Unfortunately, if you are starting or running a trade business, there’s more that you have to consider than just finding customers and doing good work. You must also know about the legal essentials. There are several types of legal issues a small business owner must address and we try to cover them here as simply as possible.
They include the structure of your business, insurance, employment law and the terms and conditions that you use with your customers. Getting these right protects your business. So, let’s go!
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If you are starting a trade business, it is important it is set up correctly from day one. Tax can be saved and effort avoided. Shareholder or partnership arrangements are key if you’re going into business with anyone else.
First, you need to choose the best structure for your business:
- Sole trader
- Limited Company
There are three things to consider when choosing which approach works best:
- How much tax you will pay
- How much paperwork is involved
- How much risk is involved
How much tax you will pay
Generally, when you are a smaller one-person-band you will pay less tax as a sole trader but more if you get bigger. Unfortunately, the cut-off point tends to change each year with changes in tax rules. Some advice from an accountant can be really helpful here.
This is the mirror image of the sole trader. You will pay less tax once you are larger.
How much paperwork is involved
You need to register as self-employed - see https://www.gov.uk/set-up-self-employed.
You need to do an annual income tax self-assessment. This will switch to run on software under “Making tax digital” from April 2024.
You need to form the company - this is fairly easy and cheap - search online for “Company formation”.
You need to do annual accounts for the company, usually, you need an accountant to help you.
You need to do an annual Confirmation Statement. This is very simple if shareholdings haven’t changed.
There are rules around paying dividends that you must follow.
How much risk is involved
You are the business and are personally liable for anything that goes wrong and people can sue you. In the worst case and if insurance doesn’t cover the issue, you could lose everything you own, including your house.
The limited company is effectively a person in the eyes of the law. If things go wrong people will sue the company but your exposure is limited to losing the company and its assets.
In addition, you may need to do paperwork in connection with:
- Pay as you earn if you have employees (including yourself in a limited company)
- VAT if you are VAT registered
- Construction Industry (CIS) returns usually if you use subcontractors or subcontract to other people
In each case, what you need to do is the same whether you are a sole trader or limited company.
There are also some options around partnerships, but most trade businesses don’t go down that route and getting some proper legal advice is probably the best approach for these cases.
If you have employees (including yourself if you are in a limited company), it is compulsory to have Employers Liability Insurance.
Other insurance is generally not compulsory but if you are part of a Competent Person’s Scheme such as NICEIC, the scheme is likely to insist on insurance like Professional Indemnity Insurance. This protects you (and your customer to some extent) if a job goes really wrong.
In addition, it makes sense to have public liability insurance as it’s both cheap and protects you against the massive liability where, for instance, something fell from building work onto the head of a passing pedestrian.
Search online to find insurance quotes.
Employment law is complex and is where lots of small business owners can get tripped up. If you adopt a strong “hire and fire” approach you can get taken to an employment tribunal which can waste huge amounts of time. It can also result in surprisingly painful awards made against you.
If you don’t have a signed employment contract with your staff, don’t think that protects you. In fact, it puts you in a worse position.
This is a complicated area and is something that should specially be looked into once you start employing people, and particularly if you have a growing staff roll.
Terms and conditions
If you are providing service to homeowners, they have a lot of legal protections, whether you have any formal terms and conditions or not. However, if you are helping out other businesses, any written agreement between you and them will rule.
In both cases, you are better off if you have some written terms and conditions and tell your customer that this is the basis on which you do business.
There isn’t room to go into this in detail here, but your trade association may be able to help. Alternatively, there are sites like this one: https://simply-docs.co.uk/Terms-and-Conditions-Templates/Professional-and-Trade-Terms-and-Conditions where you can purchase terms and conditions off the shelf.
If you hold personal details of your staff and customers either on paper or on one or more computers (heads up: your smartphone is a computer) you should be registered under the data protection act with the Information Commissioner’s Office (ICO). You can visit the ICO website here. There is a small annual charge.
Protecting your business name
If you start becoming larger, Intellectual Property may become an important issue. That’s because your business name may start becoming well known in your area. You don’t want someone else to set up their competing business with the same or similar name and steal your customers.
The way to protect yourself against this is to trademark your business name. The difficulty is that you may find that your name isn’t unique or isn’t sufficiently unique to allow you to be granted a trademark. That is an argument for trying to trademark your business name at an early point where it wouldn’t be too difficult to change.
Just search for “Online trademark registration” to find out much more.
If you have a trademark, you can threaten to sue (and eventually sue if necessary) anyone who is “Passing off” as you. Usually, the threat makes people back down.
Most people running smaller trade companies hate paperwork and hate legal complications even more. Unfortunately, they are a fact of life. It is absolutely true that facing these issues head-on and taking action before they become a problem guarantees less hassle in the medium term. All of the best!
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