Setting up and running a small business can be a daunting task. There are many pitfalls, not least the increasingly complex and, some would say, burdensome legal framework under which the business has to operate. However, taking time at the beginning to set your business off on the right legal footing can serve you, your business partners and employees well in the future.

More than just a lawyer
It is important to find a good lawyer who has a thorough understanding of the commercial marketplace. Your solicitor should be able to give you sound business-oriented legal advice. Owners of small businesses can often find themselves isolated and a solicitor can be a useful source of support. It is worth taking some time to choose carefully.

The legal status of your business - limited company or partnership?
You should first consider whether you wish to set up a limited company, partnership or a limited liability partnership. The advantage of a partnership is that your details do not have to become public. If you set up a limited company you are obliged to provide Companies House with details about your business, including information about directors, registered offices and share capital. If your turnover exceeds £1million you will also have to file audited accounts at your own expense. In a partnership you are personally liable if anything goes wrong. As a company, the liability is limited. However, in practice, a bank or landlord will ask company directors to give some kind of personal guarantee. Shareholders should make sure that they have a Shareholder’s Agreement. This will detail what happens if the shareholders fall out or die, including the right to buy a deceased shareholders’ shares. For this reason, shareholders may consider taking out Key Person Insurance.

Commercial Leases - make sure you know what you are signing up for
In the area of commercial property you need to be clear what you are taking on if you are signing a commercial lease. There will usually be obligations to make repairs and there may be restrictions on the right to renew the lease. You need to be sure that the premises have planning permission for the use you intend to make of them and that the landlord agrees to that use.

Contracts of employment - ignore them at your peril!
Employment legislation emanating from Europe is having a big impact on small businesses. Each employee is entitled to receive statutory details about their terms of employment within 13 weeks. This would include location of work, holiday entitlements and a basic job description and is an area that smaller businesses often neglect. A simple A4 sheet will often suffice. Without it, an employee can refuse to carry out new tasks and this is important for small businesses where flexible working can be of paramount importance. If you employ freelance staff, great care must be taken to distinguish between a Contract of Service (i.e. employment where tax is deducted under the PAYE system) and a Contract for Services (i.e. issued to a freelance worker or independent supplier). If you employ more than 5 people you must now make a ‘designated’ stakeholder pension available to your employees by 8th October 2001, whether or not you make any contributions to it. Your local independent financial advisor should be able to help.

Employment law pitfalls
Apart from the issue of contracts, there are many other areas that employers need to consider. The Government offer two useful helplines, one for New Employers (0845 61 43 143) and one for Employers (0345 143 143). The Inland Revenue and ACAS can also be of help. You need to be sure that you comply with the new employment laws that are coming in effect as a result of EU Directives. Both parents are now entitled to unpaid parental leave. Employees on fixed term contracts and part-time employees now have the same rights as full time workers. As for the future, there are now proposals to give women the right to return to work part-time after having children.

Agree your Terms of Business in advance
It is a good idea to have standard terms and conditions drawn up for your suppliers. You should also be very clear about agreeing credit terms for both customers and suppliers. The difference between 30 and 90 days can have a significant impact on the cash flow for a small business.

VAT headaches
VAT is a subject that has the tendency to make even the staunchest business manager turn pale, but the principle is relatively simple. You are legally required to register for VAT if you have an annual turnover of more than £52,000. You effectively then become a tax collector for the Government. The advantage of registering is, of course, that you can claim back the VAT on all your business purchases. For this reason, some owners decide to register voluntarily for VAT to get this benefit.

Data protection and copyright
If you keep names and addresses of living persons on a computer, it is necessary to register under the Data Protection Act with the Data Protection Register (Tel: 01625 545 740). In the area of computer software, you will need to be sure that you hold adequate copies/licenses for programmes that you use for your business.

A safe place to work
You need to be sure that your business comes up to the standards of cleanliness, hygiene and welfare, safety and comfort as outlined by the Health and Safety Executive (Tel 0742 892346). Your Local Council will also be able to advise. It almost goes without saying that a pleasant working environment will not only benefit employees but also the business itself.

Trade Descriptions
A little thought should be put into describing the services or products you supply, together with a clear statement of prices and payment terms.

Insurance costs - a necessary evil
Make sure that you are adequately insured. If you have visitors to your premises you will need Public Liability Insurance to protect the company and the directors from any claims for damages should any visitors have an accident. Employer’s Liability Insurance is legally required if you are employing staff and the certificate must be displayed. You will also need to take out insurance to cover theft, fire, contents, professional and product liability and other risks as appropriate to your business.

A good framework
Just a few of the many legal issues that affect SMEs have been addressed here. Getting the framework right and understanding your legal obligations is an important part of any business managers’ job. If done properly, it should help you to realise the full potential of your business.

Chris Wiper and David Hogg can be contacted at Close Thornton Solicitors in Darlington. Telephone: 01325 466461 or e-mail.

For further information about this news release please contact Close Thornton Solicitors Marketing and Media Department. Tel: 01325 466461 or e-mail.

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