Legal requirements for company formation

In any walk of life, sets of rules and regulations can always seem daunting at first. But, if you delve a little deeper, the laws surrounding company formation are easily understandable. Think of it this way: none of us want unnecessary wrangles with the taxman. We want to treat customers and other people we deal with fairly, and we want to ensure that our name, reputation, and hard work is acknowledged and protected.

From registering with HMRC through to advertising your products, you’ll find that most — if not all — of the laws you’ll come across as an entrepreneur are geared towards keeping your business on track, ensuring your wider obligations are met and your relationships are conducted smoothly.

But the principle, “ignorance of the law is no excuse” is a relevant one: finding out you’ve fallen foul of a particular rule can be a costly experience. So with this in mind, here are the areas of regulation that new business owners ought to be familiar with before they form up.

Sole traders

At least in the very early days, many entrepreneurs choose to operate as a sole trader; the simplest form of business in terms of legal requirements. As a sole trader, the law makes no distinction between you and your business and there’s no separate structure to set up. The only formal requirement involves registering as self-employed with HMRC; thereby enabling you to report your income via a tax return each year. Once your annual turnover is expected to reach £83,000, you’ll also need to register for VAT purposes. You can find out more about this in our guide to being a sole trader.

Partnerships

If you’re forming a partnership with someone else, each of you is required to register as self-employed with HMRC. The key legal aspect to focus on here is the partnership agreement: the document that sets out the details of the relationship, defining who’s responsible for what and how your profits are going to be divided — among other elements. A vague or insufficiently thorough partnership agreement can lead to legal disputes between partners, so it’s worth paying careful attention to the wording of the agreement right from the outset. Our guide, What is a partnership? provides further pointers on this.

Companies

Setting up as a company makes sense for many new entrepreneurs as it can give your fledgling enterprise a sense of stability and authority. For example, it can be tax-efficient and make it easier for other people — including investors — to get involved with the business. Forming a company is something that’s easy and inexpensive to do, and we have a range of company formation packages to give you all the support you need with it.

The law requires you to have a registered office for your company and our guide to choosing a registered office sets out the range of options available to you; something that’s especially relevant if you are looking for a prestigious address.

Your requirements

As the director of your newly formed company, you also have various obligations to meet. However, it’s worth remembering that the law surrounding companies is not designed to trip up new business owners. In fact, the aim behind these rules is usually pretty straightforward. For instance, your annual filing requirements are designed to ensure the information Companies House has on your company is up to date, while the rules on company tax returns provide you with a clear timetable for submitting the information necessary to work out your company’s corporation tax liability. Our company formation compliance section includes a range of walk-through guides to help you keep on top of these requirements.

Withdrawing funds

A large chunk of company law concerns how and when you can take money out of the company account. As the driving force behind the business, being restricted in this regard might seem harsh; but it’s all part of maintaining your company as a separate legal entity. It can actually work in your favour when it comes to financial planning, as our guide to company tax helps to demonstrate.

Fair treatment of customers

The law in this area is designed to ensure that the products or services you offer are of a reasonable standard, that the information you provide is accurate, and that customers can buy with confidence. It’s important to become familiar with these legalities before you start trading to avoid inadvertently breaching the rules. If picked up on, for example, a breach can trigger a visit from Trading Standards, and, in more serious cases, prosecutions and fines. Knowledge of the law also means that any misunderstandings with customers can be sorted out quickly and cheaply. So do try and get your head around them as soon as you can.

As a starting point, all new business owners selling to the general public should take a closer look at two sets of rules: the Consumer Rights Act 2015 (CRA) and the Consumer Protection from Unfair Trading Regulations, 2008 (CPUTR).

Consumer Rights Act 2015

The CRA sets out what businesses need to do when goods are faulty and how services should match up to what has been agreed. It also covers areas such as how long customers have to change their minds and get a full refund if they have ordered from home; something that’s especially relevant for ecommerce businesses.

Consumer Protection from Unfair Trading Regulations 2008

The CPUTR covers misleading, aggressive, and unfair behaviour towards consumers. Under these rules you cannot, for instance, place a “Closing Down” sign in your shop window purely as a ruse to get people in. Nor can you tell a customer that a price is available “For This Week Only” (when it’s not), or print a Federation of Master Builders logo on your letterhead when you are not a member. The government’s guidance on CPUTR gives other useful examples, and is worth paying particular attention to when planning your marketing campaigns. Of course, still bear in mind that you can be persuasive, that’s the whole point of marketing — but don’t be misleading.

Certain industries have very specific consumer protection rules to follow; catering and construction being just two examples. Don’t worry though, all you need to do is browse our industry-specific guides to get the full lowdown on your niche.

Your duties to customers and the wider public

As a business owner, you owe a ‘duty of care’ to those who would reasonably or foreseeably be affected by your actions. As an example, if you provide a service to a client and you carry out a poor job compared to what a reasonably competent professional would be expected to do, and if that client suffers loss, then that client may be entitled to claim compensation for that loss.

Crucially, there doesn’t have to be a contract between you and the other party to make a claim. As an example, if you cater for a wedding, a guest who becomes ill through eating underprepared food may have a claim — as would someone injured due to fault on your part when browsing in your shop.

Insurance

Public liability insurance covers you for such claims, as does professional liability insurance if you offer a service. These types of insurance are not compulsory, but the cost of such claims — especially if the loss is significant — can be crippling for a small business owner, so taking out insurance should be a top priority after company formations. An insurer can take the stress out of dealing with these claims and can also aid you with preparing risk assessments, thereby minimising the chances of these incidents happening in the first place.

In other areas, the law lay downs specific rules on what you must do to keep customers safe and one such area is data protection. Under the Data Protection Act, if you hold and process information not just about your clients but also your employees and suppliers, then you must keep it secure, only use it for specific purposes, and only hold onto it for as long as you need it. More broadly, be aware that small businesses are a tempting target for cybercriminals and the cost of dealing with a security breach can be significant. Take a look at our information on how technology can help keep your business safe for tips on best practice.

Employment

If your business requires staff, it’s important to be aware of the body of regulation that governs the relationship between employer and employee. These rules have a practical effect before you even hire your new starter. For instance, The Equality Act makes it illegal to discriminate on the basis of age, gender, race, disability, and various other characteristics, so advertising for “young, enthusiastic bar staff”, or asking an applicant if she intends to start a family would almost certainly fall foul of these rules.

Legislation concerning the National Living Wage and National Minimum Wage as well as areas such as minimum holiday requirements and paid parental leave should be researched, too. Only once you know the true cost of taking on an employee with reference to the law, can you properly budget for taking on staff.

Public liability insurance is not compulsory, but is highly recommended for many businesses. By contrast, employer’s liability insurance is a legal requirement for anyone taking on staff. You should also be aware of the specific rules governing workplace safety, from operating machinery through to minimising the risk of injury through prolonged use of desktop computers. The Health and Safety Executive provides a raft of resources concerning all of this.

A set process for appraising and reviewing staff performance can help you avoid claims for unfair dismissal if a particular employee fails to live up to expectations. More broadly, rather than just paying lip service to appraisals, getting proactive in this area — by finding ways to delegate responsibility and reward good work for instance — you can help to boost engagement and increase productivity. Our introduction to employment law helps to put all of this in context for you.

Protecting your business identity

As a business, your most valuable assets are likely to include your name, your reputation, and the products, processes, and services that are unique to you. It follows that you should look closely at how best to protect them.

Right at the beginning, this also involves making sure that your business does not step on the toes of existing players. Your company name, for instance, cannot be the same as or ‘too like’ an existing business. Happily on this topic, we have the ideal guide to choosing the perfect business name to help you get this right.

If you do not intend to trade as a limited company just yet, you might also consider registering a company with the same name as your business. As our guide to dormant companies explains, a dormant company can be kept alive with the minimum of effort, while stopping someone else registering a company with that name.

If you develop a unique product, process, service, or trademark, the law on intellectual property is designed to prevent other parties from taking commercial advantage of it. What’s more, as our guide to tax highlights, your work in this area might also qualify your company for Research & Development Relief — effectively lowering your tax bill. Handy tip for you there.

Want to find out more?

The good news is that becoming an entrepreneur does not mean having to memories reams of rules and regulations. A better way is to find out what’s possible, discover more about best practice, and see what specific rules apply as you explore. In other words, it’s about looking at the rules in context. If you want to find out more information on company formation, then pop across to our Help Centre or give us a call. You can register a company with The Formations Company. There are no hidden or recurring costs for you. Even the Companies House £10 registration fee is included in the price.