As a small business, the world of legal compliance can be daunting. How do you ensure you’re following all the necessary regulations? From taxes to advertising standards, the answer lies in understanding which legal requirements apply to your small business. It’s important to be aware of and comply with the relevant regulatory standards. To help you get started, we’ve created an easy-to-understand guide to the legal requirements for starting a small business. Learn more about the licences you might need, employment law and how to organise your small business accounts.
Legal requirements for starting a small business: a quick overview
Setting time aside to understand the legalities of running a business can greatly benefit your small business idea in achieving long-term success. From avoiding fines and potential prosecution to creating a workplace culture that prioritises your team, legal compliance helps you build strong foundations for a successful business. To help you meet all the legal requirements for starting a small business, this guide will look at key steps for compliance, including:
Choosing the right legal structure for your small business.
Registering for taxes.
Applying for permits and licences.
Understanding employment law.
Following health and safety regulations.
Following data protection laws.
Complying with advertising standards.
We’ll also look at industry-specific standards, offering guidance on how different types of businesses can meet legal requirements in the UK.
Choosing the right business structure
Choosing a suitable legal structure will be one of the first requirements when starting a small business. The three main options to choose from include sole traders, limited companies and partnerships:
Sole traders | Limited companies | Partnerships |
You and your business are a single entity. | You and your business are separate entities, so any profits (or debts) belong to the business. | In a partnership, the responsibility for your business is split between you and your partner(s). |
You’re classed as self-employed. | Limited companies will file annual accounts to Companies House which are publicly available. | Each partner will submit a self-assessment tax return as well as one partnership tax return for the business. |
You’ll file a tax return, which is private between you and HMRC. | Profits of less than £50,000 are taxed at 19%. | Each partner will pay income tax in line with current rates and allowances on their share of the business profit. |
The standard Personal Allowance is £12,570. This is the amount of income you can take out of the business without paying tax. | If your profits are between £50,000 and £250,000, you’ll be charged at the main rate of 25% but with the possibility of marginal relief, reducing your tax bill. | |
The tax rate paid on your income depends on how much income falls into each tax band. | Profits over £250,000 are charged at 25%. | |
It’s easier to register as a sole trader and involves less admin than a limited company. | You’ll have no personal liability. |
Disclaimer: All tax rates and fees mentioned are accurate as of June 2024. For the most current rates and requirements, please visit the GOV.UK website, contact HMRC or consult a financial advisor, as these may change over time.
Whether you register as a sole trader or limited company is up to you. However, the benefits of the structures make them better suited to different business types, so it’s important to choose the right option for your small business. Questions to ask yourself when you’re making the decision include:
Are you looking to grow your small business in the future?
What level of liability protection do you need?
Will your profits be over £50,000 per annum (p/a)?
Are you looking for investors?
It’s important to note that you can change how your business is legally structured over time. Let’s say, for example, you’re starting a side hustle upcycling second-hand clothing and you don’t expect to make more than £50,000 in your first year. The appeal of easy registration and less admin might make registering as a sole trader your preferred option. After a few years of trading, however, you’ve expanded your business and want to own your own shop, hire employees, and seek investors. You can change your legal structure to a limited company to better suit your business goals and benefit from limited personal liability.
Understand and register tax obligations
Once you’ve chosen the best legal structure, the next step is to register your business to meet small business tax obligations. If this is your first time registering a business, it can be challenging to know where to start. To help you, we’ve put together some key registration information to guide your next steps.
Registering as a sole trader
As a sole trader in the UK, you’ll need to register with HMRC as soon as you’ve earned more than £1,000 in a single tax year (which runs from 6th April - 5th April). Here are seven steps to follow to register as a sole trader:
Keep records for tax compliance.
Register for value-added tax (VAT).
Create a Government Gateway account on the government website.
Apply for a unique taxpayer reference (UTR).
Log in to your tax account.
Register for self-assessment tax and National Insurance (NI).
To avoid penalties, fines and interest being charged, registering for tax purposes must happen before 5th October for the relevant tax year.
If you miss the tax deadline you must contact HMRC as soon as possible to inform them and ask for advice on what to do next. They can offer guidance and sometimes reduce penalties if you have a reasonable excuse for missing the deadline.
Registering as a limited company
To meet legal requirements, register your limited company with Companies House and pay an incorporation fee of £50 for online registrations. Registering for Corporation Tax at the same time can make it simpler to meet financial obligations. To register your limited company, follow these eleven steps:
Choose a business name.
Select business directors and a secretary.
Select shareholders and guarantors.
Pinpoint people with significant control over the business.
Create a business plan and documents that detail how your business will be run.
Create a record-keeping system.
Create a Government Gateway account on the government website.
Register your small business with Companies House.
Present at least 3 pieces of information to prove your identity (such as a passport number, NI number and place of birth).
Apply for a UTR.
Follow the guidance to register for Corporation Tax.
You must register for Corporation Tax within the first 3 months of running your small business. HMRC can impose penalties for late registration which, in some instances, can result in legal action being taken against your small business.
The start of your business isn’t the moment you make your first sale. Instead, it’s as soon as any business activity takes place such as buying materials for your products or renting a business space.
Registering as a partnership
As a partnership, both partners will need to follow similar guidance as sole traders to register with HMRC. This includes selecting a business name, setting up record-keeping systems and registering for VAT if applicable. You’ll also be required to nominate a partner to register the partnership with HMRC. Register by 5th October in your second tax year to avoid fines.
Do you need to register for VAT?
The legal obligations of a business can change over time. For example, VAT becomes a requirement for any UK business once your turnover is higher than £90,000 in any 12-month period, or you expect your turnover to go over £90,000 in the next 30 days.
Once your small business reaches the threshold for VAT, you must register with HMRC within 30 days. Preparing the necessary documents and information beforehand will help to simplify the registration process.
Once you’ve registered for VAT, you must charge VAT on any applicable goods and services. To do this:
Calculate the new price including VAT using the relevant VAT rate.
Add the VAT separately to your invoices.
Add your VAT number to your invoices.
Keep records of VAT owed and to be reclaimed.
Complete and submit VAT returns, usually on a quarterly basis.
Pay your VAT bill.
Stay up to date with VAT rates as they can change. If a rate changes, you must reflect it in your prices.
Set-up business banking
A business account makes it easier to track your business-specific income and expenses. Making it simpler to monitor any small business loan repayments, ensuring you meet your financial obligations. To benefit from business banking, all digital transactions related to your small business should be captured through your business account. Any cash payments should also be deposited into your business bank account for an accurate record of your income. This enables accurate accounting and reporting for HMRC tax returns and Companies House accounts.
Get the necessary licenses and permits
When starting a small business, legal requirements can include licenses and permits. To learn more about whether your small business requires licenses or permits, we’ve put together a list of some of the most commonly needed for merchants operating in the UK.
Disclaimer: All approval, registration, and licensing fees referenced below are accurate as of June 2024. Please contact your local council for the current rates and requirements, as they may change over time.
Permission to place tables and chairs on the pavement
For cafes, restaurants and pubs, adding tables and chairs to the pavement outside your business can increase your capacity and help you appeal to a target market looking for outdoor seating. Before placing any furniture on the pavement, obtain a license from your local council. If you’re granted the permit, be aware of other restrictions, such as the size or number of chairs allowed and the area you can use. It’s important you take these rules seriously to remain compliant, keep your permit and continue welcoming customers to your outdoor seating. For first-time applications, local councils charge up to £500 for pavement licenses and typically £350 for license renewals. Licenses can be granted for up to 2 years.
Market stall license
If you’re exploring low-investment business ideas, you might consider selling your products at a local market. With stalls often costing as little as £5, it’s a cost-effective way to bring your small business directly to your local customer base. Before setting up your stall look into whether you need a market stall license or a street trader license. You can apply for these licenses through your local council. The cost for a market stall license varies depending on your council’s rates.
Auction premises registration
If you’re auctioning goods or services, you might need to register as an auction premises with your local council. Certain areas require licenses if you’re auctioning specific items. For example, many London boroughs require auction premises registration if you’re auctioning furniture, jewellery and books. This applies to both auction houses as well as smaller stalls. The cost for auction premises registration varies depending on your council rates. For example:
Royal Borough of Kensington and Chelsea: The registration fee is £304.70.
Southwark Council: The registration is £788 (which includes an application fee of £647 and a compliance fee of £141).
Premises licence
A premises license allows small businesses to sell alcohol, host entertainment events and provide late-night food service. Premises licenses are required for any small business idea that involves:
Selling alcohol.
Serving food or drinks between 11pm and 5am.
Providing public entertainment.
Bars and restaurants need a premises license, but there are plenty of other venues that can require one, too. For example, if you’re hosting an indoor sporting event and serving food and alcohol after 11pm for late-night showings, you will need to obtain a premises license. A premises licence costs up to £635 for new applications, which can be multiplied by a maximum of three for businesses that primarily supply alcohol (like pubs) increasing the cost to £1,905. A further annual charge of £350 is applied for renewals, which can be multiplied by a maximum of three, increasing the cost to £1,050.
Local authority food establishment approval
If you’re opening a food-based business that deals with animal products, you may require local authority food establishment approval. This approval is needed for any small business that handles, prepares or sells food products such as meat, fish, egg and dairy produce. For example, if you own a butcher shop that sells local meat or a deli that sells a variety of meats and cheeses, this would apply to you. A food establishment like a vegan cafe, however, won’t come into contact with animal-origin products, so wouldn’t need this specific license. Applying for local food establishment approval costs £395.540.
Adventure activities licence
If you’re looking into hobbies that make money and are turning your love of adventure activities into a business for young people (under 18), make sure to get an adventure activities license first to ensure you meet specific safety standards. This applies to a wide range of activities, including:
Caving - potholing and mine exploration.
Hiking - mountaineering and gorge walks.
Climbing - rock climbing, abseiling, and climbing walls.
Watersports - canoeing, paddle boarding, kayaking, sailing, and rafting.
The adventure activities license also covers renting out equipment. For example, if you start a small business renting canoes and kayaks to be used in specific waters, you’ll need to apply for this licence. It’s crucial to note that applications need to be registered three months before you plan on opening your business. Applying for Adventure Activities Licensing costs £715.
Hairdresser registration
Whether you’re starting a business from home as a self-employed barber or opening a salon, you might need to register as a hairdresser. This allows your local authority to ensure you’re meeting health and safety standards. Registering as a hairdresser can cost a fee depending on your local council. If you don’t need to register, you will still need to follow health and safety requirements. These can include ensuring your working environment is well-lit to avoid accidents, well-ventilated and taking measures against infection by sterilising your equipment such as scissors, combs, razors etc.
Street collection licence
For merchants who collect money for charity, you’ll need a street collection license. This license enables you to:
Go door-to-door collecting money.
Sell items on the street for charity (such as at a permitted stall).
Collect money in public areas, such as parks or shop doorways.
If you’re collecting money for charity without a licence, you could face fines of up to £200. It’s free to apply and obtain a street collection license.
Speak to your local council
To understand whether any of these licenses or permits apply to your small business, speak with your local council. Outline details of your business plan, including what you’ll be selling and where. Your local council can then offer guidance specific to your business, helping you apply for relevant licences. Once you’ve applied, wait for approval before moving forward with your business plans.
Employment law
The UK employment laws are in place to protect your business and your employees. If you’re planning on hiring staff, it’s important to understand the relevant legal requirements. We’ve included some areas of employment law that small businesses should be aware of including:
Registering as an employer
Before the first payday, register as an employer with HMRC to receive your Pay As You Earn (PAYE) code.
Offering minimum wage or higher
As the business owner, you’re responsible for all team members being paid at or above the current minimum wage. For employees over the age of 21, the National Living Wage is currently £11.44 per hour.
Maximum working hours
You can’t ask your employees to work more than 48 hours per week (see the government guidance for exceptions).
Rest breaks
Employees have a right to rest. For example, an employee who’s worked more than 6 hours a day has a right to take a 20-minute break. They also have the right to 11 hours of rest between working days.
Employers’ liability (EL) insurance
As soon as you hire an employee, you must take out EL insurance to cover any employee claims of illness or injury caused by negligence in the workplace. This should cover your small business for at least £5 million.
Holiday allowances
All contracted employees, whether full-time, part-time, part-year or agency workers are entitled to 5.6 weeks of paid holiday.
Sick pay
Employees who have an employment contract with your small business and earn more than £123 per week are entitled to statutory sick pay (SSP) when they’re ill for more than 3 days.
Maternity leave
Your employees must take at least 2 weeks of maternity leave and are permitted up to 39 weeks of paid maternity leave, and a further 13 weeks of unpaid leave.
Paternity leave
Employees are entitled to 1 or 2 weeks of paid paternity leave at either 90% of their average weekly earnings or £184.03 (whichever is lower).
Recruiting and hiring employees
There are UK laws that guide businesses through the recruiting and hiring process. For example, discrimination laws prohibit businesses from discriminating against factors such as gender, race, religion, age, disability and sexuality. It’s also required that you conduct checks on your employees before hiring, such as:
Making sure they have a right to work in the UK.
Any necessary Disclosure and Barring Service (DBS) checks, such as for jobs working with children.
When moving towards the onboarding stage, it’s essential you create employment contracts to protect both your business and your employees. These should outline employment particulars, including working hours, salaries and holiday entitlement. As a small business, the hiring and recruitment process can be time-consuming. To make it easier, you can outsource this process to a reputable recruitment agency.
Following Payroll Laws
Learning how to run payroll can help you meet financial requirements and fulfil employment laws. For most merchants, this means registering with the government’s PAYE system, which is a legal requirement if your employees:
Are paid £123 or more every week.
Receive a pension.
Receive expenses and company benefits.
Have had another job or received Jobseeker’s Allowance, Incapacity Benefit, or Employment and Support Allowance.
The PAYE system ensures you follow tax laws when you pay employees by deducting income tax and National Insurance, as well as any other applicable deductions (for example student loan repayments or pension contributions) on every payment. It’s your responsibility to deduct NI and tax from your employee wages, before reporting the payments and deductions to HMRC every time you pay your staff. You are required by law to provide employees with payslips, yearly P60s and a P45 if they decide to leave your business. If you don’t have a finance or payroll team to help with your payroll, you can make the task simpler by:
Using reputable payroll software to automatically deduct tax and NI.
Outsourcing your payroll.
Health and Safety Executive (HSE) regulations
Every business in the UK is required to follow strict HSE laws. These are in place to keep you, your employees, and your customers safe. For example, there are requirements around selecting the right workplace facilities. These include adding welfare facilities (such as the right number of toilets), creating a healthy and clean working environment, and maintaining a safe, well-maintained facility with regularly maintained equipment. If you’ve never had to follow HSE regulations, getting started can feel a little overwhelming. We recommend breaking down your health and safety management into easier steps, including:
Appointing someone responsible for health and safety.
Writing a health and safety policy.
Carrying out a workplace risk assessment including hazards, risks and controls.
Reducing the risk of workplace accidents (such as slips and trips through responsible cleaning, and ensuring floors are in satisfactory condition).
Training your employees.
Ensuring you have EL insurance.
How to make your small business HSE compliant
Depending on the industry of your business, you will need to follow industry-specific health and safety regulations to be compliant. Let’s say, for example, that you own a bakery. To ensure compliance for your small business follow Food Hygiene Regulations and the Food Safety Act. Starting with ensuring your bakery is compliant with HSE regulations. This includes investing in wellbeing facilities, ensuring no tripping hazards and clearly labelling all fire exits. Through conducting a risk assessment of your premises you’ll be in a better position to identify all potential risks and detail how they’ll be minimised. For example, the sharp knives in your kitchen are identified as a risk. In your assessment, you outline solutions such as using protective covers and correct storage to reduce the potential for injuries. Food hygiene is also crucial for bakeries. You’ll be inspected by Environmental Health Officers (EHOs) under the Food Hygiene Rating Scheme to monitor your food hygiene practices where you’ll be expected to display:
Personal hygiene practices (including handwashing and covering cuts or wounds correctly).
Separating raw and cooked ingredients using the correct chopping boards and storage.
Policies that reduce the risks of cross-contamination between foods.
Correct sanitisation of the workspace and all equipment.
By adhering to these guidelines, our fictional bakery can remain compliant with both HSE regulations and food hygiene standards. This not only helps avoid legal issues but also creates a safe environment for both employees and customers. For more comprehensive advice for your small business, it’s recommended to read the government guidance on food safety practices and laws.
Staying up-to-date with HSE regulations
With a wide range of rules and the possibility of guidance changing over time, it’s important to stay up-to-date with HSE regulations. Simplify HSE by regularly checking the HSE website for updates and guidance. Subscribe to newsletters for alerts on any regulation changes, and use the HSE resources and tools, including guides and checklists, to inform yourself of relevant regulations. Hiring an employee with existing HSE experience as your health and safety manager can also improve business HSE compliance. They’ll be responsible for staying up-to-date with regulation changes and ensuring HSE standards are upheld.
Data protection and privacy laws
When your business deals with any customer or employee data, follow data protection and privacy laws. For example, if you own an online shop, you might collect customer emails for email marketing. This requires customer permission and plans in place to keep it safe from third parties, including hackers. These regulations are outlined in the General Data Protection Regulation (GDPR) guidance and the UK’s Data Protection Act. Key rules to be aware of include:
Using any personal data legally and transparently.
Only using data for purposes you’ve already specified.
Not keeping data after it’s necessary to do so.
Ensuring the security of personal data.
If you’re storing emails, for example, under the Data Protection Act you won’t be able to use them for anything other than the activities your customers have specifically agreed to, such as contacting them about an order or a product re-stock. Email addresses should also be kept in access-only storage, with a strong firewall in place to prevent data breaches. If the customer opts out of receiving emails from your small business, you no longer have permission to store their email address. This means you should delete their address from your mailing list. As a merchant, you can make sure you comply with data protection laws by registering with the Information Comissioner’s Office (ICO). This is a legal requirement for any business dealing with personal data.
Protecting your intellectual property
Intellectual property (IP) refers to creations from your mind, such as product designs, a business name, artwork (like a logo) and inventions. IP can also be created as your business grows, so it is important to regularly review your IP and take steps to protect your creations from theft. IP protection gives your business a legal claim over your work, ensuring that:
Your IP isn’t able to be used by other businesses without your permission.
Your business image isn’t damaged by unsolicited use of your IP.
You can also use IP rights to earn additional income. Let's say, for example, that you create an innovative, eco-friendly plant pot for your flower business. By patenting your new pot, you can start offering patent licensing agreements, allowing other businesses to pay to use your design in their products.
Different options for protecting IP
If you want to safeguard your IP against theft, the main options to look into are:
Copyright
When you publish an original piece of work (such as a study on your website or a logo with artistic elements) it’s automatically copyrighted, which prevents others from distributing or copying it for their own use.
Patents
For innovative inventions, a patent gives you exclusive rights to your design. These are expensive and time-consuming to apply for but offer comprehensive security for your unique IP.
Trademarks
Trademarks are designed to protect your business branding from being used without credit. Branding that can be trademarked includes your business name, logo, colour palette or the name of a product. After trademarking, you can add the Ⓡ next to your branding and marketing material, making it clear that it’s protected.
Registering a design
You can register the shape, appearance (such as pattern or colour) and configuration (the specific way that separate parts fit together) to protect your IP.
Unregistered design rights
Like copyright, this is automatically applied to designs and provides IP protection against another business (or individual) copying your work.
What happens if you don’t protect your IP?
As mentioned above, published original works are automatically protected by copyright or unregistered design rights. For example, if you design a pair of trainers, you’ll have a level of unregistered design rights to prevent others from recreating your exact design. It’s important to note, though, that this only lasts for either:
15 years after the product was first created.
10 years after the product was first sold.
It’s also harder to prove that you created an original design if it’s not registered. For stronger protection and the ability to take legal action against any copies of your designs, it’s best to register for design rights. For inventions, if you don’t patent your idea then you don’t have any legal rights to stop others from using and reproducing your invention. For example, if you create a unique, stretchy lace for your trainers that makes them easier to slip on, without a patent, other merchants could use your laces in their trainer designs.
Industry-specific regulations
The list of legal requirements for a small business in the UK will vary depending on your industry. To give you some guidance on the legal requirements to expect, we’ve taken a look at some industry-specific regulations:
As a self-employed therapist, register with an authorised membership body, like BACP, and you might also need a DBS check to work with vulnerable clients.
If you create a low-cost business idea selling homemade vegan chocolates at a local market, follow the Food Standards Code to ensure food safety.
If you’re working as a freelance accountant, you must register with a supervisory authority, like the AAT or ACCA, to monitor your business.
When selling homemade skincare products, follow Good Manufacturing Practices (GMP), ensure you correctly label your products and avoid using prohibited ingredients.
Any business with a physical location needs to follow regulations around gas, fire and electrical safety. You’ll also need to comply with accessibility laws and ensure you have a suitable number of toilets.
If you’re overwhelmed by the various industry-specific legal requirements, it’s a good idea to speak to a government professional or lawyer with experience in your industry. They’ll be able to guide you through the essential regulations and give you advice on how to meet legal standards.
Advertising and trading standards
When it comes to how to advertise your business, follow the Advertising Standards Authority (ASA) guidelines. These are published to help businesses remain in line with trading standards laws and outline legal requirements to prevent misleading customers. For example, with the majority of consumers now stating that sustainability affects their purchasing decisions, environmental claims in advertising have become a more recent ASA focus. To avoid greenwashing (in which businesses mislead consumers around their sustainable actions), the ASA advises merchants to:
Avoid making absolute claims, such as ‘greenest’, and instead use comparative claims, like ‘greener’.
Have robust evidence ready to back up your claims.
Avoid purposefully omitting details about your business’s impact on the environment.
Avoid using misleading imagery that wrongly associates your business with sustainable practices.
The ASA also outlines legal requirements around advertising standards for:
Influencer marketing.
Pricing in advertisements (including describing a product as free).
Testimonials and reviews.
Promotions.
To learn more about what makes a non-compliant advert, take a look at the ASA’s list of non-compliant advertisers. With details on how different adverts and marketing broke ASA regulations, it offers real-life examples to further your understanding of advertising standards.
Speak to a professional
Whether you’re looking at business opportunities in the food industry or you’ve recently opened a local shop, the best way to guarantee you comply with HMRC and tax laws, employment and HSE regulations, and secure the right permits is to speak with a professional. Look for experts with experience in your industry, including financial advisors, lawyers and health and safety consultants. These professionals will be able to guide you through the legalities of opening a business, ensuring you follow all government regulations for a smooth, stress-free business launch.
Disclaimer: The contents of this page are intended for informational purposes only and should not be construed as professional advice. For matters requiring legal or financial expertise, it’s recommended to seek guidance from qualified professionals.
Legal requirements for starting a small business FAQs
What are the basic legal requirements to start a business in the UK?
What documents should a small business have?
Can I run a small business without registering?
What are the tax obligations for a small business?
What is a legal compliance checklist?
