Session 8

Legal Issues

Accounting

By the end of today’s session you should:

• Understand when and how to start legally registering your company in the UK

• Know how to do basic accounts

• Understand the minimum insurance you need

• Know who to go to for more advanced / complicated issues

When should you legally register your startup?

1. As soon as possible

2. During the planning process

3. As soon as you finish your business plan

4. Just before you make a major purchase

5. Just before you sell anything

The main types of company• Sole trader• Partnership, which may be a

– Limited liability partnership (LLP)

• Limited companies, which may be a– Company limited by guarantee– Company limited by shares

• Community Interest Company (CIC)– Often called ‘social enterprises’, although a

social enterprise can also be a normal company

Other types

• Charities– Limited company– Unincorporated association– Trust

• Co-operative

Sole trader

• You are the business• You can choose any name (Google it first though)• You must keep basic accounts, but not a balance sheet• Usually you don’t need an accountant

Sole traders can count a percentage of their losses against other tax they have paid. This is good if you are employed and earning more than £7,475.

Sole traders are personally liable for all losses the business incurs.You cannot sell shares in your business.

To set up call HMRC or visit http://www.hmrc.gov.ukYou can do everything online.

Doing your accounts

• End of year Self Assessment• Keep all your receipts

(expenditure)• Issue simple invoices when you

sell anything• You can use your usual bank

account, but its usually better to have a separate account

• You will need to put aside a day every year to work out what you owe (or can claim back) in taxes

– It is usually best to set your financial year to be the same as the tax year, so it ends on 5 April

Doing your accounts

• An example!

VAT

• VAT is a tax, currently charged at 20%, collected by businesses on behalf of the Government.

• If your business turns over (buys or sells) more than £70,000 in a year you must register for VAT.

• You can also choose to be VAT registered.• If you are VAT registered then:

You can reclaim VAT you have paid on goods and services you buy for the business.

You must add VAT to the prices you charge to your customers, and pay this to the Government.

Partnership

• You and your partner(s) are the business• You are both responsible – a bit like in a joint tenancy• Many partnerships go wrong• You should draw up an agreement with your partner

Partners are personally liable for all losses the business incurs.If your partner runs up losses and disappears, you are liable.

To set up call HMRC or visit http://www.hmrc.gov.ukYou can do everything online.

Limited liability partnership

• You are only liable for the amount of money you have invested in the business

• You must file accounts with Companies House• You should draw up an agreement with your partner• Separate limited companies can together be a LLP

You cannot sell shares in the business.You can be fined if you do not file accounts correctly.

You are personally protected from losses in most cases.In some cases you can claim losses against personal tax.

To set up use an online service such as www.companiesmadesimple.com

Company limited by shares

• The business is a separate entity• It is owned by its shareholders• It is managed by its directors• The directors must file ‘Year End Accounts’ in a certain way• Most people use an accountant (£300 to £500 / year)

You can divide ownership of the business up with shares.You can sell shares in the business to investors.You are personally protected from losses in most cases.

You can be fined if you do not file accounts properly every year.You cannot usually count losses against your other earnings.

To set up use an online service such as www.companiesmadesimple.com

Setting up a company limited by shares

• You will need to decide:• Registered Office

Address• Director Details• Shareholder Details

– Can be same as director– Agree number of shares

each shareholder will be issued with

• Currency of shares

Issuing shares

Value of the company = Number of shares issued

X

Value of each share

•So if you issue 2 shareholders 50 shares each, and decide each share is worth £1, the company is worth £100.•You can either pay the company upfront for these shares, or ‘owe’ the company the money. If you ‘owe’ money when the company ceases trading, you will have to pay up!

At the end of the year

• Complete your annual statutory accounts and file at Companies House

• Complete an annual self assessment (Inland Revenue)• Make an income statement showing what your income

and costs have been and what profit (or loss) you have made

• Make a Balance Sheet• Complete your Corporation Tax and VAT returns• Process the PAYE for any employees you have – usually

at least one (yourself)• You can use online accountants to do all this for you

(if you use their online accounting software)– www.cheapaccounting.co.uk (from £29.99 per month)

Company limited by guarantee

• The business is a separate entity• It is has members not owners• The members are the decision makers for the company• They may appoint a board of trustees• The company will have a constitution which sets out how it

operates

This type of company is usually used for charities or social enterprises.The members and trustees are protected from losses.The company can still make a profit and pay its members.

Special rules apply if the company is also a charity.The company cannot usually be sold to profit the members.

To set up use an online service such as www.companiesmadesimple.com

Community Interest Company (CIC)

• A limited company with special features• A community interest test is used to check that the

company works for the benefit of the community• An asset lock ensures that the assets and profits are

protected

This type of company is usually used for social enterprises.It can pay limited dividends to encourage investment.Some public bodies and trusts will give grants to CICs.

Some public bodies and trusts only give grants to charities.

To set up visit http://www.cicregulator.gov.uk

Charity

• May be a limited company, association or trust• Must provide a benefit to the public• Must be different from existing charities• Has a special status in law• Trustees run charities and have certain obligations

Charities can claim tax exemptions.Many companies, trusts and public bodies will only give donations and grants to charities.

The law limits some of your activities.You attract grants but not investment.

To set up visit http://www.charity-commission.gov.uk

Insurance• Public liability insurance

– Covers you if• You accidentally injure someone in the course of your work• Someone is injured at your premises

– Many public institutions (eg Universities) require you to have it, but the law does not

• Professional indemnity insurance– Covers you if you give advice (eg financial) to others and want to be insured

against professional negligence

• Employer’s liability insurance– Covers you if your staff are injured or become ill because of you

• Go to www.insuremyliability.co.uk

Risk, Health & Safety

• Risk assessments– Use your common sense and this template

www.venturenavigator.co.uk/content/basic_risk_assessment_template

• Health & Safety– In some industries (eg food & drink, medicines) there

is specific legislation to comply with– Visit your local council website for help & advice on

Food Hygiene Training– Visit www.hse.gov.uk for advice of Health & Safety

training

Where next?

• For more complicated issues speak to an accountant– Ask for recommendations from other businesses– Speak face to face with several (at least 3) – it is a

long term relationship

• If you need a lawyer– Remember that they want your money– Current students may be able to get contract advice

through Enterprise Lab

Course programme1 20 Oct Finding role models and teams

2 10 Nov Generating ideas

3 24 Nov Planning your first year

4 8 Dec Branding and building a website

5 12 Jan Pitching and raising finance

6 26 Jan Marketing and PR for startups

7 9 Feb Selling and negotiating

8 23 Feb Accounting and legal issues

9 9 Mar Running an office and bookkeeping

2pm-4pm in Arts Building S21