Six crucial legal considerations for your tradesman business

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Starting up your own tradesman business is an exciting endeavour, but it’s crucial to be aware of what you need to set up and organise before launching. For example, there are many legal obligations and regulations that you must adhere to in order to cover all bases and follow all legislative requirements. Although they aren’t likely to be the first things which spring to mind when dreaming of building your tradesman empire, ignoring these six legal considerations will do your burgeoning business more harm than good.

Insurance

With the right amount of cover, you can run your business safely in the knowledge that you’re protected if anything goes wrong. As the jobs you carry out are often high-risk — roofing or welding, for example — insurance can give you, your business and your clients essential cover if the worst does occur, and makes certain that your business meets legal requirements and won’t be left destitute.

For instance, the law requires any business which hires a team of people, regardless of whether they are full-time employees, contractors or temporary workers, to take out employers liability insurance. Another useful cover to have in place is public liability insurance, which protects you against any claims made as a result of harm or damage caused to a third party or their property due to your work. All it takes is one person tripping over some equipment to force you to make a hefty pay-out, and covering any associated legal fees. Similarly, professional indemnity insurance covers your business if a client comes to physical or psychological harm as the result of bad advice, or poorly-delivered services. 

Business structure

Before launching your company, you’ll have to establish and choose the right business structure, which can impact how much tax you pay, what personal liability you need to hold, and the amount of administrative work involved. To decide which is right for you, you need to evaluate your current situation and future business plans. The four main business structures are:

Sole trader

Operating as a sole trader means you own and run the business by yourself, making you self-employed. You have full control, allowing you to change your business as you please and entitling you to keep all profits as income. However, you will still need to pay tax and national insurance. Sole traders must register with HMRC if they earn over £1,000 in a year, and file a self-assessment tax return. This is the simplest and easiest form of business to start. 

Limited company

A limited company can be private or public. The former doesn’t publicly trade shares and is limited to a maximum of 50 shareholders, which means business plans and finances are private. Conversely, a public limited company trades shares on the stock exchange, allowing them to access more capital, but have less control over the business itself. This offers businesses professional status, tax-efficient income and opportunities to raise capital.

Limited companies must be registered with Companies House, enabling them to operate as a distinct legal entity to directors and shareholders. All business assets, liabilities and profits belong to the company and you’ll be considered an employee, so that if the business fails your personal assets are not at risk. You will only be liable for company debts up to the value of the shares you hold, which isn’t the case if you’re a sole trader, as your personal assets and business assets are one and the same.

Partnership

This involves two or more individuals agreeing to share the responsibilities, risks and costs of running a company, with each partner recognised as self-employed. All partners will also be jointly responsible for any losses or debts the business encounters, and collectively liable for any one partner’s negligence or misconduct. Tax and national insurance also must be paid on your individual profits, which is each person’s share of the company’s profits during a tax year.

This works similarly to a self-employed business, though a partnership structure has fewer legal obligations, as a corporate tax return isn’t necessary. It also allows for greater capital, as ownership and control is shared equally between partners. Shared responsibility means each partner can bring a different range of skills and knowledge to the business, giving it a better chance of access, while mutually experiencing the potential risks and stress.

Limited liability partnership

This structure is similar to that of a limited company, as it protects your assets and limits liability to what you and your partners have invested. A limited liability partnership can have any number of partners, but  two of them must be responsible for filing annual accounts. It must also be registered at Companies House and with HMRC. Unlike partnerships, this structure means individual partners are not responsible for company debts or other legal obligations, and each partner has to file their own personal income tax, self-employed tax and estimated taxes for themselves.

Employment laws

If you hire employees, you will need to abide by the relevant employment laws. As a business owner, aspects like paying your staff the minimum wage, providing monthly payslips, and ensuring a safe working environment will all be your responsibility. You will also need to check if your employees have the right to work in the UK, and register them with HMRC, as well as providing them with statutory sick pay, and 28 days’ holiday for full-time workers. Staff members will also have to be enrolled on a pension scheme if they are aged between 22 and pension age, earn more than £10,000 annually and work in the UK.

The key component of all of these regulations is drawing up a contract between you and your staff, which is essential for outlining the responsibilities and directives to which they’ll have to adhere during employment, and must correspond with employment laws. For example, staff are not allowed to work more than 48 hours in a week, be offered six months’ maternity leave, and have the ability to work flexibly after 26 weeks of service.  As their employer, you are also responsible for the wellbeing of your employees, including health and safety on your premises, and responding to any issues relating to discrimination and bullying.

Tax

Every business has to pay tax, so you need to know the relevant laws before getting your tradesman business up and running. For instance, income tax is a requirement as soon as your profits go beyond a business’s personal allowance of £12,500, which is how much free tax an individual is entitled to each tax year. If your business is a limited company, then you will be subject to pay corporate tax once your company starts making a profit, at the current rate of 19% in the UK.

Businesses must pay VAT if they make more than £85,000 a year in VATable sales of goods or services. The standard rate is 20%, 5% if reduced and 0% for some exceptional cases, such as physical education and sports activities, antiques and charities. As a business, you’ll also pay national insurance which, though not strictly a tax, must be paid to the government once every employee earns over £183 a week, or a self-employed individual is making a profit of more than £6,475 a year.

Client contracts

When securing clients, a written contract is necessary to settle details and avoid any legal action, should anything go wrong or be disputed. The logistics of your work, like payment dates and materials used, will need to be agreed upon before it begins, in order to provide accountability for both parties. A contract not only covers your back but also the client’s, as it also includes things like work start and end dates, necessary planning permission and your credentials and insurance policy.

Contracts with clients will be signed by both you and the customer, and can be referred back to at any point. If a contract hasn’t been signed by both parties, or an agreement hasn’t even been written up, you could face more significant disputes if a client claims that something is wrong. This could affect your business finances if you find yourself facing any legal claims and fees as a result.

Intellectual property

Your intellectual property (IP) refers to any ideas and creations that can be legally owned, from core assets like your business name, brand or domain to any products you’ve created. Legally protecting your IP keeps your ideas and creations safe, and formally marks them as your own, making it easier to take action if anyone copies or steals them. While you can have your intellectual property protected by law, you can also take steps to keep it safe yourself to reduce the possibility of it being stolen in the first place.

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*This indicative price is for £1m public and products liability, £250,000 legal expenses, £10,000 financial loss and £10,000 accidental death insurance cover for a sole trader. The price includes insurance premium tax and our admin charge. 22% of new customers paid less than £59 between 1st January 2019 and 31st August 2019. The actual price you pay will depend upon your specific business requirements and will be affected by your trade, your claims history and the optional covers you select which are all priced separately during the quote process. This website is intended for customers based in the UK and is therefore subject to the UK regulatory regime(s) © Copyright 2020 Tradesman Saver | Tradesman Saver and Henry Seymour & Co. are trading names of Barkdene Limited which is authorised and regulated by the Financial Conduct Authority (FRN 303965) for our insurance distribution and credit broking activities. Barkdene Limited is a credit broker not a lender. You can check this on the Financial Services register https://register.fca.org.uk/.
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