So, you’ve thought of a great idea for a new business and are excited about making a start. However, there are a number of legal considerations you need to be mindful of as part of the process. Giving due attention to these at the outset will make things significantly easier later.
Paul Matthews, head of WHN’s corporate and commercial team, explores six of the main legal issues for new business owners to consider.
1. Business structure
Thinking ahead and adopting the correct business structure at the outset will save trouble and expense in the future. While it’s possible to change your business structure later, the more extensive your business affairs become, the more complex (and therefore expensive) this process is likely to be.
The main business structure options are:
- Sole trader (if there is only one owner of the business) or general partnership (if there are two or more)
- Limited liability partnership (LLP)
- Limited liability company.
A major consideration is whether you want or need the protection of limited liability status. If you choose to operate as a sole trader or general partnership, you’re assuming personal liability for the liabilities incurred in running the business. Therefore, if the business gets into financial difficulties and liabilities have been incurred, you will be personally responsible for them.
Similarly, if there is a claim made relating to the business (for example, a personal injury claim or claim for breach of contract) which is not covered by insurance, you will be personally liable. The claimant can therefore obtain a judgment against you personally and enforce it against your assets including your house. In more extreme cases, you could find yourself made bankrupt.
In contrast with an LLP or limited liability company, these liabilities generally rest with the LLP or company. But there are exceptions to this. You will still be personally responsible for any liabilities you have chosen to personally guarantee. For example, if, as a new business, you look to borrow money from a bank, personal guarantees are likely to be required if you choose to use an LLP or limited liability company.
For most businesses, ensuring you obtain limited liability status will be prudent and give significant peace of mind.
Tax considerations are also an important factor in deciding which structure you adopt, with significant differences in how companies and LLPs are taxed.
It’s also important to consider what plans you have for the business. There are substantial differences between companies and LLPs in terms of how they operate and your plans for the future may help determine your choice. For example, if you foresee you are likely to want to institute a share ownership scheme for employees, you may decide a limited liability company is the better vehicle.
Receiving expert legal and accountancy advice on these issues when setting up is extremely important to avoid making the wrong choice of structure.
Putting in place the appropriate business insurances is critical before you start trading. Some insurances such as employers’ liability insurance are a legal requirement while others, though not legally required, are nonetheless essential.
Others may be desirable – including cover for a situation where a key person within the business is unable to work due to serious illness or an accident. It may be possible to obtain a policy to help with the cost of hiring professional cover for that person, which may otherwise have been prohibitive.
Exactly what insurance will be required will vary from business to business and the advice of an experienced insurance broker should be sought as part of your business planning process.
3. Health and safety
There’s a plethora of legal provisions designed to protect the health and safety of employees and members of the public who may be affected by the activities of your business. It’s essential that you familiarise yourself with these requirements and undertake appropriate risk assessments with a view to putting in place the risk management measures required to ensure compliance.
The Health and Safety Executive (HSE) publishes guidance on these issues, while obtaining expert legal advice and advice from health and safety consultants would be wise, as failure to comply can lead to personal liability on the part of directors and senior management, and various criminal offences apply.
4. Data protection
This is another complex area that will affect your business and you will need to be aware of the requirements and the data protection principles which underpin them. The introduction of the General Data Protection Regulation (GDPR) has substantially ramped up the protection of personal data.
Most businesses will need to register with the Information Commissioner’s Office (ICO) and you will also need appropriate data protection policies and privacy statements. Furthermore, you will need to monitor that these are adhered to and ensure your employees receive appropriate training.
5. Employment law
If you plan to take on employees, you need to be aware of the applicable rules. As a minimum, you will need to issue a written statement of their terms of employment setting out the particulars required by law.
The particulars required by law do not cover many of the provisions you may regard as important, for example, confidentiality and provisions preventing a departing employee poaching customers. It is therefore generally better practice to embody these particulars within a more detailed written contract of employment.
You should also consider the various policies your employees need to observe, including data protection, health and safety, use of social media as well as the impact of pension auto-enrolment rules. Specialist legal advice should be obtained to ensure these matters are covered in your contracts of employment.
You will need to think about the legal terms on which you do business with your customers with a view to putting in place appropriate terms of business.
Where there is more than one owner of the business you should also put in place appropriate arrangements between the co-owners – a shareholders’ agreement in the case of a company or a partnership agreement in the case of a general partnership or LLP.
These agreements cover various major issues, including what happens if a co-owner dies or wants to exit the business. Putting a well-thought-out document in place at the outset can help avoid significant disputes in the future.
You should also consider putting in place appropriate life cover (and possibly critical illness cover) to provide a pot of money to buy out the interest of a deceased or critically ill co-owner.
Paul Matthews is Head of the Corporate and Commercial Team based at WHN’s Bury office. Paul advises clients on a range of corporate and commercial transactions including company and business sales and acquisitions, management buyouts and general commercial contracts. If you are starting a business and need some legal help, please contact Paul on 0161 761 4611 or at firstname.lastname@example.org