We all make mistakes but sometimes the law is not very forgiving – ignorance of it has never been a defence. Here are a few common pitfalls to watch out for when running a business. This guide can only point out highlights. There are other solutions guides that cover many of these topics in more detail.

Be clear about your trading status

To start a business as a sole trader, you just need to inform the Inland Revenue and Contributions Agency that you are self-employed. If you trade under a name other than your own, you must put your name on your stationery.

A partnership is formed when two or more people get together to start a business, sharing the workload and investing capital to start things going.

You don’t have to, but it is wise to have a written partnership agreement (even with a spouse) and get it checked by a solicitor. If you don’t have a formal, written agreement, you will be bound by the terms set out in the Partnership Act 1890. This allows a partner to withdraw without giving notice, which could be awkward, not least because they may insist on the immediate return of their capital contribution.

Be careful about creating a partnership without realising it. For example, if you run a business with somebody but don’t employ them, they are entitled to a share of the profits. Most importantly, be aware that in a partnership, partners are each responsible for business debts incurred by other partners, whether or not it was agreed and there is no limit to their liability.

Limited liability partnerships are a hybrid between a normal partnership and a limited company. You can operate like a normal partnership but have, in effect, limited liability. You will need to register this type of partnership with Companies House.

There are advantages to creating a separate legal entity by incorporating a business. A limited company has a life of its own and continues despite the resignation, death or personal bankruptcy of either its management or shareholders. It is also the ideal vehicle for expansion, since it is easy to raise capital from outside investors by selling shares. It also means that shareholders enjoy limited liability for debts generated in the course of business. However, company directors have certain duties and failure to live up to these can result in fines, personal liability, disqualification and even imprisonment.

Confusing names

A business’s name will come to stand for its reputation so people will seek to protect it. You may run into problems if your name could be confused with an existing business in the same area or line of business. (If this is done deliberately it is called ”passing off”.)

If confusion could occur, the other party could take you to court to make you change your name.

Data protection

If you keep information about identifiable individuals, you may need to notify the Information Commissioner. This is not expensive (£35 for a year) and simple to do.

Even if you are exempt from notification, you must still abide by the principles of the Data Protection Act 1998. The Act applies to information on websites as much as to computer and paper records. There are eight enforceable principles of good practice concerning data. It must be:

• Fairly and lawfully processed.
• Used for limited purposes.
• Adequate, relevant and not excessive.
• Accurate.
• Kept only as long as necessary.
• Processed in line with the subject’s rights.
• Not transferred to countries that don’t have adequate protection.
• Secure. The responsibility for security rests with you. Even inadvertent disclosure of personal information could mean you would be liable to pay compensation to the person concerned.

You may only carry out data processing where one of the following conditions has been met:

• The individual concerned has given their consent.
• The processing is necessary to fulfil a contract with the person.
• It is to protect the person’s vital interests.
• It is to comply with a particular law.
• It is in the legitimate interests of the business (unless this adversely affects the individual).

It is a criminal offence to break the law on data protection. If you are caught, you face a fine of £5000 plus costs in a magistrate’s court, or an unlimited fine in the High Court.

Advertising

• If you make claims in your literature that are untrue, the Advertising Standards Authority has the power to effectively close down your operation.
• The public has access to local Trading Standards Offices, which have wide powers to investigate and prosecute.

Beware of knocking the competition in your marketing materials. There are various restrictions imposed by law, and by the British Code of Advertising, which is drawn up by the Committee of Advertising Practice. You may compare yourself with the competition, either by implication or explicitly, but it must be in a way that is “clean and fair”. The Code further states that “the elements of the comparison should not be selected in a way that gives the advertisers an artificial advantage”. So never unfairly attack or discredit another business or their products.

The only acceptable use of another business’s broken or defaced products in promotions is to illustrate comparative tests. The source, nature and results of these tests should be clear.

Slander of goods occurs when someone maliciously makes a false statement (written or oral) to a third party that disparages a trader’s goods or services, and the trader loses money as a result.

Trade libel occurs when you make a statement that disparages the trader as well as their goods and that statement is shown to be false.

Refunds and returns

The Distance-Selling Directive gives remote buyers (such as via telephone, Internet or direct mail) certain rights.

These include the right to cancel an order within seven days and you must make this clear to each customer in writing, at the latest, by the time the goods have been delivered.

There are certain exceptions, which include holidays, perishable and personalised goods. Tapes, CDs, videos and computer software are also excluded unless they are returned unopened.

If requested, you must provide a refund within 30 days whether the goods have been returned or not. There is no deadline for customers to return goods. You can charge for the cost of returning the goods but this must be made clear in writing at the time of purchase.

Agreements and contracts

Contracts underpin business relationships. They can be oral and sometimes implied but it is best if they are written.

A binding contract includes:

• An offer and an acceptance.
• Consideration – an obligation to pay or a promise to provide something in return.
• Certainty – the contract must be clear about what all parties must do.
• An intention by both parties to be bound by the contract – even if it is an oral agreement.

The other party will be entitled to damages if you breach a contract. However, sometimes it is unclear when you have formed one. For example, be careful when asking, say, a copywriter friend to ”knock up some ideas” that you are not laying yourself open to a large fee.

Put agreements in writing so everyone knows where they stand. In the case of the copywriter, for example, you might consider the following: What is the brief? Who will pay? When? How much? Are expenses included? What are the acceptance criteria? Who will own copyright?

Finance

When friends and family invest in your business, put the agreement in writing and get a solicitor to check it. Often, what is taken by the business owner as a gift is actually intended by the other party to be a loan and repayment may be demanded at any time, which may not always be possible.

Moreover if, say, a relative lends half the money you need to start a business, you may find that you have unwittingly created a partnership and the other party is eligible for 50% of the profits.

Read loan and overdraft agreements carefully and ensure you understand all the terms and conditions. Think about the implications before signing personal guarantees, especially when you have also given a charge over your property; your home is on the line.

Intellectual property

Copyright exists to protect creative works like articles, poems, photographs, designs, songs and sculptures. For example, this guide is protected by copyright.

You do not need to register copyright. Be careful, therefore, when you copy material off websites and incorporate them into your own, or use other people’s photographs or drawings in your company newsletter. Seek written permission first.

Copyright only applies to the original works, not copies, and only to the form in which a concept is expressed and not the concept itself. So if someone writes an article, only the words, not the ideas in it, are subject to copyright.

To protect an invention, you must apply for a patent. However, it is essential you do this before you have made details public anywhere.

To protect a logo or a slogan, you must register them as a trademark.

Consider taking out intellectual property insurance to help pay for the cost of defending your intellectual property rights.

Employment

Make sure that all new employees are entitled to work in this country, or you could face heavy penalties. There is a range of documents you can inspect to prove this.

Have a contract of employment in place from the day all employees start work. A solicitor can supply a sample contract.

To avoid leaving yourself open to claims for unfair dismissal, discrimination and breach of contract, take legal advice before altering terms and conditions of employment, making people redundant or dismissing them.

Also, to protect yourself, you should warn employees that any discrimination, sexual harassment and other illegal acts will not be tolerated.

There is now a legal requirement for businesses employing five or more people (whether part or full-time) to offer staff access to a pension. You risk a fine if you do not.

Health & safety

As a small business owner, you have heavy legal obligations regarding health and safety issues. If you fail to carry out these responsibilities, you may face prosecution, your insurance premiums may rise and you may find it hard to buy insurance altogether.

Information packs are available from the Health & Safety Executive spelling out the requirements.

Business insurance

You are legally required to have employer’s insurance if you employ anyone, even if they are casual, part-time workers.

Other insurance is useful as a sensible business precaution.

If you sell products, product liability insurance will protect you if someone is injured by a defect in your product.

If you offer services or advice, get adequate professional indemnity insurance. Many professionals find it hard to imagine a case where work they have done results in a claim for hundreds of thousands of pounds. However, the effects of a mistake can be out of all proportion to their individual contribution.

Indemnity cover may be needed for years after the work has been done, because it has to be in place when the claim is made.

Debt control

If you do not spell out your terms and conditions of trade (T&Cs), you are asking, in effect, for customers to pay you when they feel like it. And if they become insolvent before paying up, you may not be able to reclaim your goods if you do not have a Retention of Title clause (under which you retain ownership until payment) in your T&Cs.

Draft some suitable T&Cs or adapt some from others in your industry and ask a solicitor to check them. Then ensure your customer agrees to them, and ideally signs them, when placing an order.

Trading insolvently

It is a criminal offence to continue to trade when you know the business is insolvent. If this occurs, in a limited company, directors can become personally liable.

So if the company gets into financial difficulties, take professional advice fast. You may be able to reschedule debts using a Voluntary Arrangement. The alternative may be to call in a liquidator or a receiver if your bank has a debenture. Be careful not to give particular creditors preferential treatment.

Licences

Some trades require specific licences to operate. For example, if you sell food, you may need to register under the Food & Drugs Act and the Licensing Act. If you offer financial advice, you may need to register under the Financial Services and Markets Act. Your local Business Link or national equivalent will be able to advise you.

Environmental issues

Be aware of your environmental duties. For example, there is a raft of regulations relating to the control and disposal of hazardous substances.

Working from home

If you work from home there are four main parties to consider:

• Landlords and covenants: you should inform your landlord and check there is no restriction on working from home, as there is with many council properties.
• Building Society or other mortgagee: inform them you are working from home.
• Insurance companies: you must tell your domestic insurer that you are working from home or you could invalidate the whole of your domestic cover.
• Your Local Council regarding planning permission, licences, health & safety, and business rates.

Planning permission is not normally needed to run a business from home if the character and use of the building remain essentially residential and the business activity is incidental to such residential use. If this is the case:

• You can use a room as your personal office.
• You can run a business from home doing anything from hairdressing to dressmaking, music teaching to consultancy.
• You can use the garage to repair cars or store goods connected with a business.
• You can provide accommodation for a childminding service or playgroup.
• You can use part of the house for bed and breakfast accommodation.

All these uses must be kept on a small scale so you do not cause nuisance or inconvenience to your neighbours.

However, if the answer to any of the following questions is “yes”, you will have changed the character or use of your home and may need to apply for planning permission:

• Will your home no longer be used substantially as a private residence?
• Will your business result in a marked increase in traffic or people calling?
• Will the business involve activities unusual in a residential area?
• Will your business disturb the neighbours at unreasonable hours, or be particularly noisy or smelly?

Leases

Be careful when signing lease agreements, especially for property. Even if you move your business and sell the lease on, you could find yourself liable for the residue if the next person defaults.

Check whether you will be liable to repair and improve the property under the terms of your lease.

In summary

Starting a business is an exciting time – but do not let these common pitfalls ruin your chances of success.

Useful contacts:

The Nationwide Access Register
W:www.direct-enquiries.com

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