B4 – Proven Idea Resources Legal Information for New Start-Ups

B4 - Legal Information for New Start-Ups Aim: To understand the different legal forms a business can take and what considerations you will need to start one. Learning outcomes: Understand the different types of legal business structure. Know what business names can and cannot be used. Understand the major legal implications in setting up a business. Know who to contact and why in order to become self employed, or a business owner/manager.

Outline Types of businesses Choosing a name Insurance Licenses Self-Employment, Tax & NI & VAT Contacts Exam!!!!

Legal forms of business Sole Trader Partnership Limited Liability Partnership Limited Company

Souce: Business Link Sole Trader Simplest way to run a one-person business Does not involve paying any registration fees. Keeping records and accounts is straightforward. You get to keep all the profits…but you are personally liable for any debts that your business accumulates.

Souce: Business Link Sole Trader Set-up –You need to register with the Inland Revenue as self-employed. Management and raising finance –You make all the decisions on how to manage your business. –You raise money for the business out of your own assets, and/or with loans from banks or other lenders. Records and accounts –You have to make an annual self-assessment return to the Inland Revenue. –You must also keep records showing your business income and expenses. Profits (Losses) –Any profits (or losses) go to you. Tax and National Insurance –As you are self-employed, your profits are taxed as income. You need to pay fixed-rate Class 2 National Insurance contributions (NICs) and Class 4 NICs on your profits. Liability –As a sole trader, you are personally responsible for any debts run up by your business. This means your home or other assets may be at risk if your business runs into trouble.

Souce: Business Link Partnership In a partnership, two or more people share the risks, costs, and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business accumulates. Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved. A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.

Souce: Business Link Partnership Set-up –Each partner needs to register with the Inland Revenue as self- employed. –It's a good idea to draw up a written agreement between the partners. For further advice, consult an accountant or solicitor. Management and raising finance –Partners themselves usually manage the business, though they can delegate responsibilities to employees. –Partners raise money for the business out of their own assets, and/or with loans. It's possible to have 'sleeping' partners who contribute money to the business but are not involved in running it. Records and accounts –The partnership itself and each individual partner must make annual self-assessment returns to the Inland Revenue. –Must keep records showing business income and expenses.

Souce: Business Link Partnership Profits –Each partner takes a share of the profits. Tax and National Insurance –As partners are self-employed, they are taxed on their share of the profits. Each partner needs to pay fixed- rate Class 2 National Insurance contributions (NICs) and Class 4 NICs on their share of the profits. Liability –Each partner is personally responsible for all debts run up by the partnership as a whole. This means their homes or other assets may be at risk if the business fails.

Souce: Business Link Limited Liability Partnership (LLP) A Limited liability partnership (LLP) is similar to an ordinary partnership – as a number of individuals or limited companies share in the risks, costs, responsibilities and profits of the business. The difference is that liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. This means that partners have some protection if the business runs into trouble.

Souce: Business Link Limited Liability Partnership (LLP) Set-up –There is no restriction on the number of members, but at least two must be "designated" members - with extra legal responsibilities on them. –LLP must register (incorporate) at Companies House. –It's a good idea to draw up a written agreement between the partners. For further advice, consult an accountant or solicitor. Management and raising finance –Usually the members manage the business, but can delegate responsibilities to employees. –Members raise money out of their own assets, and/or with loans. Records and accounts –The LLP itself and each individual member must make annual self assessment returns to the Inland Revenue. –All LLPs must file accounts with Companies House.

Souce: Business Link Limited Liability Partnership (LLP) Profits –Each member takes an equal share of the profits, unless the partnership agreement specifies otherwise. Tax and National Insurance –Members of a partnership are taxed on their share of profits and pay the tax and National Insurance (NICs), according to their business structure. –An individual will pay income tax and NICs, and a limited company partner will pay corporation tax. Liability –Every LLP must have at least two designated members. Read the list of extra legal responsibilities placed on them at the Companies House website.

Souce: Business Link Limited Liability Company (Ltd. and plc) Limited companies exist in their own right, distinct from the shareholders who own them. This means their finances are clearly separated from the personal finances of their owners. Shareholders may be individuals or other companies. They are not responsible for the company’s debts (unless they have personally guaranteed a bank loan, for example). However, they may lose the money they have invested in the company if it fails. Main types –Private Limited companies can have one or more members (eg shareholders). They cannot offer shares to the public (eg on the stock exchange). –Public limited companies (PLCs) must have at least two shareolders and can offer shares to the public. A PLC must have issued shares to a value of at least £50,000, before it can trade. –Private unlimited companies: these are rare and usually created for specific reasons. Legal advice is recommended before creating one.

Souce: Business Link Limited Liability Company (Ltd. and plc) Set-up –Must be registered (incorporated) at Companies House. –Must have at least one director (two if it's a PLC) and a company secretary, who may also be shareholders. Management and raising finance –A director or board of directors make the management decisions. –Finance comes from shareholders, borrowing and retained profits. –PLC’s can raise money by selling shares on the stock market, but private limited companies cannot. Records and accounts –File accounts with Companies House. –A "shuttle" annual return (form 363s) will be sent before the anniversary of incorporation each year. It needs checking, amending and returning to Companies House with the appropriate fee. The directors and secretary are responsible for notifying Companies House of changes in the structure and management.

Souce: Business Link Limited Liability Company (Ltd. and plc) Profits –Profits are usually distributed to shareholders in the form of dividends. –From 1 April 2004, distributions to individuals by companies with taxable profits subject to a zero rate of corporation tax, will be subject to a minimum of 19 per cent corporation tax. Tax and National Insurance –Companies pay corporation tax and must make an annual return to the Inland Revenue. –Company directors are employees of the company and must pay Class 1 National Insurance contributions as well as income tax on their salaries. –If your company or organisation has any taxable income or profits, you must tell the Inland Revenue that your company exists and that it is liable to tax. Liability –Shareholders are not personally responsible for the company's debts, but directors may be asked to guarantee loans to the company.

Souce: Business Link Franchises Buying a franchise is a way of taking advantage of the success of an established business. As the 'franchisee', you buy a licence to use the name, products, services, and management support systems of the 'franchiser' company. This licence normally covers a particular geographical area and runs for a limited time. The way you pay for the franchise may be through an initial fee, ongoing management fees, a share of your turnover, or a combination of these. A franchise business can take different legal forms - most are sole traders, partnerships or limited companies. Whatever the structure, the franchisee's freedom to manage the business is limited by the terms of the franchise agreement.

Souce: Business Link Buying a business Take advice! Try to get at least 3 years accounts What is it worth to you? (this may be very different to the asking price) One approx. rule of thumb: –annual profit x 1.5

Souce: Business Link Choosing a name (1) Do you want the name to reflect what your business does? Or would something more abstract be suitable? Would it be a good idea to include your own name? Do you want a traditional-sounding name, conveying durability and old-fashioned values, or a modern name, suggesting a fresh, innovative approach? Think about the future: avoid words or phrases that are likely to date quickly, or limit your trading opportunities. If you’re likely to be trading overseas, check that the name doesn’t mean anything inappropriate in the relevant languages. Think about callers and customers: avoid very long names, strange wordings and unusual spelling.

Souce: Business Link Choosing a name (2) You can choose just about any name you want… …But….. There are specific rules that you must follow when choosing limited company names, sole trader and partnership names. And, for all types of business, there are some sensitive words and expressions that you can't use without official permission e.g. trade marks such as McDonalds.

Souce: Business Link Sole trader and partnership names People operating as sole traders or in partnerships can trade under their own names, or choose a different business name. The name must: –not be offensive –not include the words "limited", plc or equivalent –not contain sensitive words and expressions (unless you've obtained permission to use them)

Souce: Business Link Sensitive words and expressions There are some words and expressions that you can’t use in a business name unless you have official permission. These are words that might give a false impression about your business. They are known as sensitive words. The rules about sensitive words apply to all types of businesses and fall into five main groups:- Type of expressionExamples Words that suggest your business is of national importance British, Irish, National, International, European Words that suggest a special status Association, Authority, Chamber of Commerce, Chartered, Council, Institute, Society Words that suggest a particular function Charity, Insurance, Register, Trust Words that suggest a specialised activity Architect, Chemist, Health Centre Words that suggest connections with government or royalty Parliament, Government, Royal, Queen, Prince

Souce: Business Link Sole trader and partnership names Is anyone else using your proposed business name? If a sole trader at the other end of the country is using it, there may not be a problem; but if another local business or a national firm is using it, you should definitely come up with a different name. Check local phone books, business directories and the Internet. Make sure that your proposed name - or something similar - hasn’t been registered by a company. You can do a company search on the Companies House website. Make sure that the name isn't too similar to a word or expression that has been registered as a trade mark. Check the Patent Office website to find out whether your chosen name has already been registered as a trade mark.

Souce: Business Link Limited company names If you’ve decided to form a limited company, you’ll need to register your name and other details with Companies House, but first: Check that your proposed name doesn’t break the rules. –Your company name must end with limited, plc or Ltd (or Welsh equivalent) and must not be used anywhere other than at the end of the name. –The name isn't offensive. –The name isn't the same as - or very similar to - one already in the register. –The name doesn't include any sensitive words or expressions - unless you have obtained permission to use them.

Souce: Business Link Getting your name on the web Even if you are not intending to create a website for your business immediately, it’s likely that you’ll want to have a presence on the web at some point in the future. This could be Single screen advertising your company and giving contact details Site that allows customers to browse through products, place orders and make payments online.

Souce: Business Link Getting your name on the web Domain names –The address at which a website is located, for example my-new-business.co.uk, is known as a domain name. (For most businesses based in the UK, a name ending with.co.uk is suitable.) –Your address will normally include this name, for example –To reserve a domain name for your business, you need to register it through an agent, who will charge a small annual fee. It’s a good idea to do this as soon as possible - even if you’re not going to use your domain name straight away.

Souce: Business Link Registering your domain name Decide on a suitable domain name for your business: –You can use numbers as well as letters. Hyphens can be used to separate words - but you can’t include spaces, full stops or other punctuation. It’s a good idea to have a few alternative names in case your first choice has already been taken. Check whether the name is available: –The official registry for UK domain names is Nominet - you can use their website to check whether your chosen domain name is available. Register the name –This is a simple process which you can carry out online with any registration agent. There are hundreds of to choose from - a good starting point is Nominet's list of registration agents.

Souce: Business Link Useful Sources of Information Related guides on –Choose the right legal structure for your business –Set up and register a limited company (private or plc) –Set up and register as self-employed –Book a course on Putting Your Business On The Web through our Training Directory Related web sites you might find useful View a full list of guidance booklets on the Companies House website: Check registered companies at the Companies House website: Check registered trade marks at the Patent Office website: Find out about choosing a name for your business on the National Business Register website:

Souce: Business Link Business Insurance Compulsory: –Motor vehicles –Employers Liability Essential: –Public Liability –Fire, theft Others as appropriate: –Professional Indemnity –Personal Accident, Health, Life, Pensions –Goods in transit Contact an Accredited Broker or Professional body

Souce: Business Link Licenses Your business may require a license to operate –It is your responsibility to find out. Who to apply to: –Local Authority –Environment Agency –HM Customs & Excise –Information Commissioner –Police –Traffic Area Office

Souce: Business Link Self-employment To be a sole trader, a partner or a member of a limited liability partnership, you must be self-employed. You must register with the Inland Revenue. – This does not mean that you can’t also do other work as an employee, but the work you do for your business must be done on a self-employed basis. –You may be fined £100 if you fail to register within three months of becoming self-employed.

Souce: Business Link Self–employment Who to contact for help Tax –Inland Revenue National Insurance –Inland Revenue Value Added Tax –Customs & Excise –You must register for VAT if your business turnover exceeds £56,000

Souce: Business Link Record Keeping Start now! What to keep? –Receipts, Invoices, Bank Statements, Pay-in book, chequebook, Business mileage. –(You will need to start doing your accounts!) How long for? –6 years

Souce: Business Link Useful Websites Business Link National Website: – Local e.g. North Yorkshire – Inland Revenue – Customs & Excise –

Quick Quiz 1.How many different legal forms of business are there? 2.Name them 3.What do LLP, Ltd and PLC stand for? 4.Are directors and shareholders personally liable for a companies debts? 5.Why might you contact ‘Companies House’? 6.Is a Franchise a legal form of business? 7.What 3 names can you not use for your business? 8.How much can you be fined for not registering as self- employed within 3 months? 9.Which government agency should you contact for VAT, NI and Tax. 10.How long to you need to keep Invoices etc. relating to your business?