Legal Considerations

The Legal Side

What form of business would be the best for me?



You can be a sole trader, a partnership, a limited company or a co-operative - the choice is yours. But before you begin trading, you need to decide which legal form of business is best for you. This decision will affect the way you are taxed and the accounting records you will have to keep.

The table below outlines the main issues you would have to consider for the two main forms of business.

 

Issue Sole trader Limited company
Setting up formalities Only need to register as self-employed. Have to register with the Registrar of Companies.
Liability Unlimited liability Limited liability
Management All the decisions are made by the owner. Board of directors and management team control the business.
Raising finance Relies largely on personal money. Capital is raised by issuing shares.
Records and finance accounts No strict accounting or audits required Accounting and audit requirements apply.
Accounts must be open for public inspection if turnover is more than 350,000.
Profits All profits belong to the owner. Dividends may be paid to the shareholders.
Tax, National Insurance and Pensions Self-employed status:profits, drawn or not, taxed as income Possibly at higher Rates.
NI cheaper But fewer benefits.Tax deductible Pension contribution.
Corporation tax on company profits. Losses retained in company.
Continuity If the owner dies or retires, the business may go out of existence. A company has 'perpetual existence'.
Selling the Business sold. Usually the whole business has to be of the shares. It is possible to sell some or all


What name should I call it?



If you are going to trade on your own, or as a partner, read 'Business Names - Guidance Notes' before you decide on a name. You can get this from the Companies Registration Office. It tells you how you can name a business, and what you are not allowed to use without permission or proper entitlement, such as the words 'Royal', 'Authority', 'International' and so on. It also explains the regulations you must meet if you are going to trade under a name which is not your own.

If you decide to use a business name (depending on the name you use), you must display certain information in a prominent place where you work (even if you are working from a shed in your garden). This information must also be on all business letterheads, invoices, receipts and so on. It is up to you what style you use, but it must include your business name, your own name and those of any co-directors or proprietors and your permanent business address. If you have any problems, your accountant will be able to help you.

Company names If you decide to form a limited company, you need to know about the rules and regulations explained in the booklet 'Company Names - Guidance Notes'. You can also get this from Companies Registration Office. Restrictions on names and the rules on what information you must give are the same as those for individuals and partnerships going into business. But you must also make sure that there will be no objection to the name you choose. This could happen if the name you want is the same as or similar to a name already being used. This is a fairly important point, because if you are told to change your name, it could cost your business a lot, and not only in money.

How do I protect my product?

Copyright and patent laws protect your ideas from being exploited by a rival business. They also prevent someone using your 'intellectual property' without your permission. Applying for a patent is a very complicated procedure. We strongly recommend you talk to a patent agent. The Chartered Institute of Patent Agents or the Patent Office will be able to help you.

Another legal protection is 'copyright'. Copyright is the creator's or legal owner's rights in creative work like paintings, writings, photographs, advertising artwork, video tapes and TV commercials, even when these are made for a client. Remember this if you are using artwork or creative work of some sort. Unlike patent protection, copyright happens automatically.

How do trading laws affect me?



There is a wide range of laws to protect consumers, employees, the general public and businesses themselves. So it is important that you have at least a basic understanding of the law and how it affects you and your business. Your solicitor should be able to tell you more about existing trading laws, but the following Acts of Parliament are important to all businesses:

  • Consumer Protection Act 1987
  • Trade Descriptions Acts 1968 and 1972
  • Sale of Goods Act 1979
  • Health and Safety at Work Act 1974


Whatever your business, as far as consumers are concerned, there are 3 trading standards which are almost bound to affect you:

  • If goods are faulty, customers can have a full refund or part of a refund. Or you can agree to repair or replace the goods. A notice that says 'No Refunds' is not legal. In some cases, displaying such a notice can be a criminal offence.
    • Goods must always live up to the claims you make for them.
    • Goods must meet certain safety standards.


    What other legal obligations have I got?

    When planning a business you must bear in mind that certain industries need licences to trade. The following businesses are just some of those which need special licences to trade:

    Auction sale rooms, betting offices, billiard halls, bingo halls, cafes and restaurants, caravan sites, children's nurseries, cinemas, theatres, employment agencies, food manufacturers, fruit machine owners, hairdressers (not always), ice-cream sellers, market stall owners, mobile food shops, nursing agencies, nursing homes, pawnbrokers, petshops, kennels, selling petrol, riding schools, selling fireworks, selling alcohol, selling tobacco, scrap metal dealers and theatrical employers.

    Keeping records

    You will need to keep records for your own sake, but you must also keep them by law to support your VAT, tax and National Insurance contribution payments and claims. If you are a limited company, there are further conditions to do with your annual report and accounts, records of board meetings and transactions in your company's shares.

    If you are a sole trader or a partner, the tax rules are different but you will still need to produce complete financial records. Your accountant will know what to do.

    If you plan to keep any information about people electronically, for example on a personal computer, you must register under the Data Protection Act 1984. Under this Act, computer users must follow 8 Data Protection Principles for using computers.

    Premises

    Before you choose a property, talk to your solicitor and check with the local council. Make sure you are on the right side of the sometimes complicated regulations, like environmental health rules, which govern how premises can be used for trade. For example, if you are planning to start a food business, you must register the premises you intend to use at least 28 days before you open. You must take these rules into account even if you are trading from home, where, for instance, you might need planning permission.

    You need to look closely at business leases. Remember, they are not as easy to get out of as they are to get into. You should ensure that you consult a professional, e.g. a solictor. Use the checklist on the right to help you decide on the kind of premises you need.

    What about my tax liabilities?

    The amount of tax you need to pay will depend on a number of things, but you will generally pay less tax if you put allowable business expenses down against your gross profit. (Another good reason why your records are so important!) Your accountant will be able to help you reduce the amount of tax you pay.

    The following leaflets are available, free of charge, from your local tax office or enquiry centre:

    Subject Title Leaflet Date
    Starting Up Starting your own business? CWL1 4/97
    PAYE PAYE - Pay As You Earn IR34 1/96
    PAYE & CGT Appeals against tax IR37 3/95
    The Inland Revenue The examination of business accounts IR72 5/95
    The Inland Revenue How settlements are negotiated IR73 1/94
    The Inland Revenue< /td> You and the Inland Revenue IR120 5/94
    Allowances Tax allowances and relief's IR90 8/94
    The Inland Revenue How to complain about the Inland Revenue AO1 4/95
    Vocational training Tax relief for vocational training IR119 4/97
    Working for yourself Employed or self-employed?
    A guide for tax and National Insurance
    IR56/NI39 5/95
    Profits tax How your profits are taxed IR105 7/94
    Corporation Tax A general guide IR126 7/95
    Corporation Tax Company leaflet IR128 7/93
    PAYE Employer compliance reviews and negotiations IR109 3/97
    PAYE PAYE. Settlement agreements IR155 11/96
    PAYE Employers guide to PAYE and National Insurance Contributions CWG1 4/97
    Expenses Expenses payments: forms P11D
    How to save yourself work
    IR69 2/96
    CGT Capital Gains Tax. An introduction CGT14 4/97
    Self assessment A general guide SA/BK1 6/95
    Self assessment A guide for the self-employed SA/BK2 6/95
    Self assessment A guide to keeping records for the self-employed SA/BK3 6/95
    Self assessment A general guide to keeping records SA/BK4 2/96
    Self assessment Electronic version of the tax return SA/BK5 3/97


    Tax on profits and income

    If you are a sole trader or in partnership, you pay income tax. If you form a limited company, you must pay corporation tax on the profits your company makes. You must also pay income tax on your wages. These will be paid by PAYE (Pay As You Earn) as you are an employee of the company.

    Once again, your accountant can help you.

    VAT (Value Added Tax)

    Each year, the Government sets a level of turnover, and if your business goes over this level in any 12 month period, you must apply for VAT registration. In some cases, it might be best to register even if you are below this level. If you have any questions about VAT you can read the official guide 'Should I register for VAT?' or ask your local VAT officer or accountant for advice.

    What are my responsibilities as an employer?

    At first you may be able to run your business by yourself, if not, or as your business expands, you may need to employ people. If you do need to recruit employees, you should know your responsibilities as an employer.

    Every employee, whose employment continues for one month or more, has the right to receive a written statement setting out certain details of their employment. This should be provided no later than two months after their employment starts.

    This statement must include the following details:
    • The name of the employer and the employee as well as their job title and job description.
    • Their place of work.
    • The date the employee's employment and period of continuous employment began.
    • Terms and conditions relating to hours of work, holiday entitlement and pay (including public holidays).
    • The scale and rate of pay. Pay intervals and methods of calculation.
    • Grievance procedures.
    • Sickness procedures, including sick pay.
    • Pension schemes.
    • Length of notice needed to end employment.
    • Any collective agreements.
    • Disciplinary rules including the process and any appeal arrangements. (An employer with fewer than 20 employees does not have to give these rules.)


    Discrimination and the law

    Generally, when recruiting an employee, it is illegal to discriminate on the grounds of race, sex, disability and marital status, however there are certain limited exceptions. The anti-discrimination laws continue to apply to all other parts of an employee's job, including wages and holiday after the recruitment process. As an individual you could be personally liable for discriminatory actions.

    Tax and National Insurance Contributions If you employ anybody, either full-time or part-time, you are responsible for deducting income tax and National Insurance Contributions (NICs) from their wages, and you must also pay the employer's share of the NICs. If you are not sure about NICs, always consult your local Contributions Agency office. There are different tax and National Insurance rules depending on your circumstances.

    When you take on someone you need to tell your local tax office. They will send you documents that show you how much you need to take out of each employee's wages, and where to send the money. You must record each employee's earning and tax and National Insurance Contributions and tell your local tax office about these amounts every year.

    In the case of National Insurance, the contributions for your employee will be in two parts. You must pay one part and your employee must pay the other. These contributions depend on how much you pay your employee. The Inland Revenue will collect them at the same time as they collect any tax. Your local Contributions Agency office will be able to give you more advice on National Insurance.

    Your own National Insurance depends on your circumstances. If you are a company director you will be treated in a similar way to your employees. You will be classed as an employee of your company and will pay contributions in the same way as your employees but, there is a special way to assess directors' National Insurance. Please contact the Contributions Agency office for further advice on this matter.

    If you are a sole trader or partner you will need to contact both the Contributions Agency and the Inland Revenue. You can register with them by filling in one form - CWF1. On this form you choose whether to pay your National Insurance contributions every month by direct debit or every three months when you receive a bill. Your contributions will be charged at the same rate each week. You may also have to pay an extra contribution for any profit your business makes. This is assessed and collected along with your income tax.

    Health and safety

    You must make sure that, as far as is reasonably possible, the health, safety and welfare of your employees is not at risk whilst they are at work.

    Contact your local Heath and Safety Executive for advice and information that will help you set up and maintain safe legal working conditions for employees.

    Trade Unions.

    It is illegal to refuse a person employment because he or she is or is not a member of a trade union. You should know the various laws that protect your employee's rights to choose whether to join a trade union.

    Dismissing an employee.

    We hope you will never have to take such a drastic step, but if you do, you must have a valid reason for dismissal and you must act reasonably and follow procedures. Failure to do so could lead to an unfair dismissal claim. Unless the dismissal is for gross misconduct. You must give the employee notice of dismissal as set out in their contract. Failure to give proper notice may lead to a wrongful dismissal claim.

    Sub-contracting.

    One alternative to employing directly is to sub- contract some work. This may be more cost effective in ironing out short-term trading highs and lows, and might alleviate some of the responsibilities of an employer. However, legal responsibilities can arise in this respect, for example the transfer of undertakings regulations. You may need professional help in respect of such matters.

    You can get leaflets about employment related issues from the Department of Trade and Industry, the Advisory Conciliation and Arbitration Service or the Department of Social Security. The law in these areas change frequently and, you should know about the following current employment laws:
    • Disability Discrimination Act 1995
    • Employment Rights Act 1996
    • Data Protection Act 1984
    • Trade Union and Labour Relations (Consolidation Act 1992)
    • Trade Union Reform and Employment Rights Act 1993
    • Transfer of Undertakings (Protection of Employment) Regulations 1981
    • Equal Pay Act 1970 and 1983
    • Sex Discrimination Act 1975 and 1986
    • Race Relations Act 1976
    • Health and Safety at Work etc. Act 1974


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