Choosing your business structure
What is a sole trader?
A sole trader is a self-employed individual who is solely responsible for their own business. It is most common to start as a sole trader as it requires minimal set up, cost and administration.
When and why should you register as a sole trader?
If your business is a low cost start up and you are not going to need to borrow money to grow your business then being a sole trader may be right for you at this moment. However, it is important to understand that you alone are responsible entirely for all costs of the business.
As a sole trader it can be quite a lonely and exasperating journey. However, the advantage of being in full control and being your own boss and doing what you are passionate about may be what makes up for the uncertainty and heavy responsibility that comes with it.
How to register
Although you are not required to register at companies’ house, you must notify HMRC that you are self-employed within 3 months of starting.
You will need to register for your self-assessment and then file a tax return yearly.
You’ll need to keep a record of all your business transactions preferably on bookkeeping software.
You’ll also need to pay Income Tax on your profits and Class 2 and Class 4 National Insurance
|Class||Rate for tax year 2017 to 2018|
|Class 2||£2.85 a week|
|Class 4||9% on profits between £8,164 and £45,000|
2% on profits over £45,000
As a sole trader your business is not thought of as a legal entity therefore you will be solely responsible for all debts and legal action taken out against you.
So whilst you may benefit from having less regulations and paperwork to deal with, the high risk that comes with being a sole trader may make you think about registering as a limited company instead.
Private Limited Company (LTD)
What is a private limited company?
A Private limited company is a business that is owned by its shareholders and run by directors. The ownership of the company is split into shares and is owned by the shareholders. The directors run the company and are required to perform certain duties for the company and its shareholders.
What does ‘limited liability’ mean?
This means that all debts that are incurred are the liabilities of the company and not of the shareholders or the directors. So if the company was to go bankrupt, the shareholders would only lose the investment they put into the company, but their own personal assets would not be affected. The directors also do not incur any personal liability as the act as agents for the company.
Requirements for forming a Private Limited Company
- To set up a private limited company you need to register with Companies House. This is known as ‘incorporation’.
- At least one director over the age of 16 must be appointed.
- The company must have a registered office in the UK.
- The company name must comply with Government regulations
- At least one share must be issued at the time of incorporation.
- An address for the company
- Details of the company’s shares (At least one shareholder is needed)
- To check what your SIC code is (identifies what your company does)
- Shareholders to agree to create the company and the written rules (known as ‘memorandum and articles of association’)
- Details of people with significant control over your company
Register your company
Once you have these details, you can register your company.
It costs £12 to register online and £40 by post
Your company is usually registered within 24 hours online and 8 to 10 days by post.
After you’ve registered
Once the company is registered you’ll get a ‘certificate of incorporation’. This confirms the company legally exists and shows the company number and date of formation.
You’ll also need to register for Corporation Tax within 3 months of starting to do business.
Business legal structure comparison table
|Sole trader||Exclusive owner of the business, entitled to keep all profits but liable for all losses|
· Low cost, easy to set-up
· Full control retained
· Very little financial reporting
· Full liability for debt
· Pay more in tax
· Lacks credibility in market
|Partnership||Between two or more individuals who share management and profits|
· The above, but with more heads
· More potential to raise finance
· The above, affecting all partners
· Can be messy to wind up
|Limited company||Private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested|
· Less personal financial exposure
· Favourable tax regime
· Ability to work for corporate clients
· Administrative and regulatory demands heavier
· Annual accounts and financial reports must be placed in public domain
|Limited liability partnership (LLP)||Some or all partners have limited liabilities, and exhibits elements of partnerships and corporations|
· Flexibility: can be incorporated in members’ agreement
· Advantages of limited company and partnership combined
· Profit taxed as income
· Partners must disclose income
· LLP must start to trade within a year of registration – or be struck off