Legal Business Guide
Companies with fewer than 49 employees are classed as 'small to medium businesses or SMEs', they account for 99.3% of all businesses. These businesses are vital to the economy and provide good employment opportunities, they account for 60% of all private sector employment.

However, as one in three small businesses fail within the first year, and 50% of business don't last beyond 5 years the importance of building secure foundations cannot be underestimated. Do your research and plan your business before you launch it to avoid adding to the statistics. It takes an awful lot of hard work, research, dedication and planning to make a success of your venture: there are no shortcuts.

There’s no doubt that starting your first venture can be an exciting, albeit daunting, experience. Being your own boss has many advantages. However, it is easy to get carried away with ideas for your new product or service and forget about the basics. You must have the right processes and contracts in place to protect your idea and you must be able to finance your venture as it grows, particularly if you are going it alone.

This guide is designed to give you the basic information to get you started. Depending on the type of business you are planning to launch, you may need to look at some areas in greater detail than others (for example, finding suitable business premises might not be relevant if you’re intending to operate from home).

Research your business idea

Chapter one: Researching your business idea

The first stage is to do your research. It may sound obvious but it’s a key point many people forget.

There are many elements you should research in order to ascertain if you have a viable proposition for a new business and whether you have the skills, knowledge and finance to make it happen.

The marketplace

The market you operate in will depend on the type of business you’re looking to launch. If you intend to operate from physical premises, then the location is important. If you will be operating online, you need to understand how people are operating across digital channels.

Regardless of whether you are online or off line, you must undertake market research by identifying and analysing the needs, size and future potential of your chosen market and understand the competition already operating within it.

Your competition

Market research is also a key factor in maintaining your competitiveness once you are up and running. Regardless of the sector in which you’re hoping to operate, you will have competitors who are either offering the same, or a very similar, service to the same, potential customers you want to reach. It is, therefore, important that you research everything they do thoroughly and learn from their successes and mistakes.

How are you going to position yourself?

Now you know who your competitors are and the landscape of the marketplace, the next stage is to look at positioning. What are you going to do differently to make you stand out from the crowd? What will be your unique selling point (USP)?

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Write your business plan

Chapter two: Writing a business plan

Many people think a business plan is only needed for raising finance for a start-up. Although it is certainly a requirement if you’re looking for a business loan, it is also a really useful strategic tool to have in your armoury regardless of how you intend to fund your venture. It allows you to focus your efforts and helps you to consider all the possible pitfalls before going to market. Typically a business plan has a three-year forecast which acts as a roadmap for your future growth. It should be a living document which you continuously amend and update as your business develops.

There are certain elements every business plan should contain such as your overall vision for the business, objectives, marketplace, funding, people and products; there will also be elements specific to your marketplace. You will need to research these carefully. Some of the large banks have their own templates for this purpose.

Templates from banks

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Chapter three: How to structure your business

There are several ways to structure your new business; the route you choose depends on several factors including whether you have to employ other people, your growth plans and the type of business you are planning on launching.

Sole Trader

There are many advantages to being a sole trader when you first set up. You are effectively a self-employed individual so are responsible for your own tax and NI contributions which makes accounting far easier. You do not have to register with Companies House and submit company accounts each year. However, it important to take into account the disadvantages of being a sole trader before you commit yourself.

Key advantages:

  • Easy to set up
  • Less regulation
  • Fewer start-up costs

Key disadvantages:

  • Might not look as professional
  • Personally liable for debts of business
  • May be harder to raise finance

Partnership (unincorporated)

If you’re looking to launch your new business with someone else you could set up as a partnership. This means that you will be setting up a legal entity which you co-own so you are jointly liable for any issues and debts.

Key advantages:

  • Easy to set up
  • Less regulation when compared to LLP
  • Work can be shared amongst partners

Key disadvantages:

  • Disputes could easily disrupt the business without a written agreement
  • Partners are personally liable for debts of business
  • Decision making can be more difficult

Private limited company (limited by shares)

Perhaps the most commonly envisaged way to start a business is by setting up a private limited company. This means registering your company at Companies House in Cardiff (for companies in England and/or Wales). On registration, the company must have at least one director (manager) and shareholder (owner) who can be the same person. Companies also have the option of appointing a company secretary (although this is not mandatory). Each year, companies must submit accounts and a statement of company information (called an annual return) to Companies House. A limited company can have many shareholders.  From a legal perspective the financial liability of the shareholders is limited to the original amount invested (subject to complying with the law of course!)

Key advantages:

  • Limited liability for business owners
  • More likely to be able to raise finance
  • More credible than a sole trader (on the face of things)

Key disadvantages:

  • Submitting annual accounts and returns
  • Main governing document of the company (Articles of Association) is publicly available
  • More regulation than sole trader or unincorporated partnership

Limited liability partnership (LLP)

A limited liability partnership differs from a limited company in that the directors are not responsible for the actions of each other. There is also no corporation tax to pay; tax is paid by the individuals on their earnings, like an unincorporated partnership. LLPs are typically popular in the professional services sector (such as lawyers, accountants and surveyors). The main advantage of an LLP over a limited company that the former’s governing document (the partnership document) remains private.

Key advantages:

  • Limited liability for business owners
  • More likely to be able to raise finance

Key disadvantages:

  • Submitting annual accounts and returns
  • More regulation than sole trader or unincorporated partnership

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Raising finance for your start-up

Chapter four - Raising finance for your start-up

A major stumbling block for many new businesses is raising the initial capital to fund the start-up costs and then the ongoing, working capital to maintain and develop the business. Banks, the traditional route for raising money, have been much more conservative in their approach to risk since the 2008 economic crash and have been applying more stringent criteria when lending money. 

However, all is not lost and there are other options available to budding entrepreneurs.

However you choose to raise funds, you must make sure that the financial elements of your business plan are well researched, complete and achievable.

Self-financing

Self-funding is a popular way to finance a new venture. It stands to reason that investors will be more open to helping you grow if you have stumped up the initial finance yourself, after all, why should they risk their money if you don’t have the self-belief to risk your own?

There are many options for self-financing, for example you can rely on your savings, cash in investments or take out a personal loan to fund the capital you need to get started.

Business loans

Business loans are another popular route for raising finance for a new venture. However, as noted above, banks tend to be cautious and so you will need a watertight business plan if your application is to succeed.

Crowdfunding

Launched in the late 1990’s, crowd funding is now a well established approach to raising finance. This has worked particularly well for technology start-ups where people are keen to be involved at the outset in the hope they have stumbled across the next Apple. Crowd funding involves many investors contributing (usually) small amounts to the project. As a reward for their investment, they are often given sample products pre-launch. Investors invest via a crowd funding platform (Kickstarter is one of the better known platforms) which takes a percentage of the investment fee.

Venture capital

Venture capital funding is usually associated with larger, more established businesses looking to expand using a large cash injection. Fortuitously for small businesses and start-ups, venture capital firms have recently shown a keen interest in backing entrepreneurs. They offer private investment in return for an equity share in the business – think Dragon’s Den!

Bear in mind that with this approach, you will lose some control over your business as you will be giving away equity shares so will no longer be the sole owner. However, the upside is that you can benefit from the advice and input from someone with more experience than you who is willing to help you grow the business further.

Grants

Business grants are there specifically to help people get their business ideas off the ground. However, many are put off because of the sometimes convoluted, complex application process to obtain the funding. There are a number of government grants available for start-ups and small businesses as well as enterprise grants from organisations such as the Prince’s Trust.

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Legal and commercial elements

Chapter five – Commercial and legal elements

There are a number of commercial and legal elements to consider when you’re setting up your business. Make a list of what you need to do at the beginning so you don’t fall at a hurdle further down the line. Unfortunately many start-ups wait until there is a problem before seeking professional advice, when it is often more expensive to fix or the damage to the business may be irreparable. It is surprising the number of clients who come to us with a problem who have no written agreements in place. This makes any disputes that arise all the more difficult to resolve.

Legal overview

Many people worry about consulting a lawyer, with concerns over fees and fears that they may overcomplicate something you feel should be straightforward. However a well-drafted contract, governing the relationship between you and your customers, will help to resolve many issues and stop them escalating into a much more expensive dispute. There are also other areas you need to consider:

  •  if your business is successful, you may need to employ staff and so will need to consider employment legislation and contracts (see Chapter Six)
  • although your brand will have automatic intellectual property rights, they will be limited in some circumstances so you should consider what more you can do to protect your brand and maximise its value
  • if you trade with consumers, you will need to ensure you comply with current consumer legislation, including data protection

The above is by no means exhaustive, but failure to take the above into account could have serious ramifications for your business – and your finances.

Trading Terms

Whether you sell goods, services or even digital content, you must have terms and conditions governing sales with your customers, regardless of whether they are other businesses or consumers (or a mixture of both). In any event, having a robust set of terms not only sets out your rights in respect of getting paid but it also defines and limits your obligations.

You also need to consider your suppliers’ terms and conditions: make sure you understand what you are purchasing, the cost of purchase, when you are going to get it, and what will happen if something goes wrong.

Other routes to market

Rather than selling directly to customers, you can appoint agents (an agency) or distributors to sell your product or set up a franchise. However, you will still need to have trading terms.

Agency – the process of appointing agents to enter into contracts on your behalf, usually in return for a commission. Agents are particularly useful if trading abroad.

  • you still contract with the end user but don’t have direct contact with them.
  • an agent is useful if you are unfamiliar with the market and need additional expertise,
  • disadvantages include still being directly liable to the end user and also having to pay a potentially hefty commission to agents when terminating their agency agreement.

Distribution – the process of appointing distributors who will purchase stock directly from you and then sell into a set market/territory.

  • you do not contract with the end user.
  • you are paid by the distributor who purchases your stock.
  • distributor retains the customer base (although could be contractually obliged to share it with you).

See also: Agency and Distribution FAQs

Franchising – the process of licencing your brand and business out to franchisees who operate your business (usually in a specific territory) for you.

  • As franchisor, you receive royalties in return for letting the franchisee use your brand.
  • Quick way to expand as the franchisee incurs the start-up costs for their operation.
  • Problems with franchising include lack of control over the franchisee and the potential risk to your reputation/intellectual property.
  • See also: Could franchising unlock your business dreams? 

Intellectual property

Intellectual property (IP) Copyright, trademarks and patents are all things you should consider. It is wise to organise your intellectual property portfolio from the start. This has a number of advantages: it will help to maintain your brand integrity; your intellectual property rights are recognised by law; and it will help to protect your brand and avoid any infringements of third party intellectual property rights.

Outsourcing contracts

A small business or start up is unlikely to consider outsourcing at the outset. However, as the business grows, it might prove to be more efficient and cost-effective to outsource certain functions to specialist operators. Sub-contracting is more likely, particularly if you have a small building business and need to sub-contract specialist services such as steelwork. If you’re planning on outsourcing or using sub-contractors to help with any part of your business you should have a legally enforceable contract in place to protect you and your business in the event of a dispute.

Outsourcing is the process of contracting a specialist supplier take over a function of your business (such as cleaning services). Outsourcing is often a cheaper way of running a particular function although the downside is some loss of control.

On the other hand, subcontracting involves you delegating your obligations to a customer under a contract to a third party. It is important to ensure there is no gap in obligations between your obligation to the customer and the subcontractor’s obligations to you.

Data protection

The Data Protection Act 1998 applies to all businesses and organisations holding customer information, containing identifiable personal information, in either an electronic or paper based format.

Consumer rights

Consumer rights have been strengthened by the enactment of the Consumer Rights Act 2015.  Therefore, it is important that you are aware of your legal responsibilities and your customers’ rights, as well as ensuring that your terms and conditions are compliant, before you start trading.

Finance

Aside from raising the initial finance for your start-up you’ll also need to think about how to manage your budget and cash flow. This will depend on how you decide to structure your business. Your financial structure needs to reflect the fact that you will be responsible for contributions to HMRC and for paying yourself, employees and your suppliers.

An accountant can advise on an accounting system to suit your business. They can help with personal and business tax, HRMC and year end reports and submissions.

Insurance and licensing

Depending on your business there is a wide variety of insurances and licences you may need to meet legal requirements and protect yourself from any financial claims.

You may need licences for your premises, food, alcohol and entertainment or a one-off licence for some events. A brief summary of the two most common types of business insurance are below:

Public liability

Public liability simply protects you if your business causes injury or damage to any member of the public or their property. It offers financial insurance against any compensation claims brought against you.

It’s worth shopping around and doing your research. Some specialist businesses need certain clauses in their insurance to offer additional protection. For example, if you are working with animals you may need specific public liability insurance to cover all eventualities whilst they are in your care.

Product liability

If you are intending to invent, produce and manufacturer a product then you will need to consider product liability insurance. Your product may have passed all required statutory and non-statutory tests but if, for any reason, it causes damage or an injury to a third party then you may be held liable. Insurers offer a range of coverage to protect you and your products.

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People

Chapter six - People

People are one of the biggest assets to your business. It is important you recruit and retain the right employees from the outset. It’s also good to know your rights and legal redress should you encounter any issues along the way.

Recruitment

There are many way to approach recruitment; as a start-up it is less expensive to recruit directly rather than use recruitment agencies. When crafting job adverts, you must avoid using words or descriptions that might imply discrimination, so only mention those attributes specifically required for the job. Match the media you use to the vacancy you have so that you tap into the largest pool of potential candidates and remember that the personality of the person and their fit with your culture and values is as important as their skills and experience.

Employment law

Employing people is a big responsibility and should be treated accordingly. Employment law not only covers larger issues such redundancy or tribunals, it also covers day to day aspects such as employment contracts and employee handbooks which should include workplace policies. The latter are important; they ensure that employees know where they stand in relation to disciplinary matters and give guidelines as to appropriate conduct in the workplace.

Employers’ liability

If you employ staff you need insurance against liability for disease or injuries arising from their employment with you. This insurance protects you against any compensation claims caused on or off site. It’s worth noting you can be fined up to £2500 a day if you do not have appropriate insurance.

PAYE

‘Pay As You Earn’ is the system used by HMRC to collect employees’ tax contributions directly from their salary rather having to complete a tax return at the end of each financial year. HMRC generate a tax code for your employees and you will need a system in place to deduct contributions from your employees.

Pensions

You will have no doubt seen the “we’re in” pension auto-enrolment adverts on mainstream TV. As an employer you have certain obligations under pension law. All employers will eventually have to provide their employees with a workplace pension scheme and the starting date will depend on their size. This is automatic enrolment. Employees will qualify to join the scheme if they:

  • Are between the ages of 22 and state pension retirement age
  • Work in the UK
  • Earn over £10,000 per annum

As an employer you must contribute to the pension scheme. If you don’t comply you will be issued with a penalty.

Incentives

As a new employer you may want to incentivise your employees in both a tax efficient and cost effective manner. There are several options which allow you to motivate your key team members whilst maintaining the cash flow in your business. It is worth consulting your employees to find out what benefits they would value: it could be family friendly benefits such as flexible working, a bonus scheme or a company car.

There are also some unique and modern ways of incentivising a team using modern technology and apps.

Health and safety

The law states that all employees are entitled to work in a safe environment. Therefore you need to ensure that the building is properly maintained, that computers are set up correctly and proper guidance for undertaking certain tasks (such as working from height) is in place.

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Your business premises

Chapter seven - Premises

You may be able to run your business from a home or you may need commercial office space, a retail or distribution unit. Regardless, you need to ensure that any arrangement you make is legally compliant and does not put you at a disadvantage:

Licensing or leasing

There are usually two ways of leasing business property. In the short term, a licence is flexible, cheaper to organise and does not tie you in to a long financial contract. Alternatively, leasing gives you more legal rights, agreed rents and therefore more long term security.

Outsourcing

As discussed in the Commercial and Legal chapter, outsourcing is a cost-effective way to remove non-essential business tasks and allow you to focus your attention on your key business activities, for example you may choose to outsource your IT or payroll. It allows your business to utilise the skillsets of key professionals without incurring the expense and responsibility of employing someone directly.

It’s important when you’re outsourcing to have a contract to govern the relationship between you and your supplier. This should include many points including but not limited to protecting your assets (including your IP), migration of services, and confidentiality.

Rates

Business rates apply to business premises. The responsibility for paying the rates usually lies with the business which occupies the unit rather than the owner of the building. You need to check your lease carefully and account for rates payable in your business plan.

As a small business you may be entitled to rates relief: there is a Government scheme (Small Business Rates Relief scheme (SBRR) designed to help start-ups get off the ground and avoid some initial costs. There are other relief schemes available for charities, enterprises and retail.

Insurance

As discussed in previous chapters of this guide, it’s worth considering what insurance you need to cover particular aspects of your business; in some instances it is a legal requirement. For instance, you’ll need commercial property and content insurance for your premises. You may also want to consider things like business interruption cover.

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Launching and marketing

Chapter eight – Launching your venture 

Once your products and new services are in place and you’re ready to launch to the market, the next stage is promoting your product / services to your target audience.

Website

Google currently processes over 40,000 searches per second so a website for your new product or service is essential to maintaining a presence in the digital world.

There are a few key points to think about when approaching the design and development of your website, most importantly, design for your users, not you! You’ll need quality content, a website that is easy to navigate, high quality imagery and clear calls to action. It doesn’t have to cost a fortune to have a website designed; try using a freelancer rather than an agency but research their previous work and the position their websites have achieved on Google.

For Google, make sure your website is responsive; this means it adjusts to the screen size it on which it is being viewed, such as a mobile phone or tablet. As more and more people use the internet on the move this is now more important than ever. Speed is also important:  both users and Google are impatient so don’t over load your pages with large images and documents or scripts that have a large file size.

We could talk for hours on how to rank your website on Google but these guides should give you a good start.  

Social Media

Do not underestimate the power of social media. Whether it’s Facebook, Twitter, LinkedIn, Snapchat, Instagram, Youtube, the possibilities for your business are endless. It allows businesses to see who is following them, to target their marketing to a very specific audience and, most importantly, it allows you to communicate with customers (both actual and potential) very quickly and efficiently. If used properly it can make a huge difference.

Marketing

Your marketing plan will depend on the product or service you are supplying and your target audience. All businesses need to be mindful of their brand reputation, especially in the digital world.

Networking

Many consider business networking to be crucial when starting a small business. It can be a great way to raise awareness of your business among the local business community while making useful local contacts.

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all images adapted from freepik.com