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Legal Structure

Legal structure

The process of setting up a business has many legal aspects. You must decide on the structure of your business, register with the government, and learn about your legal duties, including tax requirements.

There are also significant elements to think about, like choosing a company name and considering how additional regulations will affect business.

This module provides an overview of the different legal structure’s businesses can use and what regulations may affect your business.

Topics to be covered

  • Types of business structures
  • Sole stranded
  • Partnerships
  • Limited company
  • Opening a business bank account
  • Choosing a name and logo
  • Other legal requirements

Types of business structures

New entrepreneurs need to decide which business structure will suit their start-up.

The three main types of businesses are

Sole trader

Partnership

Limited company

If your business develops in an unexpected way, there’s nothing stopping you from changing to a different structure later, although switching can be an unnecessary headache.

Therefore, it’s best to have a solid plan for the structure you intend to follow in the first few years to ensure the business runs smoothly.

Sole trader

Most new business owners start as a sole trader, especially if they don’t intend to employ people right away.

Running a self-employed business is often the simplest structure. There are fewer legal requirements then other types.

As a sole trader, you

Have overall control of the business

Are regarded as self-employed for tax purposes Are not legally required to prepare accounts to be audited

Have access to various allowable expenses and capital allowances

However, the owner of a sole trader business is completely liable for all debts and legal action, which means you may risk losing money or assets of the business fails.

If you decide to run your business as a sole trader, HMRC requires you to create an online account via the government gateway.

To register, you need to provide the following details:

  • Your name and home address
  • National insurance number
  • Contact details
  • A name and address for your business which can be your own name and address if you wish Contact details for the business address Start date of your business

Sole traders must register by 5 October in the business second tax year.

So, if you begin in March 2018, you have until October 2018, because these months are in two separate tax years. But if you begin working in August 2018, you have until October 2019.

After registering, you’ll be sent a letter containing your 10-digit activation code (unique taxpayer reference) and information about your responsibilities as a sole trader.

You should also receive a self-assessment tax return notice following the end of the tax year.

Sole traders must follow numerous tax requirements. Once you have registered with HMRC, you can use the system and online forms to fulfil these requirements.

Sole traders must

Pay income tax on business profits (minus expenses) Pay class 2 and class 4 national insurance on all taxable business profits Submit a self-assessment tax return annually Register for vat and submit vat returns if earning over a certain threshold

You need to keep records of all income and outgoing in order to fulfil financial duties properly. Without records, you won’t have a clue what exactly has gone in and out of your account over the year.

An accountant HMC and calculate tax for you, but you still need to be aware of how cash is flowing in your business to run it well. Poor management of business finances often results in failure

Partnerships

The legal status of a partnership is used when two or more people want to set up a business together. Like a sole trader, it’s easy to register and doesn’t involve huge amounts of paperwork.

The main type is known as a general partnership.

In terms of registering with HMRC, the requirements are similar to those of a sole trader, including the time by which you must register 5 October, although each partner has to register separately.

However, partnership businesses don’t pay income tax in the same way sole traders do. The nominated partner is responsible for sending a partnership tax return, while all other partners have to send their own tax returns based on their share of the profits.

Financial and legal liabilities are still tied to people in a partnership because responsibility Is shared amongst the partners.

There are also two other types of partnerships:

  • Limited partnership
  • In a limited Partnership requires at least one general partner who has unlimited liability, while the liability of other partners is capped.
  • Only the general partner is held accountable for debts and legal issues: limited partners only lose any capital contribution made.

Limited liability partnership

In a limited liability partnership, the business is legally a separate entity from its members. Partners cannot be held personally liable for debts and legal matters, unless they knowingly allowed issues to occur or were involved in fraud.

An LLP requires at least two designated members who have more responsibilities and other partners, and, unlike the other two types of partnerships, needs to register with companies’ house via the government website.

For a partnership to be successful, a high level of cooperation is necessary. So, before starting a business with another person, you should draw up a partnership agreement.

As a minimum, your partnership agreement should cover:

  • The purpose of the partnership business Contributions of each partner Management powers and duties
  • How decisions are made Profit shares and capital contributions Succession Expulsion
  • Arrival and departure of partners Death or divorce of partners

Working with a partner creates added risks, so invest plenty of thought into whether starting a partnership is right for you, as it’s a huge commitment.

Limited company

A limited company is more complex an operating as a sole trader or in a general partnership. It involves more steps, costs, paperwork, and accounting.

However, its structure is what attracts many business owners, as it allows them to grow the business, shield personal finances and assets from liabilities, and employees stuff easier.

Limited companies are considered their own legal identity, meaning the rights and obligations of a limited company are separate from the people who run it.

Shareholders and directors have limited liability: they are not easily held accountable for the actions of the company and their assets Finances are separate from the business.

Protection of this nature is known as the veil of incorporation. The veil protects people in a limited company from being held personally responsible for debts or legal matters, except in certain circumstances, such as fraud

To be a limited company, you need to register with companies’ house.

To register, do you need:

  • A company name
  • An address for the company
  • At least one director and one shareholder Details of the business purpose and main activities
  • Details of the company’s shares and anyone with a significant control over the company
  • A document that details the rules and purposes of the business, you must submit it to companies’ house.
  • Downloadable templates are available online at Gov.uk

It costs 12 pounds to register a limited company and is usually process within 24 hours. You can pay 100 pounds to be registered on the same day, as long as it’s submitted by 3 PM.

When choosing a business name, you are required to select one not in use or too similar to an existing limited company.

You can search the company’s house register to see if you decide name is already taken:

  • Once a business registers with companies’ house, certain information is made freely available to the public including the name, registered address, date of incorporation, insolvency information, and current and resigned offices.
  • Having information publicly available is beneficial for companies in the interest of transparency and professionalism, particularly for those that intend to do business with other companies or government organizations.
  • In some cases, it’s possible to buy an existing or off the shelf company via a company registration agent, accountant, or solicitor.
  • Do you spell companies that have been pre-registered at companies house but never started trading. So, when a new owner buys them, they can start trading immediately.
  • It can be a good option if you find one that fits your needs and you would like to avoid the preparation and paperwork.

The directors of a limited company have many legal duties, including:

  • Set up and run a business bank account, prepared in line with UK GAAP and IFRS Submit the companies annual accounts to companies’ house.
  • All accounts are made available to the public, meaning anyone can see how a company is doing
  • File an annual return with companies’ house to keep records up-to-date
  • Register for and submit a personal self-Assessment tax return annually
  • Submit an annual corporation tax return to HMRC Register for and submit VAT returns if earning over a certain threshold
  • Pay class one national insurance contributions and income tax, and report employee payments and deductions to HMRC

While the company Can hire someone to manage these duties, such as an accountant, it remains the director’s responsibility to ensure that the required tax and records are submitted to the government.

Although the legal duties of a limited company are numerous compared to Sole traders and partnerships, forming a limited company has many advantages.

The benefits of forming a limited company include:

  • Protection from liabilities including debt or legal action
  • Better structure for employing staff and paying salaries via a PAYE limited companies can provide various benefits, pension plans, and employment incentives that sole traders cannot
  • Selling the business or shares is easier
  • Corporation tax on profits is usually lower than the highest thresholds of sole trader income tax As the Owners are separate from the company, it may be easier in some cases to secure funding.
  • The company name is protected by law once registered

Opening a business bank account

Sole traders, partnerships, unlimited companies are not legally required to have a separate bank account for the business, but it’s highly recommended.

You will find it easier to trade a manager income and expenditure with an account dedicated to business finances.

Visit your local bank to understand the types of banking services they offer small businesses. Be sure to shop around and compare the costs of different types to figure out what works best for you.

To open a business bank account, you need:

A form of identification – such as a passport or driving license

 

Proof of address Dash for example, a recent utility bill.

You’ll also need to provide details of your business, including the name and registration number. Some banks may even request copies of your incorporation documents and a routine credit check will be carried out.

Choosing a Company Name

Take plenty of time to consider your company name, as the name you choose will form a core part of the business’s identity. Also keep in mind that the more you expand, the harder it is to separate yourself from a name I’m rebuild your brand.

Your business name must not

  • Be already in use by another business
  • Breach a registered trademark
  • Include limited (Unless it’s limited)
  • Include offensive words or phrases
  • Use words restricted by the government
  • These requirements apply to all types of businesses.

You may also want to create a logo, as it gives your business a visual and memorable side to its identity.

Think carefully about the type of logo you use, you should seek the help of a designer to create something attractive and professional.

Effective logos are:

  • Unique enough to create a memorable a lasting impression on customers and clients.
  • Simple enough for customers to remember.
  • Imaginative and sufficiently different from your competitors
  • Clear enough to be re-produced to any size and scale, such as on business cards and shop signs
  • A business logo must also adhere to legal requirements.

Your logo must not:

  • Be in use by or similar to the logo of another business
  • Conflict with an existing registered trademark
  • Be offensive or misleading
  • Breach legal restrictions. Some designs are protected by law, such as badges relating to the government or certain institutions E.G the Olympic Rings

If you want your logo to be trademarked, you can register it with the intellectual property office.

Other legal requirements

No matter what kind of business you run, there will be other legal requirements and they are likely to be more that are industry dependent.

Other legal aspects to consider include:

  • Business insurance
  • Licenses
  • Health and safety
  • Data protection
  • Intellectual property
  • Employment law

The requirements of some of these are covered in more detail in specific training courses, but the following slides cover the fundamentals, so you understand what your business needs.

Insurance

 

Additional types of insurance may be required depending on the industry your business is in, you should have:

  • Public liability insurance which protects you from claims for injury or damage caused by your business.
  • Buildings and contents insurance which protects your goods, including those in transit, and your premises against damage
  • Employers liability insurance which you need if you want to employ people, as it protects you against claims for any injury caused Stuff at work
  • Product liability insurance which protects you against claims for injury or damage caused by the products you make and sell
  • Motor insurance which offers protection if your business card causes injury or is damaged
  • personal insurance such as life insurance, accident cover, and pension insurance.

 

Licenses

Some businesses must acquire licenses from the local authority and some licenses are needed before you can even begin trading.

For example, you may need a license to:

  • Run a food business
  • Sell alcohol
  • Work as a childminder
  • Sell from a stall on a street
  • Play copyrighted music in your premises

Visit the government website to find out what licenses your business may need.

Health and safety

Under the health and safety at work etc., act 1974, businesses must take steps to protect the health, safety, and welfare of employees and the public against risks posed by work activities.

Health and safety regulations relates in many areas, including the workplace environment, fire safety, first aid, do use a specialist work equipment, working with chemicals, food preparation, and more.

Business owners must carry out risk assessments to determine whether to address Health and safety issues in the business.

Data protection

The data protection act and the general data protection regulation require businesses to hold and process information about clients, employees, and suppliers securely.

Secure information handling is crucial for maintaining a good reputation amongst customers and potential clients and for keeping your business out of legal issues.

Intellectual property

Anything that you create can be protected by law, such as inventions, music, drawings, photographs, writing, software, etc.

The four types of intellectual property protection:

  • Copyrights, which protect original works such as music, artwork, film, architectural works etc Patent ‘s, which protect inventions and prevent others from using, making, or selling them without authorization.
  • Trademarks, which project words, phrases, symbols, or designs that represent a business’s products or services
  • Trade secrets, which protects the process, formula, design, method, or other information used by a business.

Some intellectual property rights apply automatically, such as copyright, but patent and trademark had to be registered. Trade secrets need to be kept protected by the business through confidentiality and nondisclosure agreements.

Employment law

If your business employees’ people, you have to comply with a number of legal requirements. These are in place to protect the rights of the people who work for you.

Employment law covers:

  • Job descriptions
  • Working hours and holidays
  • Employment contracts
  • Wages and conditions
  • Tax and national insurance
  • Pensions
  • Discrimination
  • Maternity and parental leave

Summary

The three main types of businesses are sole traders, partnerships, unlimited companies

  • Sole traders have fewer legal requirements than other types of businesses but are completely liable for all debts and legal action. They must register with HMRC
  • Partnerships involve two or more people setting up a business together. They are three different types: general partnership, limited partnership, and limited liability partnership
  • Limited companies are a legal identity and are considered separate from shareholders and directors. To be a limited company you must register with company’s house
  • It is not a legal requirement to set up a business bank account, but it is highly recommended to help you manage business income and expenditure.
  • There are numerous other legal aspects to consider, including: choosing a suitable name, insurance and licenses, health and safety, data protection, intellectual property, and employment.