Legal advice for start-ups

There are different types of businesses, such as limited companies and sole traders. You should consider carefully which type your business should be.

29th October 2018

Choosing your business structure

The type of business that you start will have an effect on how you run it and what rules you will need to follow. These are the most common types of businesses:

Sole traders

Operating as a sole trader means that you are self-employed. As a result, you are solely responsible for the business and for taking care of any debts, as well as paying for any stock or equipment you may need. However, you will also get to keep all of the profits from the business.

Being a sole trader does not mean that you are the only person involved in the business, so you can hire people to work for you and remain a sole trader.

Limited companies

If you start your business as a limited company, it will become an organisation with a number of members involved. If you are the director of the company, you will be responsible for running it.

However, owning a limited company gives you protections that you would not have as a sole trader. For example, if the business runs up debts, you can’t be held personally responsible for them, unless it is a private unlimited company or you have broken the law.

Running a limited company also means that you will have other taxes to pay, such as corporation tax. You will also need to split any profits with other shareholders in the company.

Business partnerships

A business partnership works similarly to a sole trader, except that it involves two individuals working. This can be a good idea as it allows the two partners to share the responsibilities without the complications of setting up a limited company.

It also enables each partner to work to their strengths – for example, one partner could focus on the business and financial side, while the other deals with the client/customer-facing aspects.

Things to do when starting your business

Registering your idea

If you have a unique idea for your business, you should patent it before you do anything else, as you will not be able to do so once you have publicised your idea.

To register your idea you will have to complete an application form and pay a fee, and you will need to provide a detailed description, known as an abstract, as well as a set of claims explaining the features of your idea and why it differs from others already in existence.

You can file for a patent on the Intellectual Property Office’s website, which also has a number of guides to help you through the process. You can apply through the European Patent Office or the World Intellectual Property Organization.

It can take as long as five years to obtain a patent, and the process can be quite complex. You may also wish to hire a patent attorney to help you.

As soon as your business becomes profitable it is also worth considering the protection a trade mark can offer to your business.

Financing your business

Starting a business can cost a lot of money, and unless you have substantial savings to dip into, you will probably need to look elsewhere to secure the financing you need. Fortunately, there are other options available to those who require financial support to get their business up and running:

Business loans

You may be able to get a bank to give you a loan to cover the start-up costs. However, banks are careful about lending money, so you will really need to prove that you have a viable business model which is ready for investment.

For this reason, you will need to convince the bank that your business could be successful, showing them that there is a market for your business idea. You will also need to provide them with forecasts of how much you will spend and recoup on the business while you are paying back the loan.

Taking a loan out to fund your business can be a difficult and risky path to follow. You will need to prove that you can pay the money back, and you may also have to provide security against the loan, such as your house – this means that the bank would be able to take your house if you are unable to repay the loan.

Selling shares in your business

You could consider selling shares in your business to raise funds, a process known as investment finance. Selling shares in the business will spare you from having to repay any of the money that you receive, meaning that profits from your business will not go towards paying back interest.

Of course, giving shares in the business will mean that you won’t take all of the profits of the business – however, it does mean that there is less risk to you if the business fails.

You will also have less control over the business, and you will have to consult your investors over certain major decisions. However, your investors could bring valuable insight and contacts that will enable you to expand the business.

Government grants and schemes

The government runs a number of schemes aimed at providing funding to start-up businesses, including the Start Up Loans scheme which provides business loans on more favourable terms than you are likely to receive from a bank.

If you are receiving Jobseeker’s Allowance, Income Support or Employment and Support Allowance, you may be able to apply for the New Enterprise Allowance, a weekly allowance from the government to support you in starting up your new business.

This allowance can be worth up to £1,274 a week, paid over a period of 26 weeks. You can also apply for a loan towards your start-up costs.

If you are given New Enterprise Allowance, you will also be given a business mentor, who can advise you on how to get your business started. If you have a disability or health condition, you may also be able to apply for an Access to Work grant, an additional grant designed to help if you need any extra support.

The schemes and grants available to you may depend on your area of business as well as whereabouts you are based in the country. To see what support could be available to you, look at the government’s Business Finance Support Tool.

Disclaimer: This information is for general guidance regarding rights and responsibilities and is not formal legal advice as no lawyer-client relationship has been created.

Hannah Parsons

Legal Advice Manager, Solicitor

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