Legal Basics for New Business Owners
An introductory guide to the key areas of law you need to be aware of when running a business
When setting up a new business, it’s essential to familiarise yourself with the key relevant aspects of the law. Breaking the law through ignorance is no defence, and could result in hefty financial penalties or even imprisonment, so it pays to be informed.
This guide gives an overview of the key areas you need to be aware of when running a business, such as:
- Your trading status
- Choosing a name for your business
- Leasing premises
- Data protection
- Refunds and returns
- Agreement and contracts
- Taking finance
- Intellectual property
- Employing staff
- Health and safety
- Business insurance
- Terms and conditions
- Working from home
- Environmental issues
Your trading status
You’ll need to decide whether you want to set up as a sole trader, partnership or limited company.
To start a business as a sole trader, you need to inform HM Revenue and Customs that you are self-employed. If you trade under a name other than your own, you must also put your own name on your stationery.
A partnership is formed when two or more people get together to start a business, sharing the workload and investing capital.
If you establish a limited company, you must register it by sending the necessary forms to Companies House.
You don’t have to do so by law, but it is wise to have a written partnership agreement (even with a spouse) and get it checked by a solicitor. If you don’t, you will be bound by the terms set out in the Partnership Act 1890, which allows a partner to withdraw without giving notice, and to insist on the immediate return of their capital contribution.
Be careful about unintentionally creating a partnership. If you run a business with somebody, but don’t employ them, they are entitled to a share of the profits. Most importantly, in a partnership, partners are each responsible for business debts incurred by other partners, whether or not this was agreed, and there is no limit to their liability.
Limited liability partnerships
These are a hybrid between a normal partnership and a limited company. You can operate like a normal partnership but have, in effect, limited liability. You will need to register this type of partnership with Companies House.
Incorporating a business
The main advantage to incorporating a business is limited liability. As a sole trader, the owner of a business assumes all the liability of the company, but when a business becomes incorporated, each individual shareholder’s liability is limited to the amount they have invested.
A limited company can continue despite the resignation, death or personal bankruptcy of either its management or shareholders. It’s also a good structure if you plan to expand, since it is easier to raise capital from outside investors by selling shares. However, company directors have certain duties and failure to fulfill these can result in fines, personal liability, disqualification and even imprisonment.
For more information, see our guide to Becoming a company director and your responsibilities.
Choosing a name for your business
You should avoid choosing a name which could be confused with an existing business in the same area or trade, as that business could take you to court to make you change your name. Companies House may also refuse to register a company name which is confusing, misleading or offensive.
For more information, see our guide to Choosing and protecting your business name.
Be careful when signing lease agreements, especially for property. Even if you move your business and sell the lease on, you could find yourself liable for the residue if the next person defaults.
It’s worth checking whether, under the terms of your lease, you will be responsible for repairs and improvements to the property.
For more information, see our guide to Taking on new business premises: sorting the legal issues.
If you keep information about identifiable individuals, you may need to notify the Information Commissioner’s Office (ICO), a simple and inexpensive process.
Even if you are exempt from notification, you must still abide by the principles of the Data Protection Act 1998. The Act applies to information on websites as much as to computer and paper records. There are eight enforceable principles of good practice concerning data. Data must be:
- Fairly and lawfully processed.
- Used for limited purposes.
- Adequate, relevant and not excessive.
- Kept only as long as necessary.
- Processed in line with the subject’s rights.
- Not transferred to countries that don’t have adequate protection.
- Secure: the responsibility for security rests with you (even inadvertent disclosure of personal information could make you liable to pay compensation to the person concerned).
You may only carry out data processing where one of the following conditions has been met:
- the individual concerned has given their consent
- the processing is necessary to fulfill a contract with the person
- it is to protect the person’s vital interests
- it is to comply with a particular law
- it is in the legitimate interests of the business (unless this adversely affects the individual)
It is a criminal offence to break the law on data protection. If you are caught, you could face a fine, a custodial sentence or community service.
For more information on your responsibilities under the Data Protection Act, see the the Information Commisioner’s office website: ico.gov.uk