life.
We can help you to:
- Decide on the most suitable structure for your business – sole trader, partnership, or limited company
- Prepare a business plan, cashflow projections, budgets, and trading forecasts
- Assess your finance requirements, advise on the best sources of finance, and draw up the necessary proposals
- Establish a good working relationship with your bank
- Complete any registration procedures with Companies House and HMRC
- Deal with company secretarial issues
- Set up a recording system for your internal use and for complying with statutory requirements
It’s our job to help you understand all of the above by breaking it down into simple steps and offering the best advice on how to ensure your new business succeeds in the future. Looking to start a business? Let’s talk.