What are my legal obligations when running a side business?

Thinking about setting up a side hustle but aren’t sure about your legal obligations? We’ve worked with DAS UK to create this guide, which gives an overview of the legal obligations involved with running a side business.

DAS UK is our business legal expenses insurance provider and they’re experts in justice and legal services for both individuals and businesses.

• Best small business ideas to start in the UK
• How to start a business
• How to go self-employed in the UK
• What is business insurance?

Running a side business: what about my main job?

If you’re an employee, you have an obligation not to compete with your employer. This is governed by common law, under the implied duty of fidelity (essentially, the duty of good faith or loyalty).

Some employers will often include express terms in your employment contract saying that you can’t compete with them. Your contract might also say that you need to ask their permission to start a side hustle.

If you start a side hustle that competes with your employer, they’ll see this as a conduct issue and it could end in your dismissal.

So, before starting a side hustle alongside your main job, check your employment contract to see whether you need to get permission. If you’re not in competition with your employer, then they shouldn’t unreasonably refuse permission.

Your employer might still have concerns that your side hustle will impact your weekly rest in terms of working time. Working time regulations set out how much rest and time off employees should have between working.

Are there licenses I need to start a side business?

This depends on the side hustle you want to start.

All businesses need to follow legislation that governs what you can and can’t do when it comes to selling goods and services. It’s best that you find out what obligations are in place for your industry, including whether you need any business licences.

You should do this before you start trading to avoid action from your local authority, the police, or the health and safety executive.

What side hustle insurance do I need?

It’s important that you think about business insurance before starting your side hustle.

The main covers include:

• public liability insurance – this covers you if a member of the public gets injured or loses out financially and blames your side hustle
• professional indemnity insurance – if you give advice or provide a service to clients, this protects you if your client loses money because of bad advice, services or designs
• employers’ liability insurance – if you grow your side hustle and eventually you decide to take on staff, you’re legally required to have employers’ liability insurance

If you’re running a business from home, it’s a good idea to get in touch with your home insurer as you might not be covered for business activities.

If you want to become a member of a professional body, they might require you to have business insurance. Some venues and suppliers might also require you to have insurance as part of your contract with them.

What legal structure should I choose for my side hustle?

There are three types of legal structure:

• sole trader
• partnership
• limited company

Setting up as a sole trader is very easy. Once you register as self-employed with HMRC and start trading as an individual, you’ll be classed as a sole trader. There’s not much paperwork and there aren’t many legal obligations. The main disadvantage is that sole traders are personally liable for all debts, meaning your own assets (including your home and your savings) are at risk if you can’t pay your business debts.

If you’re setting up your business with someone else, you can register as a partnership. Someone will have to be the ‘nominated partner’ who deals with business records and tax returns. There are three types of partnerships. An ‘ordinary partnership’ has fewer obligations than limited partnerships and limited liability partnerships (LLPs), which are more like limited companies.

Finally, if you set up a limited company, your personal assets are separate from business assets. This means they can’t be used for any business debts. While this is a big advantage, setting up and running a limited company has a lot of initial and ongoing legal obligations.

Read more about the differences of a sole trader vs a limited company.

What about side business tax in the UK?

You need to pay tax on your earnings. Employees pay income tax through PAYE, but if you make money from a side hustle, this is classed as self-employed income and you need to report it to HMRC.

Sole traders and business partnerships pay income tax. They need to register as self-employed with HMRC and send an annual Self Assessment tax return.

Limited companies pay corporation tax.

There are business expenses you can deduct from your profits to calculate your total taxable income. But tax is complex, so if possible, speak to a professional accountant or tax adviser to understand more.

Read more about paying second job tax.

What about my side hustle’s intellectual property (IP)?

Intellectual property (IP) is what you artistically create, including brand names, songs, new inventions, or symbols.

Developing your new product, service or brand is important to the success of your business, as it helps to make you distinct from your competitors. You should therefore think about protecting your creations.

And from the other perspective, you should make sure that you’re not infringing on another business’s brand, product or logo to help boost your own business.

Both small and big businesses will try hard to protect their IP, so research this before trading. IP is often registered (for example through trademarks or patents). You can search for a trade mark here.

Read more about intellectual property.

How legal expenses insurance can help

Legal protection insurance covers business legal expenses or prosecution fees for situations like employment tribunals, HMRC tax investigations, or civil actions brought under the Data Protection Act.

If you have legal expenses insurance as part of your Simply Business policy, you also have access to a number of useful services through DAS Businesslaw (you’ll just need your voucher code found in your policy documents to register).

DAS has a legal advice helpline, available whether you’re facing a serious legal issue or just want to check something with an adviser. They also offer a range of legal templates and guides.

Photograph 1: Nata Bene/stock.adobe.com