Some Laws to Consider When Starting a Business

Some Laws to Consider When Starting a Business

A Business can be categorically defined as ‘an organisation or enterprising entity which is engaged in commercial, industrial or professional activities.’ They can start in a bid to create profits for one party or another, or they can be run on a non-profit basis, whereby the business operates effectively on charitable causes. 

When considering starting a business, it’s of course not as simple as merely creating a product or service, selling it, and keeping the profit. There are specific legal regulations to take into account: such as Employment and Labour Laws, the equality act, health and safety at work act, food safety as well as the structure of the business.

Almost every single transaction and process within a business needs to be regulated. Even before you start trading and selling your services, you will need to ensure that you create a sole trader or a corporation. 

CONTENTS

  1. Research What Regulations and Laws You Need to Abide By
  2. Penalties for Not Abiding by Laws and Regulations
  3. Legal Business Structures
    Setting Up As a Sole Trader
    Setting Up As a Limited Company
    Setting Up As a Partnership
  4. Paying Your Taxes
  5. Employment and Labour Laws
  6. The Equality Act 2010
  7. Health and Safety at Work Act
  8. The Data Protection Act, 2018
  9. Food Safety Act
  10. Conclusion


Research What Regulations and Laws You Need to Abide By

It’s all too easy not to prepare your business thoroughly legally. However, this can have detrimental impacts on your business- forcing you to pay extortionate fees in fines from not following regulations properly.

The most important thing to do when starting up your business is to ensure that you properly do your research to ensure that you are not going against specific regulations (whether knowingly or unknowingly for that matter).

Regulations are there for a reason, to ensure that your customers, you and your employees are kept safe and protected. 

Penalties for Not Abiding by Laws and Regulations

To begin with, you should be acutely aware of the consequences that may ensue if you are not complying with regulations relating to your business. The first and most frequent consequence is receiving a fine[3].

These fines can be costly, relative to starting up your business, so you will undoubtedly want to avoid reaching this stage. The more extreme consequence would, of course, even be imprisonment. 

Individuals can be prosecuted and imprisoned ‘for breaches of health and safety law, with sentences of up to 6 months in a Magistrates’ Courts and up to two years in the Crown Courts’.

This applies to both employers and employees, depending on which party violates regulations. There are also more (possibly less severe) consequences, including things such as a loss of productivity within your business. 

Suppose you have been in breach of some laws. It is highly likely that your company would be required to stop or pause the production of goods or services until the situation has been resolved. 

For many start-up businesses, with production stopping, this could have a significant impact on the company’s revenue or even their ability to continue running as a business. 

This may lead to a loss of current staff, adding to this snowball effect. Without a team, what kind of business can be productive?

Of course, different businesses have different focuses on what laws and regulations they should follow. 

Find out more on avoiding social media legal issues

Setting Up As a Sole Trader:

If you are starting as a micro-business, you may be more inclined to start this as a sole trader[6]. This effectively means there is no separation between you as an individual (the owner), and the business. 

Some business owners may prefer registering as a sole trader as it removes that aspect of running as a large company that has to report every change they make, to the government. 

Becoming a sole trader means that you are self-employed. You can use money from the business for whatever purpose you like, rather than going through complicated steps as you would with a larger company. 

Generally, there are many benefits from having full control over your business. Not only do you have this ownership of profit, but it also massively reduces those middle points that can be a great hassle (things such as administration regulation and regular checks). 

As you are the one in control, you also have more privacy as a sole trader[7]– you can control your data and how you spend/control profits within your business. Generally, the benefits of running your own company are that it is far more flexible and suited to your needs, and how you envision your own business. 

However, as with anything, there are disadvantages to choosing to register as a sole trader. Firstly, you will be held liable for any issues within your business[8]. As your business, and you, as an individual, are labelled as one entity, this means that any monetary issues or penalties will have to be resolved by you. 

There is also the aspect of a perception of a less reliable business. Suppose a business is not labelled as a ‘limited company’. In that case, some people may be more reluctant to work with them.

This is why working with sole traders is seen as a much higher risk- not only to customers but also to suppliers who may be more reluctant to work with them. 

Relating to this idea of a ‘higher risk’ business, this is why it may also be harder for many of these smaller, sole trader business to receive financial aid such as loans

Setting Up As a Limited Company:

Another option which you may want to consider registering your business as is a Limited Company. This is seen as a slightly more trustworthy company to work with, too many people. This is because, while you run the business, and your decisions, registering as a limited company means that you will not be held personally responsible or liable for any issues- 

You are much more separated from your business, meaning any profit gains or losses won’t directly affect your personal assets. The only major drawback that comes from working as an LC (limited company) is that there will be a considerable range of regulations and laws that you will have to be thoroughly compliant with. 

This may make it much more difficult to work alone, ensuring you are doing everything correctly, which may encourage you to hire employees or individuals to help, effectively growing your business. 

Setting Up As a Partnership:

Another option, if you feel that you want to enlist help in terms of running your business, is a Partnership.

In a partnership, you and your partner (or partners) personally share responsibility for your business. This includes any losses your business make, and bills for things you buy for your business’ [9]. This means that working in a partnership may ease some of the strain involved with solely running your own business. 

Of course, this may have drawbacks in terms of personal conflicts with your business partner, commonly involved in problems such as decision-making processes, monthly expenses, or work-load share.

There are also many other laws and regulations to consider when starting a business, and these can be heavily dependent on what business structure you have decided on (Sole trader, Limited company, Partnership etc.) 

Find out more on business corporations.

Paying Your Taxes

Paying Your Taxes

The main thing you will have to think about and consider will be tax and national insurance.

If a sole trader runs your business, you may comparatively have to pay more tax, as this is dependent on your income which is linked to the business. 

Despite this, ‘the standard tax-free Personal Allowance (for 2020/2021) is £12,500, and you won’t pay any income tax until you earn more’ [10]. Supposedly, registering as a sole trader is a common choice for business owners within the UK (60% of all UK small businesses are sole traders).

All you will have to pay, under UK tax law, is personal income tax (depending on your personal earnings), as well as National Insurance Contributions (The class or category of your contributions once again depends on how much your business is earning). 

If you have registered your business as a Limited Company, you will have to pay Corporation Tax on any profits you make (currently in the UK, the rate is 19%), as well as personal tax and NIC’s. 

This may start to make your business slightly more expensive to run, as there is the added cost here of a corporation tax. If you are not an extremely high earning, and smaller business, perhaps registering as a sole trader may be more economical in terms of saving on Taxes and NIC’s.

Partnerships are somewhat similar in terms of tax to that of Limited Companies, with the basic income tax rate being 20% on profits, and partners also paying 2 classes of NIC’s. 

Paying attention and ensuring you read up on what type of tax you should be paying, depending on your business structure, is very important. As ensuring you are compliant with government regulations means you will avoid any fines or legal action taken against your business.

Finally, as briefly mentioned earlier, you should ensure that you do your research and thoroughly understand the differences within Industry-specific legislation. 

Employment and Labour Laws

Employment Laws

The first law that you should be aware of is the Employment Rights Act 1996[1]. This ensures that your company is compliant with, and active in delivering your employees with at least the minimum wage (Currently £8.72 in the UK for over 18’s), and also ensures that Overtime work is correctly regulated to avoid any malpractice. 

This act, of course, includes things such as child labour bans and requirements for keeping data and records of employees’ work. 

[1] Legislation Gov UK: Employment Rights Act, 1996

The Equality Act 2010

The second most important of employment laws is making sure you follow the Equality Act 2010[5]This act is put in place to ensure that no employee working under a company’s name experiences discrimination or is mistreated. ‘

The Equality Act 2010 legally protects people from discrimination in the workplace and broader society’. This covers the governments older legislation following three separate categories of the Sex Discrimination Act 1975, Race Relations Act 1976 and Disability Discrimination Act 1995. Any employee is eligible to make a complaint regardless of the size of the business, so ensure that you are correctly following ethical procedures. 

Health and Safety at Work Act

There are also more physical laws to adhere to if you are running a business that actively requires people working at a specific location (production facilities, offices, etc.)

These are things such as health and safety at work act. It is ensuring that each person working within your business is a safe and regulated environment, from the risk of injuries or illnesses due to avoidable reasons within that business. 

This means that any licensed and operating company is subject to random checks to ensure that it is free from any recognised physical or health hazards for employees. An example of following health and safety regulations is to provide all electrical appliances such as computers, light switches, kettles etc. are correctly working and safe to use.

The Data Protection Act, 2018

GDPR The data protection

Another act that is highly relevant to every business and one that you should certainly ensure you understand is the Data Protection Act 2018 (GDPR). This complements the European Union’s General Data Protection Regulation.

This ‘controls how organisations use your personal information, or the government’. Businesses must ‘make sure information is used fairly, lawfully, and transparently’.

This means that each company must ensure that any data that they are holding, supplying, or collecting from their consumers or employees are legal and regulated to avoid prosecution.

[1] Gov UK: Data Protection: The Data Protection Act, 2018

Food Safety Act

Depending on what services or products you are trading within your business. There will be a specific set of laws regarding practice requirements or things you must state to the customer when selling your product/service; 

So, you should become familiar with these most importantly. For example, suppose your business involves selling food products, under the Food Safety Act 1990 [11]. In that case, each possible allergen must be explicitly listed, and the food must be ‘labelled, advertised and presented in a way that is not false or misleading’. Similarly, to this, in the case of selling Tobacco (or similar) products, a company must meet regulations in terms of using bold writing, of a specific (large) size and font, reminding consumers and warning them of the presence of nicotine. 

If a business selling nicotine-based products fails to present this information to consumers formally, that business is subject to fines and further legal action being taken against them.

Conclusion

When looking into laws that will impact you when starting a business, first and foremost, make yourself familiar with your particular industry-specific regulations, to change or alter your products, if need be to follow the rules listed. 

Once you have familiarised yourself with the concepts and acts within employment, health and safety laws, you will need to identify what kind of business you are running (business structure). 

Finally, as briefly mentioned earlier, you should ensure that you do your research and thoroughly understand the differences within Industry-specific legislation. 

Secondly, you should focus on how you wish to present and register your business, depending on the size of the company and aspirations you have for it; Familiarise yourself with tax and NIC’s in line with the business structure you have chosen.

Lastly, ensure that you are aware of any other regulations and laws that can be directly applied to your business, such as ensuring your employees and staff are kept happy and safe.

References

[1] Investopedia, July 4th, 2020, by Adam Hayes, Business

[2] FreshBooks cloud accounting: What Legal Requirements Are Needed to Start a Business? 8 Tips for Start-ups

[3] Xenon Group: Consequences of Failing to Comply with Legislation, Xenon Management, Training and Recruitment, 2005-2020

[4] 20 Business Laws Every Entrepreneur Should Know in 2015, by Lisa Furigson

[5] Gov UK: Equality Act 2010: Guidance, 27 February 2013

[6] Working Mums: Legal Considerations for new businesses, by Anne Bridges, 11 January 2016

[7] Gorilla Accounting: What are the Pros and Cons of Being a Sole Trader? 19 September 2019

[8] Inform Direct: Disadvantages of a Sole Trader: by Johnathan Korchak, 5 November 2014

[9] Gov UK: Setting up a business partnership

[10] Informi: What tax rates do small businesses pay?

[11] Food Standards Agency: Key regulations, 26 January 2018

Annie Shokmo

Annie is a an aspiring Law student at The University of Kent, Canterbury. She also has a passion for writing on different subjects.

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