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The Legal Requirements to Start a Small Business in the UK Explained

November 8, 2021
By James Gussie

A number of individuals and businesses are currently choosing to start a small business in the UK. With it becoming increasingly important, you should be aware that there is much more to starting this type of venture than just putting up some shelves and selling what’s on them.

The UK Small Business, Enterprise and Employment Act 2015 was signed into law to provide greater legal protection for small firms. This act has meant that there are now more rules governing the requirements of starting a new business in the UK than ever before. These include owning less than £100,000 worth of assets or having annual turnover under £6 millionStarting your own small business is both exciting and daunting. For some, it’s a lifestyle change that allows them to spend more time with family while for others it’s an opportunity to make money doing something they love. In the United States, there are no specific legal requirements in place when considering whether or not you can start a small business. However, in the UK government has put together a series of guidelines that must be followed if you’re going to open up shop here.,The “what are the legal requirements for starting a business” is a question that many people ask. The legal requirements to start a small business in the UK is explained.

For an entrepreneur, starting a new company is a hectic moment. You’re working on a business strategy, putting together a financial plan, and perhaps pitching investors or looking for financing. Ensure that all legal responsibilities are fulfilled is something that is sometimes neglected but is very important. Failure to comply may result in penalties and perhaps even legal action.

This article should assist you in navigating the legal elements of establishing a business in the United Kingdom, from naming your company to hiring employees later on. You may include important legal considerations into your conventional business plan, or you can create a separate legal plan or checklist to ensure you’ve covered all bases.

While the legal procedures discussed are unique to the United Kingdom, the basic categories are likely to apply regardless of where your company is situated. So, without further ado, let’s get started.

Table of Contents

Choosing a company name

To prevent confusion, you must pick a unique name for your company that is not currently in use.

encounter difficulties If the name is too similar to that of other firms, it may be assumed that there is a link between them, and you may be accused of attempting to pass your company off as theirs and stealing their customers as a consequence. If they file a trademark infringement complaint against you, you may be forced to alter your company name, pay damages, and spend more time and money re-doing signage, stationery, and advertising.

Made Simple makes it simple to discover whether your name concept has already been taken, and it’s also a good idea to double-check if a comparable trademark already exists.

Choosing your company’s legal status

Whether you need to register your company with Businesses House, the UK’s registrar of companies, depends on the legal status you select. The legal standing of your company has an impact on the documents and accounts you must maintain, the amount of tax and National Insurance (NI) you must pay, and your financial responsibility if the company fails.

It’s also worth mentioning that in the United Kingdom, workers must pay National Insurance payments in order to be eligible for some government benefits and a state pension when they retire. The amount will vary depending on your company’s legal status. When starting a new company, these are the most popular kinds of legal business structures to consider.

a sole proprietorship

If you are the only owner, this is the simplest choice (you can still employ people). It is not necessary to register your company with Companies House, and maintaining records and accounting is easy. Many companies begin as sole proprietorships and subsequently alter their legal status.

You may keep all of your profits and file your own self-assessment tax return online each year, or hire an accountant to handle it for you. In the following part, you’ll learn more about paying taxes.

Because there is no official registration, you will still need a trademark to protect your company’s name. You’ll have to calculate the cost of this to determine whether it’s worthwhile.

The disadvantage of being a single trader is that you have unlimited liability, which means you are responsible for all of the company’s obligations. If the company runs into financial difficulties, you may be forced to put your personal assets, such as your home and savings, at danger. Sole traders also have a tougher time getting the money they need from banks, but if your company is low-risk and does not require financing, this may be the best choice for you.

Some individuals prefer dealing with sole traders over dealing with limited corporations since the business seems more personal, especially if the job is delicate.

Partnership

When there are many company owners and two or more individuals share the expenses, risks, and obligations, this is the simplest choice. There is no need for equal shares, and each person’s responsibility is proportional to their share.

The disadvantage is that, like a solo trader, partners are not financially protected. If the company fails, you may be held responsible for your partner’s portion of the debt. To prevent this situation, form a Limited Liability Partnership (LLP), which will be liable for any debts rather than the company owners.

Limited liability corporation (LLC)

The majority of limited businesses in the United Kingdom are limited by shares. Setting up the firm as a limited company creates a distinct legal entity that protects you financially by keeping the company’s funds separate from your own.

It’s more difficult than starting a company as a sole trader since you’ll have to register with Companies House, submit accounts and yearly reports to them, and follow their record-keeping rules.

By forming a limited liability company, you may be able to save money on taxes and find it simpler to get funding. Before establishing your company, it’s a good idea to talk to an accountant about these particular advantages.

Having to pay income tax and National Insurance

As soon as you start operating, you must register with HM Revenue and Customs (HMRC) so that you may pay income tax on your profits as well as Class 2 and 4 national insurance (NI).

This may be completed online, and HMRC will create an account for you to complete your self-assessment. They’ll contact you with a ten-digit Unique Taxpayer Reference (UTR) and give you a letter with an activation code to access the account in 2-3 weeks.

You’ll need to maintain track of your company sales and expenditures to fully complete your self-assessment. I have a separate business account that I use to purchase the items I need for company operations to help me remain organized.

Accepting cash payment makes keeping track of profits a little more difficult, and it may be necessary to maintain and submit receipts. You may also use your accounting software to keep track of this and add the data to your monthly financial statements.

If you’re relocating to the UK to establish a company, you’ll need to apply for an NI number, which you can do by calling 0800-141-2075.

VAT stands for Value Added Tax (VAT)

VAT (Value Added Tax) is a tax that is levied on most products and services. If your VAT taxable turnover will exceed the existing limit in any rolling 12-month period, you must register for VAT. The current maximum is £85,000, and you don’t have to add any values from VAT-exempt transactions.

Most food and children’s clothing, for example, are exempt from VAT. In addition, some products and services, such as home energy and children’s car seats, have a reduced rate of 5%. VAT is charged at a normal rate of 20%.

Further information on how to register for VAT may be found at www.gov.uk/vat-registration.

Insurance

Some insurance plans are mandated by law, while others are optional if you wish to protect your company from specific dangers. Your car, equipment, facilities, workers, goods and services, company concept, and even yourself are all parts of your business that you may insure.

Insurance for automobiles

Vehicle insurance is always needed by law. If you want to drive your car for work, you must ensure that it is insured for the appropriate class of usage. If you use the car for commercial reasons without changing your insurance to reflect this, all claims will be denied.

Other vehicle insurances are available to protect items such as tools in a van, which would need Goods in Transit coverage. www.confused.com/van-insurance/goods-in-transit allows you to compare the prices of various plans.

Indemnity for professionals

Certain professions, such as accountants and financial advisers, need this insurance. This shields them against claims from consumers who have lost money as a consequence of their errors or carelessness. Other professional advisers often get this insurance for their own peace of mind in the event that their clients sue them.

Employer’s Liability Insurance is a kind of insurance that protects businesses against lawsuits.

This is a legal requirement for every company with workers. This is to shield you against any claims made by an employee as a consequence of an accident or sickness that occurred while they were working for you.

Consider additional insurance coverage.

Depending on the nature of your company, you may wish to consider the following insurance policies:

Structures and contents
Business Interruption —These plans generally cover any time you are unable to function due to external reasons like bad weather. The scope of your policy’s coverage is entirely determined by the restrictions set out in your insurance contract.
If you have access to information that might be useful to fraudsters, having cyber insurance can help you manage the expense of the event and cope with any regulatory action taken against you.
Employment Security
Insurance for key personnel
Money on the move
Liability for Products
Liability to the public
Shop around for insurance.
Theft

It’s important to note that all company insurance costs are tax deductible.

Because there are so many insurances to consider, speaking with a local insurance broker to ensure you have the coverage you need is a good idea. The Association of British Insurers (ABI) website has a section dedicated to assisting you in selecting the appropriate insurance for your company.

Obtain industry-specific certifications.

Certain companies must get a license from the local government in order to operate lawfully. Hotels, hair salons, street vendors, boarding kennels, and restaurants are just a few examples.

To find out whether you need to register or get a license, contact your local government and seek to talk with Local Planning or the Building Control Office, since failing to do so may result in a criminal charge.

Local governments also have Trading Standards offices that may assist you in becoming legally compliant in your industry. To be compliant, you’ll need to figure out who your industry’s regulator is and then find a method to maintain your knowledge up to date.

Is it necessary for me to get planning permission?

While you’re determining if you need a license from the local government, you should also inquire about whether you need planning approval. Even if you are not altering the physical structure, working from home or changing the use of a property may need planning permission.

If you start a company at home without authorization, you risk being penalized. Your neighbors may file a complaint if your construction results in increased foot traffic, a shortage of parking, excessive noise, and so on.

As soon as possible, inquire about your business’s intentions with the local planning or building control office. If planning permission is required, it may take time and money, so it’s best to find it out early on.

Recruiting personnel

If you want to hire employees, you’ll need to make sure you follow specific labor laws. Here’s what you’ll need to do.

Perform background checks on applicants

It is your legal duty as an employer to ensure that any employees you hire have the legal right to work in the United Kingdom. Depending on the industry you work in, you may also be required to do a criminal background check, commonly known as a DBS check. Failure to do so may result in a civil penalty for you and your company.

As an employer, you must register with HMRC.

Within four weeks of hiring your first employee, you need register with HMRC. You’ll be in charge of deducting any taxes and NI contributions from your employees’ salary. If you don’t prepare ahead, you’ll be liable for paying any leftover employee or company taxes at the end of the year.

Minimum wage in the United States

You must ensure that all employees are paid at least the current national minimum wage for all hours worked. The rate is determined by the employee’s age and whether or not they are an acting apprentice.

Auto-enrolment in pensions

As an employer, you are required to enroll all eligible employees in a workplace pension plan. There are several pension kinds that require you or the government to match each employee’s pension with a specified monetary amount. Employees in most automatic enrollment plans contribute based on their overall wages, which includes:

wage or salary
commissions and bonuses
overtime
sick pay is a legal requirement.
maternity, paternity, or adoption compensation that is mandated by law

Employment statement

You must provide a formal statement of employment to all employees who will be with you for more than a month. This agreement outlines the terms of their employment, including hours and compensation, and must be provided to employees within eight weeks of their start date. Furthermore, employees should be provided a contract (which can be incorporated with the statement of employment).

Their rights, duties, and working conditions are all spelled out in the contract. Make sure the contract specifies which provisions are contractual and which are not, since this may impact your ability to make future modifications.

Insurance for employers’ liabilities

We’ve already stated it, but if you hire anybody who isn’t a direct family member, you’ll need to get employers liability insurance. This kind of insurance can protect you against claims filed by workers who are injured or get sick on the job.

Safety and health

Employers must offer a safe working environment for their employees. If you have more than five employees, you must have a documented health and safety policy. This comprises a safe work environment, safe access to work, safe work processes, safe equipment procedures, safe worker interactions, and protection against injury hazards.

Legislation that may have an impact on your company

Legislations are laws and regulations that must be followed while operating a company. I haven’t mentioned them all since they won’t apply to every company, but you’ll need to figure out which ones do. We’ll go through the most frequent ones, but for additional information, go to www.legislation.gov.uk.

Employment legislation

Employees’ rights, as well as their health and safety, are protected by employment law. We’ll go through the major laws that employers should be aware of.

The 1974 Health and Safety at Work Act

Workers’ health must not be harmed by the premises or equipment. If you have five or more employees, you must have a written health and safety policy in place, as well as risk assessments that must be recorded and communicated to the workers.

In 1970, the Equal Pay Act was passed.

Employees must be compensated equally regardless of their gender for work of equal worth.

1975’s Sex Discrimination Act

Discrimination against employees is prohibited at all stages of recruiting, training, and employment.

1976 Race Relations Act

Discriminating against someone because of their skin color, ethnicity, or ethnic group is prohibited.

The 1978 Employment Protection Act

Employers are required to furnish workers with a formal employment contract. This protects employees from wrongful termination and provides them the right to redundancy compensation if their employment is no longer needed after two years.

Protection of the consumer

Customers are protected by consumer protection laws against unfair company practices.

Act on the Sale and Supply of Goods

The goods must be of a reasonable quality. This applies to any products that customers have selected and decided to buy.

The Trade Descriptions Act (TDA) is a federal law that

Goods and services must be exactly as described, and you must not provide false information.

The Act on Distance Selling

Some selling techniques, such as online purchasing, require you to provide a “cooling-off” period during which a client may cancel a purchase and get a refund.

GDPR (General Data Protection Regulation)

This will apply to everyone who needs to collect consumer information, which covers the vast majority of companies. You’ll want to make sure you understand the scope of these safeguards, and you can get further information from the Information Commissioner’s Office.

Create legal papers for internal use

Internal legal papers assist to build trust in your company for the benefit of all parties involved, including customers, workers, and prospective investors.

policy on data protection

A privacy policy informs your consumers about how their information will be collected, utilized, kept, and safeguarded. It should also specify if any personal information will be shared.

handbook for the company

As your firm develops, you’ll most likely make changes and additions to your company handbook. In a nutshell, it’s a book that summarizes how you run your company. It should be accessible to all employees at all times; you may either give everyone a copy or make it readily accessible for reference. Here’s what you should include.

The mission statement of your business

Your workers want to know what your company’s objectives are and why it exists. It’s here that your mission statement comes in handy. In general, it should contain information about your company’s history, vision, and objectives.

Your company’s policies

Your business rules are usually extensions of mandatory law requirements, as well as any extra company-specific regulations. This may be anything from having a clear desk policy outside of office hours to help safeguard data to the manner you want your employees to answer the phone.

Human resources and employment-related legal information

You’ll need to handle the following if you don’t have an HR staff to assist you define every policy:

Getting a job with the business
Employee advantages
hours of work
Sickness absence and annual leave
Policy for managing short- and long-term absences, as well as reporting requirements
Bribery, secrecy, whistleblowing, and data protection are all issues that need to be addressed.
Policies on equal opportunity and anti-bullying and anti-harassment
IT is in charge (including areas such as social media use both inside and outside of work)
Your health and safety policy, as well as how you and your employees plan to execute it.
Procedures for disciplinary action and grievances
Family-friendly laws measures that are flexible
Targets and processes for capability and performance management
Retirement and redundancy are examples of job terminations.

It’s a good idea to avoid making any business rules contractual for employees so that you may change them at any moment in the employee handbook.

Keeping legal counsel on retainer

Having a solicitor on retainer is beneficial because you can receive advice whenever you need it. Although you are unlikely to require a solicitor often when establishing and running a small company, having phone assistance accessible for when you do can be useful.

Peninsula Group Limited, a big national company, provides this service, but you may want to consult a local solicitor or a more friendly and personal service.

What are the benefits of creating a legal action plan?

When pitching investors or asking for financing, including a legal action plan in your broader company plan may be essential. To make your milestones more useful as a management tool, include explicit legal actions in them.

Now that you’ve gone over a number of different legal topics in this book, you may find it simpler to create your own legal action plan. Because employment law is such an important element of legal preparation, if you do not intend to recruit any employees and will be operating on your own, you may just need a basic legal checklist.

In any event, make sure you have a strategy in place to ensure you cover all bases.

Don’t be intimidated by legal restrictions.

This may seem overwhelming since there is so much to consider, but I hope that this information will assist you in planning and fulfilling your legal responsibilities. It’s important to begin small while keeping the larger vision in mind. Keep returning to your conventional business plan to make sure you don’t lose sight of your goals.

If you have any queries or concerns regarding particular legal requirements, see the official UK government website or contact a legal professional immediately for help. Wishing you the best of success with your new business!

Note from the editors: This material is for informative purposes only and should not be construed as legal advice. Contact your chosen legal advice if you have any concerns about particular laws, licenses, or safeguards.

Starting a business in the UK is not as difficult as it seems. There are legal requirements that must be met before you can start your own business. The “starting a business checklist uk” will help you to understand these requirements.

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Frequently Asked Questions

What are the legal requirements for starting a small business?

A: To start a small business, you need to register your company with the state and pay income taxes. There are also requirements for mandatory annual filings, such as invoices and records of transactions that must be filed on time to avoid penalties.

What are the rules for a small business?

A: A small business is a company or organization with fewer than 500 employees. They must follow federal and state laws, as well as industry standards for the type of work they do.