Off the Top of My Head

Starting a Business Tutorial Series: Creating Your Business Legally (UK)

For this chapter I have asked Stephen Weir of Weirfire Web Designers to be a guest author due to the fact that UK law is not a strength of mine. I will return in the next Chapter to add the Ireland perspective. As with all legal advice, this is advice only meant to get you started. You should always consult with a lawyer and accountant in your state to be sure you are doing everything correctly. Mistakes at this point can be very costly in the future. We hope this guide provides you with enough information to be informed when you speak to your lawyer and/or accountant.

Legal Start Up for Businesses in the UK

In the following article there will be a discussion on the legal implications of starting up a business within the UK. There are 3 different types of companies which must be dealt with. These are sole traders, partnerships and limited companies. One of the major legal aspects of running a business is tax which will be covered briefly at the end of each type of business

Sole Traders

Sole trader status would apply to businesses where just one person will own the business and will have final responsibility for the running operations and development of the business.

As a sole trader, there is no responsibility to register with the Companies House, therefore you can immediately start trading as a sole trader. There are however some regulations applying to disclosure of ownership which you can read about in “A Guide to the Business Names Act 1985”

It is necessary for a sole trader to contact the Inland Revenue office to register for income tax and National Insurance within the first 3 months of trading. You can be invoked with a penalty of up to £1000 if you do not register with the Inland Revenue within this time.

In conclusion the legal implications for a sole trader are that the sole trader pays tax on all profit made by the business as the profit made is treated as personal income. It is a requirement that a self-assessment tax return is completed every year. Another legal implication is that sole traders are required to pay Class 2 and Class 4 National Insurance contributions at the current dates. Finally, it is also necessary to keep proper accounting records which includes a profit and loss account and a balance sheet, to submit with the self assessment tax form.

Partnerships

Partnership status is appropriate where a business is run by 2 or more people and where the decisions made about the running operations of the business are not just carried out by 1 person. Like the sole trader there is no legal requirement for a partnership to register with Companies House. Excluding accountants and solicitors a partnership cannot have any more than 20 partners.

As with the sole trader a partnership must also register with the Inland Revenue to say they are starting a business within the first three months of trading. All business cards, letterheads and business stationary must be printed to display both trading names and personal names, if these differ. The partners of the business should write up a letter or deed of partnership which each person will sign to confirm they agree with. In the deed the terms and conditions of the partnership will be laid out including such things as termination of the partnership, in the event of sickness, the roles each partner plays within the business, salaries etc.

In conclusion the legal implications for a partnership to begin trading in the UK are that any profit made from the business is equally shared between the partners unless otherwise stated in the deed of partnership. Partners would then be assessed for tax on the personal income. Each partner must individually fill out a self-assessment form each year according to their own incomes. The partnership is liable for VAT (value added tax) if the turnover exceeds the current limit which for 2005 was £56,000. Another legal implication is that each partner must pay Class 2 and Class 4 National Insurance contributions. Finally, the last legal implication for a partnership is that they should keep adequate accounting records and produce a profit and less account and balance sheet.

Limited Company

The main reason for the owners of a company to get limited status for their business is that they would then have limited liability for the debts of the business up to whatever limit their shareholding is. The owners of a limited company do not have any personal liabilities for the companies’ debts. In a sole traders business, their house could be sold to pay any debts incurred by the business which can quite often happen.

There is only a need for one shareholder in a private limited company but they cannot publicly trade their shares. The result of this is that the shares of a private limited company are mostly owned by the employees, family members, other businesses and acquaintances of the company. The limit for the number of shareholders in a private limited company is 50.

A limited company has the requirement of registering with the Companies House. This means that certain documents must be filled out along with a registration fee of £20. The forms will be sent by Company House for the owners to fill out. It is usual practise for the owners to hire an accountant or solicitor to fill out these documents. There is also the requirement of registering your company name with Company House before you begin trading with it. The restrictions on using a business name is that it cannot be registered in the same name as another company as well as certain words or offensive terms not being permitted. If the company is a private limited company there must be at least one shareholder as well as one director and a company secretary.

In conclusion, the legal implications of starting a limited company are that the company pays corporation tax on any of the profits incurred by the company. The company must carry out self-assessment for corporation tax and the employees and employers must pay income tax using the PAYE scheme. Another legal implication for a limited company is that both employers and employees pay Class 1 National Insurance. Finally, the last legal implication for a limited company is that the company is required to produce audited accounts (that is accounts prepared by a registered accountant) and to file an annual report with the Companies House which is available for viewing by any of the general public. Companies with an annual turnover of less than £1 million are exempt from this audit requirement.

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This entry was posted on Tuesday, March 21st, 2006 at 10:14 am and is filed under Online Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.