A guide to legal considerations for startup businesses

Fresh for 2015

Setting up a new business is often viewed as a legal minefield. Business groups are constantly pressing the government to reduce the burden of ‘red tape’ that afflicts entrepreneurs, suggesting that many are put off starting their own firms by the numerous legal hurdles that they must overcome.

Legal essentials

In reality, while there are important legal obligations that every new small business owner must fulfil, they are far from insurmountable. As long as you’re aware of your responsibilities and you take sufficient precautions to ensure that you are always on the right side of the law, you have nothing to worry about.

So what are the main legal considerations that entrepreneurs must contend with when setting up a new business?

Legal structure

Perhaps the first concern you will have to address is that of structure. The legal structure you choose can have significant long-term implications for the running of your business, so it is important that you think your decision through carefully.

There are three main legal structures to choose from. You can operate as a sole trader, incorporate as a limited company, or establish a partnership. While a sole trader arrangement is the easiest to establish, requiring no formal registration, you should note that sole traders assume significant personal risk. You may wish to read our article on legal structures for more information.

Do you need a licence?

Depending on the sector in which you are operating, and the nature of your business, you may need to apply for a licence. This is particularly common in industries where your actions could result in risk to members of the public, or where you are dealing with hazardous materials.

Entrepreneurs wishing to establish a catering or hospitality business, like a pub or restaurant, will almost certainly require a licence. You will obviously need to be licensed if you intend to serve alcohol, but you may also need to register with your local authority for food standards and health and safety oversight. There are also various licence requirements for music and entertainment. You should contact your council for details.

If your business relies on a licence for its income, you may want to take out business insurance that covers you in the event that you lose it. A whole range of specific business insurance covers can be included in your policy.

Health and safety

Business owners assume a range of important health and safety responsibilities. You have a duty of care for anyone that might be affected by your business. This might include members of the public (both inside and outside your premises), employees, and visitors.

You must carry out a risk assessment to help identify the risks posed to these individuals by your business activities. Risks arise from hazards; for example, the risk of back injury is higher if your business requires heavy lifting tasks. You have a responsibility to mitigate these risks as far as is reasonably practicable. This might involve changing your working practice to ensure that employees and members of the public are safe.

Visit the Health and Safety Executive website for details specific to your industry.

Business insurance

If you intend to take on staff, employers’ liability insurance is usually a legal requirement. You run the risk of a significant fine for every day that you are uninsured, as well as leaving yourself vulnerable to compensation claims from employees who suffer injury or illness as a result of their work.

In addition, you may wish to consider other covers like public liability or professional indemnity. While these are not legal necessities, they will help to protect your business from compensation claims if something goes wrong. Claims of this sort can be cripplingly expensive, so you should make sure that you are properly covered.

All these covers can be included in one business insurance policy, which helps you to save money at the crucial start-up stage of your business.

Do you need to be VAT registered?

As a business owner you have a number of legal obligations to the taxman. These vary depending on the legal structure of your business, but you can expect to have to file at least one annual return – and if you take on staff the paperwork burden will increase significantly.

But a frequently overlooked requirement amongst new business owners is that of VAT registration. If your annual turnover exceeds the registration threshold (Editor’s note: set at £85,000 from 1 April 2017), you are legally obliged to become VAT registered. There are significant penalties for those that fail to register in time.

Of course, you may choose to register for VAT of your own volition, before your turnover reaches this point. For more information on when this might be a good idea, you may wish to read our article on voluntary VAT registration.

It is wise to find a professional to advise you on tax and finance issues when you are starting out.

New business owners are faced with a significant legal burden. This can seem overwhelming, particularly for first-time entrepreneurs. While there is often some leeway given to new businesses when it comes to enforcement, it is vital that you are aware of your responsibilities. If you are unsure where you stand, make sure you seek independent advice quickly.

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