Legal Basics for New Business Owners

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
• Advertising
• Refunds and returns
• Agreement and contracts
• Taking finance
• Intellectual property
• Employing staff
• Health and safety
• Business insurance
• Terms and conditions
• Working from home
• Insolvency
• Licences
• 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.

Partnership agreements

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.

Leasing premises

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.

Data protection

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.
• Accurate.
• 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: www.ico.gov.uk

Advertising

Make sure that your advertising is accurate, truthful and doesn’t unfairly disparage the competition. If you make a claim in your advertisement that is untrue, the Advertising Standards Authority may order you to withdraw it. Also, Trading Standards Offices have wide-ranging powers to investigate and prosecute.

• You may compare yourself with the competition, either by implication or explicitly, but it must be in a way that is clear and fair. The various restrictions imposed by law are set out in the British Code of Advertising and displayed on the Advertising Standards Agency website: www.asa.org.uk
• Slander of goods occurs when someone maliciously makes a false statement (written or oral) to a third party that disparages a trader’s goods or services, and the trader loses money as a result.
• Trade libel occurs when you make a statement that disparages the trader as well as their goods and that statement is shown to be false.

Refunds and returns

The Consumer Protection (Distance Selling) Regulations 2000 give certain rights to remote buyers (e.g. customers buying via telephone, internet or direct mail), such as the right to cancel an order within seven days. You must make this clear to each customer in writing, at the latest, by the time the goods have been delivered.

There are certain exceptions, which include holidays, perishable goods and personalised goods. Tapes, CDs, videos and computer software are also excluded unless they are returned unopened.

If requested, you must provide a refund within 30 days, whether the goods have been returned or not. There is no deadline for customers to return goods. You can charge for the cost of returning the goods but you must make this clear in writing at the time of purchase.

Agreements and contracts

Contracts form the basis for business relationships. Such agreements can be oral or even implicit, but for clarity it’s best to have them in writing. If you breach a contract, the other party will be entitled to damages.

A binding contract must:

• Include an offer and an acceptance.
• Include an obligation to pay or a promise to provide something in return.
• Be clear about what all parties are expected to do.
• Include an intention by both parties to be bound by the contract – even if it is an oral agreement.

Taking finance

If someone wants to invest in your business, make sure that you get the agreement in writing and have it checked by a solicitor.

• Be clear about the terms of this investment. Is it intended as a gift? Or is it a loan which will need to be repaid – and if so, will you need to pay interest?
• Make sure that you are aware of the consequences of accepting this investment. If, for example, a relative lends half the money you need to start a business, you may find that you have unwittingly created a partnership and your relative is then entitled to 50 per cent of your business’ profits.
• Read loan and overdraft agreements carefully and ensure you understand all the terms and conditions. Think about the implications before signing personal guarantees, especially if you are putting up property as collateral.

Intellectual property

Copyright exists to protect creative works like articles, poems, photographs, designs, songs and sculptures. You do not need to register copyright, but you should be very careful when you copy material. Remember to seek permission to use other people’s photographs or drawings.

• Copyright only applies to the original works, not copies, and only to the means of expression, not the concept itself. So if someone writes an article, only the words, not the ideas in it, are protected.
• To protect an invention, you must apply for a patent. It is essential you do this before you have made details public anywhere.
• To protect a logo or a slogan, you must register it as a trademark.
• Consider taking out intellectual property insurance to help pay for the cost of defending your intellectual property rights.

Employing staff

If you employ staff in your business, you have certain legal responsibilities and obligations. Failure to meet these could result in legal action being taken against you.

• Make sure that all new employees are entitled to work in this country, or you could face heavy penalties. For a list of the documents you can inspect to prove this – together with general guidance for employers on employer workers from overseas – see the Border and Immigration office website: www.bia.homeoffice.gov.uk
• Have a contract of employment in place from the day all employees start work. A solicitor can supply a sample contract.
• To avoid leaving yourself open to claims for unfair dismissal, discrimination and breach of contract, take legal advice before altering terms and conditions of employment, making people redundant or dismissing them.
• To protect yourself, you should warn employees that any discrimination, sexual harassment and other illegal acts will not be tolerated.
• If your business employs five or more people (whether part or full-time) you may need to offer staff access to a pension.

For more information on these and other legal issues around taking in staff, see Employment law: a checklist for employers

Health & safety

As a small business owner, you have serious legal obligations regarding health and safety issues. If you fail to carry out these responsibilities, you may face prosecution, your insurance premiums may rise, and you may find it hard to buy insurance altogether.

Information for businesses is available from the Health & Safety Executive website: www.hse.gov.uk

Business insurance

If you employ anyone, even on a casual, part-time basis, you are legally required to have employer’s insurance.

Other insurance can also be useful as a sensible business precaution:

• If you sell products, product liability insurance will protect you if someone is injured by a defect in your product.
• If you offer services or advice, consider adequate professional indemnity insurance. The effects of a mistake in a service or product you have provided can be out of all proportion to the initial error. Indemnity cover may be needed for years after the work has been done, because it has to be in place when the claim is made.

Many professional bodies actually require their members to take out adequate professional indemnity cover. For peace of mind you may want to consult an insurance broker and the relevant professional body about any legal insurance requirements.

Terms and conditions

To ensure you have effective means of debt control, you need to spell out your terms and conditions of trade (T&Cs), and get your customers to agree to, and ideally sign them, when placing an order.

You may be able to adapt some T&Cs from other companies in your industry – but don’t copy them verbatim – and be sure to have them checked by a solicitor first.

Essential things to include in your T&Cs are:

• Retention of Title clause: under this, you retain ownership until payment – if your customer becomes insolvent before paying up, you may not be able to reclaim your goods without it
• Payment terms: make it clear to your customers when you expect payment for goods or services

For more information on this area, see Working from home

Working from home

If you work from home you must inform:

• Your landlord: check there is no restriction on working from home (as there is with many council properties, for instance).
• Your building society or other mortgage provider.
• Your insurance companies: you must tell your domestic insurer that you are working from home or you could invalidate the whole of your domestic cover.
• Your local council, regarding planning permission, licences, health & safety, and business rates.

For more information, see our guide to Working from home

Planning permission

Planning permission is not normally needed to run a business from home if the character and use of the building remain essentially residential and the business activity is incidental to such residential use. If this is the case:

• You can use a room as your personal office.
• You can run a business from home doing anything from hairdressing to dressmaking, music teaching to consultancy.
• You can use the garage to repair cars or store goods connected with a business.
• You can provide accommodation for a childminding service or playgroup.
• You can use part of the house for bed and breakfast accommodation.

All these uses must be kept on a small scale so you do not cause nuisance or inconvenience to your neighbours.

You may, however, need to apply for planning permission if you answer yes to any of the following questions, as you will be changing the character or use of your home:

• Will my home no longer be used substantially as a private residence?
• Will my business result in a marked increase in traffic or people calling?
• Will the business involve activities unusual in a residential area?
• Will my business disturb the neighbours at unreasonable hours, or be particularly noisy or smelly?

Insolvency

It is a criminal offence to continue to trade when you know your business is insolvent. If this happens in a limited company, directors can become personally liable.

If the company gets into financial difficulties, seek professional advice immediately. You may be able to reschedule debts using a Voluntary Arrangement. The alternative may be to call in a liquidator or a receiver if your bank has a debenture, but this can be a costly option. Be careful not to give particular creditors preferential treatment.

Licences

Some trades, such as the food industry and financial services providers, require specific licences to operate. Your local Business Link or national equivalent will be able to advise you.

Environmental issues

Many businesses must also comply with certain environmental obligations, for example, regarding the control and disposal of hazardous substances. Find out more from the Environment Agency's Netregs site: www.netregs.gov.uk

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This business advice article published in association with Lloyds TSB.

Whether you are looking to start-up a business account or want to move your existing business account Lloyds TSB can offer you all the Business Banking support you need

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