Starting your own business can be daunting, demanding not only high levels of creativity and entrepreneurial spirit, but also a familiarity with rules and regulations set out by the UK government.
You would be forgiven for viewing these legal obligations as bureaucratic hurdles, deliberately placed to trip you up. In truth, they serve a crucial purpose – ensuring that your business operates safely, ethically, and fairly, staying firmly within the bounds of the law.
While there are plenty of reasonable justifications for their existence, the legal requirements needed to start a business in the UK can, at first glance, appear frustratingly complicated. But it’s important to understand that the relevance of many regulations will depend on the type of business you operate, the industry in which it sits, the way you want to run your organisation, and the geographical location of your premises.
In this blogpost, we will discuss your core legal responsibilities as a startup, and highlight some that might not apply to you but will apply to many of the 1.34 million UK businesses started each year.
What legal requirements are needed to start a business in the UK?
As mentioned in the introduction to this piece, your legal responsibilities are likely to vary depending on the nature of your operations. For example, a limited liability company operating in a bar serving food will need to comply with different legislation from that of a sole trader manufacturing products using heavy machinery.
There are, however, five core considerations that every business should make when starting up to establish solid legal foundations for long-term growth:
1. Business structure
Deciding on its legal structure is the first and most crucial legal step to take when starting a business in the UK. Your decision will impact liability, taxation, and who has overall authority. As a result, some structures will suit some businesses better than others:
Sole trader
A sole trader structure is the top choice for startups due to its blend of simplicity, adaptability, and uncompromising control. In this setup, you, as the self-employed owner, oversee and possess the business fully, free from any obligation to register it with Companies House. It is important to note, however, that you do need to maintain accounting records.
The key tax advantage of being a sole trader is that your business income is essentially an extension of your personal earnings. This means you’ll be subject to income tax, rather than the more intricate corporation tax. However, it’s crucial to acknowledge that your business and personal finances are intertwined. Consequently, you shoulder full personal liability for any business debts.
Partnership
If you enter a partnership, you – and the other partners – sign an agreement to establish how the business’s ownership, profits and liability are shared. Just like a sole trader, each member of the partnership is self-employed and must submit a separate tax return. While a partnership structure keeps your venture flexible and simple, all parties are jointly responsible for business debts and can be personally liable if legal action is taken against the business.
Limited company
Choosing this structure establishes your business as a distinct and separate legal entity, meaning that your liability is limited to your investment in the company shares. It also means that you pay corporation tax on your company’s profits, typically at a lower rate than income tax for individuals. Income tax must, however, still be paid on salaries and dividends paid out of the business.
The main benefits of a limited company include personal protection and beneficial tax rates, but the key drawback is an increased level of administration. You are, after all, required to register your business on Companies House and must submit an annual tax return and full statutory accounts to HMRC. Whereas the sole trader structure is preferred by startups, most maturing businesses choose to become a limited company.
Limited liability partnership
This hybrid structure is often chosen by companies that provide professional services – such as accountancy and legal firms. Similar to an ordinary partnership, each partner registers as self-employed and submits a separate tax return, but unlike an ordinary partnership, the venture must be registered on Companies House, and two partners must be ‘designated members’ responsible for filing annual accounts.
2. Business registration
By giving your business a name, you legitimise it, giving it credibility and a distinct identity in the marketplace. That name should be unique, preventing accidental infringement on any existing trademarks. Partners and sole traders must then register as self-employed, after which they will receive a unique taxpayer reference (UTR) with which HMRC can identify their business for tax-related matters.
Partners might then choose to draft an agreement, usually done with the assistance of business law specialists, which will outline how ownership, responsibility and profits are shared.
If you choose to make your business a limited liability one, the UK government expects you to be open and transparent. As part of that expectation, you are required to register details of company directors, shareholders and accounts on Companies House, a public and easily accessible database. You are also required to file annual financial statements.
3. Taxation
Taxation for UK businesses varies depending on their legal structure. For instance, sole traders are responsible for income tax and national insurance payments (Class 2 and Class 4). Partnerships follow a similar taxation process, but how profits are divided among partners can affect individual tax liabilities. In contrast, members of a limited liability partnership (LLP) are both self-employed and subject to corporation tax on their taxable profits. Limited companies, on the other hand, pay corporation tax on all profits and may also be subject to income tax when receiving dividends or a salary. Importantly, profits taxed at the corporate level are typically not subject to additional taxation when distributed as dividends to shareholders.
All business structures are subject to VAT if the company’s annual turnover exceeds the current threshold of £85,000.
4. Licences and permits
Failing to produce the correct licences or permits can be financially and reputationally disastrous for your business. Which ones you need will, however, vary depending on the nature of your operations, the industry you occupy and your location.
Most shops, restaurants and offices require a general business operating licence from the local council. By applying for one, you can also check local zoning and safety regulations that might require additional paperwork.
If your business is involved in the preparation or sale of food you will also need a food hygiene licence. The criteria to achieve your licence will vary considerably depending on your employees’ contact with the food. A restaurant will, for example, require a different food hygiene licence from a shop that sells a small selection of pre-packaged chocolate bars.
Other licences and permits include an alcohol licence (requiring both a personal and a premises licence), environmental permits – confirming that your business responsibly disposes of its waste – and health and safety certificates if your company undertakes hazardous activities.
5. Business bank accounts
While there is no legal requirement for any business to have a business bank account, it can make it easier to fulfil your financial reporting obligations. Opening a business account can also protect your personal assets if your venture fails and creditors must establish what belongs to the business and what belongs to you.
How much do startups spend on legal fees in the UK?
The average startup in the UK spends approximately £6,259 on legal fees. That figure can vary considerably (from just a few hundred pounds to tens of thousands), but it will often include things like business registration, contract drafting, intellectual property protection, compliance with industry-specific regulations, and employment law matters (creating contracts, handbooks and policy documents).
Loch Associates Group has been helping businesses get off the ground for decades, guiding them through the maze of legal obligations and strategic decisions to achieve long-term success.
We’ve partnered with plenty of brands to turn their entrepreneurial ideas into a profitable reality. If we can help you, speak to our team of business law specialists today.
