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Legal Considerations When Starting Your Own Business

September 2, 2020

The Covid-19 pandemic has already or will unfortunately result in redundancy for many people. But for some, it will present an opportunity to follow through on a long-held dream and take a new business idea to market, leading to a large number starting their own firm.

Every year, over 400,000 new businesses are started in the UK. The widespread belief is that following the Covid outbreak and people losing their current jobs, this may motivate an aspiring entrepreneur to start a new business.

Some would argue that in a downturn, organisations need to become more agile and those who drive success tend to be more focussed on delivering a business plan that improves customer experiences. A start-up with a new business idea can be well positioned to lead the way, creating new and efficient ways of doing business. Many of the biggest brands today were started in times of recession.

If you aspire to become a small business owner and wondering about the best approach for starting a new venture, there are several legal aspects that need to be considered in the business planning process and the best structure of your business start-up;

Deciding on the best new business structure

The four most common new business structures are:

  • Sole trader
  • Traditional partnership
  • Limited Liability Partnership
  • Limited Liability Company

Sole trader

Setting up as a sole trader is the simplest form of legal structure for a start-up. If you plan to freelance in the service industry, for example bookkeeping, consultancy, web design, etc, becoming a sole trader may be perfect for you.

To set up as a sole trader, you must notify HMRC of the fact, register for self-assessment, and file a yearly tax return. You will be taxed on your profits at the same rate as someone who is employed.

The biggest downside of being a sole trader is that you are personably liable for any business debt and/or contracts. It can also be challenging to enter into commercial agreements and attract investment as a sole trader.

Traditional partnership and Limited Liability Partnership

If you are combining capital and expertise with one or more people, you may wish to form a partnership. A traditional partnership is governed by the Partnership Act 1890, which doesn’t completely cover the modern alliance, so it is important to have a detailed Partnership Agreement drawn up which sets out matters such as;

  • the division of profits
  • duties, and responsibilities of each partner
  • what happens if one partner resigns or retires
  • dispute resolution

Limited Liability Partnership (LLP) is a business structure often used by professionals such as lawyers, accountants, architects, engineers etc. The main difference between a traditional partnership and an LLP is that each partners’ liability is limited. Every LLP must file accounts with Companies House, and these will be publicly available.

LLPs are governed by the Limited Liability Partnership Act 2000; however, partners can draw up an agreement which covers aspects of the partnership such as profit sharing, management of the business, and the appointment of new partners.

Limited Liability Company

Creating a Limited Liability Company (company) is a straightforward way to start a new business. You need to choose a company name and file a series of documents with Companies House, including;

  • Form IN01 (which provides information as to the company name, the names of the initial directors and company secretary, and the identities of the shareholders)
  • Memorandum of Association
  • Articles of Association

The advantages of setting up a limited company include:

  • you may pay less tax than a sole trader
  • a limited company is a separate legal entity which can enter into contracts and loan agreements which limits your personal liability
  • as your business grows, further shareholders can invest, and different types of share classes can be created, limiting the rights attached to shares – this is important if you are seeking private investment

As with an LLP, with a Limited Company will need to file annual accounts with Companies House and these will be available to the public.

Summing up

Getting the right structure for your new business idea from the outset is critical, ensuring you have the right level of business support to get you in the best shape.

As a new small business owner, getting expert advice to decide on the best legal structure of your start-up will provide you with the confidence that you are fully aligned with your business plan and goals.

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