The Legal and Financial Setup Checklist for a New Business

The Legal and Financial Setup Checklist for a New Business

Short answer: you need less than you fear in order to start, and more than you think in order to stay out of trouble. In most cases the genuine day-one requirements are a business structure, tax registration, whatever licences your specific activity demands, appropriate insurance, a way to record income and expenses, and written terms for customers. 

Everything else can follow. The mistakes that hurt aren’t the ones made in week one. They’re the records you didn’t keep and the registration deadline you didn’t know existed.

This guide is general information rather than legal, tax or financial advice. Requirements vary substantially by country, sector and circumstance. Confirm anything specific with a qualified accountant or solicitor in your own jurisdiction before acting. The points flagged [get advice] below are the ones where an hour of professional time reliably costs less than getting it wrong.

Phase 1: before you take any money

Decide your structure [get advice]

This is the one decision that’s mildly awkward to reverse, so make it deliberately rather than by default.

A reasonable default: start as a sole trader if you’re testing, low-risk, low-turnover and selling to consumers. Incorporate once any of these becomes true. Meaningful liability exposure. Larger or corporate clients who expect it. Profits high enough that the tax treatment matters. More than one owner. Taking on staff or investment.

Two things founders commonly get wrong here. The first is assuming a limited company protects you from everything, when personal guarantees on leases and loans cut straight through it. The second is incorporating on day one for the status, and adding a year of filings to a business that turned over £4,000.

Register with the tax authority

Register for income tax self-assessment, corporation tax or the equivalent in your jurisdiction, within whatever deadline applies. Late registration penalties are avoidable and irritating.

Note the registration threshold for sales tax or VAT in your country, and monitor your rolling turnover against it. Crossing it without noticing is one of the more expensive administrative failures available, because the liability applies from the date you should have registered rather than the date you spotted it.

Voluntary registration below the threshold is sometimes worthwhile, particularly if you’re selling B2B and reclaiming input tax, and sometimes harmful, particularly if you sell to consumers and it makes you effectively more expensive overnight. [get advice]

Check which licences your activity requires

Category-specific and non-negotiable. The common triggers:

• Food: registration of premises including a home kitchen, hygiene training, allergen compliance
• Alcohol, late-night refreshment, entertainment: premises and personal licences
• Childcare, care and education: registration and inspection regimes
• Health, beauty, aesthetics and tattooing: local authority registration, sometimes premises licensing
• Trades: gas, electrical and refrigerant handling all require competence registration by law
• Transport, waste carriage and scrap: operator and carrier licences
• Financial services, insurance, credit broking, immigration and legal advice:
• regulated, and unauthorised activity is a criminal offence in most jurisdictions
• Street trading, market pitches and mobile catering: local permits
• Music played in commercial premises: licensing may apply
• Signage, change of use, or working from home with client visits: planning consent may apply

Two general ones catch nearly everybody. Data protection registration, if you handle personal data, which most businesses do. And premises use permissions, so check your lease, mortgage terms or landlord agreement before running a business from home.

Get the right insurance

Two gaps recur constantly. Using a personal vehicle for business on a personal policy, which produces a void claim rather than a reduced one. And holding stock at home under a domestic policy.

Write your terms and conditions [get advice]

Cover what’s included and excluded, price and payment terms, deposits, cancellation and rescheduling, delivery timescales, liability limits, warranty or guarantee, the complaints process, and how disputes get handled.

Consumer sales carry statutory rights you cannot contract out of, and cancellation periods for distance and off-premises sales in particular. Get consumer terms reviewed once, then reuse them indefinitely.

For B2B work, use a written scope on every job. Most small-business disputes are scope disagreements rather than refusals to pay, and a one-page written scope prevents the majority of them.

Phase 2: financial infrastructure

Separate the money, from the first day

Open a separate business bank account whatever your structure. For a limited company it’s a legal necessity in most jurisdictions. For a sole trader it’s technically optional and practically essential, because mixing personal and business transactions turns bookkeeping into forensic archaeology, inflates your accountancy bill, and makes a tax enquiry considerably more painful.

A second savings account for tax is also worth having. Move a fixed percentage of every payment into it the day it arrives, with 25 to 30% a common starting point for sole traders, adjusted to your circumstances. Money sitting in the current account gets spent. The most common cash crisis in a first-year business is a tax bill that was always going to arrive.

Set up bookkeeping before you have anything to book

Choose accounting software on day one rather than at year end. Bank feeds capture transactions automatically, receipts get photographed at the moment of purchase, invoices are generated and chased, and your accountant’s fee falls substantially.

Your monthly routine takes about 45 minutes:

1. Reconcile every bank transaction against an invoice or receipt
2. Chase anything overdue
3. Check outstanding receivables and payables
4. Record mileage and any cash transactions
5. Move the tax percentage across
6. Look at the month’s profit and cash position

Missing this for six months and then reconstructing it over a weekend is a rite of passage that costs more than it appears to.

Invoicing and getting paid

Set the terms deliberately, because they determine your working capital.

Payment terms of 7 or 14 days rather than 30, unless a client insists otherwise. Terms are a negotiation, not a convention.

Deposits of 25 to 50% upfront on any job with material costs. This is normal in most industries and improves cash flow dramatically.

Staged payments for anything long-running.

Late payment charges stated in your terms. You may rarely enforce them, but stating them changes behaviour.

Easy ways to pay: card, bank transfer, direct debit for recurring work. Every point of friction adds days.

Chasing on a schedule rather than according to your mood. A reminder the day after the due date, something firmer at day seven, a phone call at day fourteen.

Records to keep, and for how long

Sales invoices, purchase receipts, bank statements, contracts, payroll records, VAT or sales tax records, mileage logs and asset purchases. Retention periods vary by jurisdiction, commonly five to seven years. Keep them digitally, backed up, and organised by month.

Phase 3: as you grow

Taking on people. Employment brings a substantial set of obligations: contracts, payroll registration, minimum wage compliance, pension auto-enrolment, employers’ liability insurance, holiday entitlement and right-to-work checks. 

Getting employment status wrong, by treating someone as a contractor who is legally an employee, is among the most expensive errors a small business can make. [get advice] before the first hire rather than after it.

Contracts with suppliers. The legal minimum is written terms, defined lead times and defined remedies.

Intellectual property. Consider registering your trade mark once the name has value. Make sure any contractor-created work such as designs, code or photography assigns the IP to you in writing, since the default in many jurisdictions is that the creator retains it, which tends to surprise people at exactly the wrong moment.

Data protection. A privacy notice, a lawful basis for the data you hold, a retention policy, and a plan for handling access requests and breaches.

The realistic day-one minimum

For a low-risk service business selling to consumers, the actual list is short.

• Structure chosen and registered
• Tax registration completed
• Any sector licence obtained
• Public liability insurance, and professional indemnity if relevant
• A separate business bank account
• Accounting software connected to it
• Written terms and conditions
• Data protection registration where applicable
• A tax savings account with a standing percentage rule

Typical cost is a few hundred pounds plus insurance. Typical time is a week of intermittent admin.

The point of all this isn’t compliance for its own sake. It’s that a business with clean records, clear terms and separated finances can be priced, borrowed against, insured, audited, sold or defended. One without them can be perfectly profitable and still impossible to do anything with.

When to pay a professional

An accountant is worth the fee if you’re incorporating, approaching a tax registration threshold, hiring, or your turnover has passed the point where a mistake costs more than the advice, which is lower than most founders assume. Expect an initial consultation to be inexpensive or free, and an annual arrangement for a small business to be modest relative to what it saves.

A solicitor is worth it for leases, employment contracts, shareholder agreements, IP assignments, and anything with a personal guarantee attached. Not usually for standard terms and conditions, where a reviewed template is generally sufficient.

The rule is to pay for advice wherever the downside is unbounded. Leases, employment and personal guarantees all have unbounded downsides. Most of the rest doesn’t.

Frequently asked questions

Do I need to register a company before I start trading?

Not necessarily, since sole trader or equivalent status lets you trade legitimately in most jurisdictions once you’ve registered for tax. What you can’t skip is the tax registration itself, any licence your activity requires, and insurance. Incorporating is a decision about liability, clients and tax treatment rather than a permission to begin, and plenty of businesses trade for a year before it makes sense.

When should I switch from sole trader to a limited company?

When liability exposure becomes meaningful, when clients require it, when profits reach the level where tax treatment materially differs, or when you take on partners, staff or investment. 

The tipping point on tax alone varies by jurisdiction and by how you extract money, so it’s worth one conversation with an accountant rather than a rule of thumb from the internet. Switching later is straightforward, whereas incorporating too early simply adds filings.

How much should I set aside for tax?

A common starting point is 25 to 30% of every payment received, moved into a separate account the day it arrives, then adjusted once you know your actual position. Setting aside too much is a mild inconvenience, while setting aside too little produces the single most common first-year cash crisis. If you’re VAT or sales tax registered, that money isn’t yours at all and belongs in the same discipline.

What insurance do I actually need on day one?

Public liability if your work goes anywhere near the public or a client’s property, and professional indemnity if you give advice or produce professional work. Add employers’ liability the moment you have staff, since it’s legally required in most places. Beyond that it depends on assets: valuable tools, held stock, a vehicle used for business, or meaningful customer data each bring their own requirement.

Can I run a business from home?

Usually yes, but check three things before assuming it. Your lease, mortgage terms or landlord agreement may restrict business use. Planning consent can be needed where clients visit or where signage goes up. And home insurance almost never covers business stock, equipment or visitors, so a separate policy is generally required. Regulated activities such as food production carry their own registration requirements on top.

Do I need written terms and conditions for small jobs?

Yes, and the smaller the job the more useful a short scope tends to be, because most disputes are disagreements about what was included rather than refusals to pay. For consumers, statutory rights apply regardless of what your terms say, so get those reviewed once and reuse them. For business clients, a one-page written scope attached to the quote prevents the overwhelming majority of arguments.

What records do I have to keep, and does software matter?

Sales invoices, purchase receipts, bank statements, contracts, payroll and tax records, mileage and asset purchases, typically for five to seven years depending on your jurisdiction. Software isn’t legally required in most cases, but it changes the economics: automatic bank feeds and photographed receipts turn a weekend of reconstruction into 45 minutes a month, and it usually reduces your accountancy fee by more than the subscription costs.

What’s the most expensive mistake new businesses make here?

Two compete for the title. Crossing a tax registration threshold without noticing, since the liability backdates to when you should have registered rather than when you realised. And misclassifying an employee as a contractor, which brings back-dated liabilities that can be substantial. Both are entirely avoidable with one conversation at the right moment, which is why they appear on the advice list above.