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Home » The key legal issues you will face as a small business owner

The key legal issues you will face as a small business owner

There are a number of different legal matters which need to be addressed before setting up a new business. Seeking good advice to help you through the planning and setup process ensures your business is built on solid foundations and can provide protection when things do not go to plan.

Being prepared for any legal issues that could occur and having a good understanding of business law is essential when setting up a new company; lacking both could lead to a make or break situation. This guide is here to help you get your business off to a flying start and make sure you are both prepared and protected for what the future holds.

1. Business Structures

You will need to begin with a strong business plan. This will enable you to address: the business’s goals, structure, purpose, how you will obtain funding, marketing and more.

You will be able to determine which structures are best suited to your business based on your business plan and visions.

Your legal responsibilities as the business owner will depend entirely on which structure you choose. This will then determine factors like the paperwork you need to fill in, the taxes you will have to manage and how you manage them, profits and your personal responsibility if you make a loss.

The three main types of business structure are:

For help on deciding which business structure is best for you read these ByteStart guides;

Business Partnership vs Joint Venture

If you are thinking of going into business with another person you will probably see the terms business partnership and joint venture coming up quite frequently, but it is vital to note that they are completely different.

A  business partnership is a legal arrangement that allows two or more people to own a business together. In a business partnership, both partners will share the ownership for the lifespan of the company, contributing money and time into making it a success.

Meanwhile, a joint venture is when you go into business with at least one other person for a specific project, joint ventures, therefore, have a time limit.

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2. Tax

The business structure you choose will then determine which tax category you must register for with HMRC.

Sole Trader

If you decide to run your business as a sole trader, you must register for Self Assessment, and pay income tax and Class 2/4 NICs. You (as an individual), and the business are treated as one entity for tax purposes.

Limited Company

Limited companies are required to pay Corporation Tax on taxable profits; this includes money made by doing business, selling assets and investments. It is the company owner’s responsibility to ensure that the amount of Corporation Tax due is correctly calculated and paid on time. In practice, most will hire an accountant to complete and file the company accounts. The key steps are;

  • Ensure that you know the correct deadline; this will be in line with your company’s financial year.
  • Calculate your taxable profits.
  • Check the Corporation Tax rates and reliefs which are applicable to you.
  • Make the payment. There are a number of ways in which you can do this including by BACS, online or at the Post Office.
  • File your Company Tax Return with HMRC.

Business Partnership

The tax payment structure is different for a business partnership, and is dependent on whether the partner is an individual or a limited company.

If the partner is an individual, you will have to pay income tax and national insurance through self assessment. However, if the partner is a company, you will have to register with HMRC to pay corporation tax.

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For more help on accounting and tax issues, read;

3. Shareholder agreements

When you register a new company, you are required to make a Statement of Capital; this is a declaration to the government of the total number of shares the business has and their value, as well as the name and addresses of all shareholders.

If the company has several shareholders, you may want to have a Shareholder Agreement. A Shareholder Agreement is a legal contract which is established between all shareholders, and works to govern the business arrangement and relationship.

You don’t have to draw up a Shareholder Agreement, however it helps to protect the investments which each shareholder has made to the company and establish good relationships between those involved.

A Shareholder Agreement would typically set out the following:

  • Responsibilities
  • Liabilities
  • Obligations
  • Shareholder Rights
  • How the business is to operate

A main issue to consider when putting together a Shareholder Agreement is what should happen if a shareholder decides to leave. Without an agreement in place, shareholders would be free to sell their shares to whomever they choose, which could leave the remaining shareholders running a company with someone they may not approve of.

A Shareholder Agreement may also outline how directors in the business will be appointed. It could be that shareholders are able to appoint themselves, or a nomination process could be put in place.

By considering these processes, and others, before important situations arise, companies can limit the possibility of disputes between shareholders and maintain good relationships within the group.

If you are entering into a business partnership, as opposed to a limited company, you should look at drawing up a Partnership Agreement. You can learn more about them in;

4. Intellectual Property

In your new business, one of your most valuable assets will be your work; which is why you should protect it. Intellectual property laws allow businesses to capture, safeguard and exploit their assets to save money and gain new sources of income.

Many new businesses employ the services of a solicitor to ensure that their intellectual property (IP) is properly protected. Legal services in IP vary, as it is quite a broad area, but some of the common things businesses seek advice on include:

  • Data protection
  • Trade mark and design filings
  • Patents and copyright
  • Protection of trade secrets
  • Commercial contracts

ByteStart’s guide to Intellectual Property gives you a great summary of IP law for small businesses.

5. Insurance

When setting up a business there are several different types of insurance you will have to take out to make sure you are fully protected.

Public Liability Insurance

You will need to take out public liability insurance to protect your business against compensation claims from outside parties who have suffered an injury or damage to their personal property as a result of your business.

Employers’ Liability Insurance

Employers’ liability insurance protects you if an employee of the business becomes ill because of work or suffers an injury. It is illegal to not have employers’ liability insurances so it is crucial that you buy cover as soon as you employ someone.

Property Insurance

Property insurance protects the building your company operates from and your assets; if your equipment or property is destroyed, lost or stolen, property insurance will protect you and provide you with the support you need to replace those assets.

Professional Indemnity Insurance

If you are providing any type of service to clients, you should look at getting Professional Indemnity Insurance. It will cover you for any mistakes you make or cases of negligence. Many corporates will not hire you, unless you have a PI insurance policy in place.

Find out more about the key business insurance policies in – Which types of insurance must your business have?

6. Non-Disclosure Agreements

A Non-Disclosure Agreement is a contract that can be drawn up between two parties to ensure that confidential material, knowledge and information is not disclosed to a third party. This could be used when a company wants to prevent any unauthorised sharing of valuable information, or if they want to restrict how the information can be used.

An example of this would be asking employees to keep trade secrets private to ensure that they do not share information which could potentially harm your business. This could be in place while they are working for a company and for a period of time after they leave.

Companies that are seeking outside investments also frequently ask potential investors to sign NDAs. While pitching to investors, secret company data or know-how may be divulged, so an NDA is used to prevent them from disclosing this sensitive information to others.

7. Employment Law

It is important for a new business to familiarise themselves with the different areas of employment law. There are hidden dangers when running a business, so it is vital that you have the correct procedures established in the workplace in order to both prevent employee claims and protect yourself if they do occur.

Putting employment policies in place means that you have guidelines available if a dispute or incident with an employee does occur, and the employee will know what to expect. Policies should cover all of the main human resources issues including; disciplinary and grievance processes, dismissals, redundancies, workplace disability and discrimination.

8. Disputes

The types of disputes that commonly occur in business include:

Contract Disputes

Ensuring that you have clearly written contracts in place with the people involved in your business can help to prevent disputes from occurring. However, when mistakes occur it is important that these are dealt with in a reasonable and diplomatic way to maintain your working relationships.

Debt Recovery and Credit Control

Optimising cash flow is very important for your business, which is why ensuring that your customers pay you is vital. Adopting a sensitive approach when discussing payment issues with customers can help to maintain the relationship you have with them while finding a solution.

ByteStart guides that help you to address these issues, include;

This guide was written for ByteStart by Slater Heelis, a law firm based in Manchester who specialise in legal services for business and individuals.