If you currently, or aim to, own a business in the UK, it’s imperative to learn the different business structures open to you and whether you need to register that business officially.
RealBusiness has put together an article, to ensure we can help business owners stay ahead of UK Government regulations and make informed decisions about when, or if, to register a business, whether you’re a sole trader or a limited company.
Table of Contents
What Are The Different Business Structures Available?
The following is a quick rundown of the different business structures available in the UK:
- Sole Trader – A Sole Trader business is the simplest available business structure. The main defining factor of this business structure is that the business owner is personally responsible for all business debts. They also must pay income tax on business profits and national insurance contributions through a self-assessment tax return form.
- Limited Company – A limited company is considered a separate legal entity from the business owner. This means that personal and business assets are separate, and the owner is not liable to pay any debts the company incurs. This limited liability of the business owner essentially protects them. They also pay corporation tax, which is much lower than normal taxes, and file company accounts with the company.
- Partnership – A partnership is considered a business where two people share the title of business owner. Each pays their tax returns based on their share of the partnership profits.
- Limited Liability Partnerships – An LLP combines the flexibility of a partnership, with the limited liability of a limited company. Each partner pays income tax on the share of their business profits and national insurance contributions.
Sole Trader Versus Separate Legal Entity
There are a multitude of pros and cons for both a limited company and a sole trader, especially when taking into account business sectors etc. That being said, typically, a business owner chooses to become a sole trader first, then convert to a limited company later – if applicable.
This is due to a limited company needing more accounting responsibilities, on top of a director and other staff. Plus, many business owners are typically not intimidated by being personally liable for losses at the advent of a business and are entitled to all business profits after tax.
When Must A Business Owner Register With HMRC?
There is a fine, yet simple, line between a side income as a sole trader and a full-fledged business in the UK. For those curious, the following are the conditions by which you’ll need to register with HMRC:
- If you are making business profits of £1000+ from your venture annually, you need to register.
And that’s it.
However, when you decide to register a business in the UK, you have to choose between several forms of business structures.
Tips For Registering Your Business With HMRC
Registering a business with HMRC is fairly easy. You need to register on their site and have your business and personal details on hand. It shouldn’t take longer than 1-2 hours, you’ll need to receive your UTR number and other details via post, which is what you need to finish the overall business registration.
Understand that once you register, you’ll now be responsible for submitting self-assessment forms, and have to pay tax. Limited companies also need to register for corporation tax within three months of starting to trade.
When Is The Absolute Cut-Off For Registering Your Business?
The 5th of October after the end of your tax year is your cut-off date. This applies even if you’re self-employed and only just meet the criteria the day before, though you’d likely be given leeway for a day or two. Register a business as soon as you find you meet the criteria, and file a self-assessment tax return. If you think you’re coming close to becoming eligible, simply register early.
When Do You Register A Business To Become A Limited Company Via Companies House?
The only time you need to register with Companies House is when you are a limited company or limited liability partnership. Sole traders need not register with Companies House.
Registering a business in the UK with Companies House is a fundamental part of being a limited company. A limited company has a certain level of public visibility that businesses don’t, as Companies House keeps a detailed record of all registered businesses and provides the public with downloadable information. Limited companies are considered to be more trustworthy as a result.
When registering a business as a limited company, maintain individual bank accounts and ensure legal compliance for your business assets.
Tips For Registering With Companies House
Registering with Companies House may be a little more tricky than registering with HMRC. While it is completely possible to do it yourself, many business owners pay third parties to handle all of the admin involved with registering on Companies House. You’ll need to have information such as a unique company name, director’s details, an address etc. You can either register online or through the postal service. There are minimal fees involved that will need to be paid before your registration is official.
Additionally, with a limited company or limited liability partnership, your assets are protected and separated from your business assets.
When Is The Cut-Off Date For Registering With Companies House?
Just like with registering with HMRC, you should register with Companies House as soon as possible. If you are a limited company or limited liability partnership, you’ll have to register with Companies House as soon as you’ve registered with the HMRC. Don’t leave it more than a few days after your HMRC registration has been completed if you don’t want to face any major fines.
What If Sole Traders Want To Register Their Business On The Companies House Register?
If sole traders want to register their business with Companies House, the only way in which they’ll be able to do so is by changing over from a sole trader to a limited company. The process is fairly simple and is very similar to simply registering with Companies House as a limited company.
As a sole trader, one is personally responsible for any losses and debts incurred by the business.
Responsibilities Of A Registered Business In The UK
Whether you opt to be a sole trader or limited company etc, you’re expected to immediately begin fulfilling your obligations, such as:
Sole Traders
- Self Assessment Tax Return – You must file your tax annually to report business income and expenses.
- National Insurance Contributions – Sole traders pay class 2 and class 4 National Insurance contributions based on profits.
- Business Records – Ensure you keep accurate records of business income and expenses.
Limited Companies
- Corporation Tax – A lowered tax based on company profit.
- Company Accounts – Annual company accounts must be prepared and filed with the company’s house.
- Confirmation Statement – Annual confirmation statements with companies house are required to ensure company information is up-to-date.
- Annual General Meeting – If your company is not exempt, you must hold an AGM.
- PAYE – Owners must set up a PAYE scheme.
Partnerships And LLPs
- Partnership’s tax returns – Annually, partnerships must inform HMRC of a partnership’s profits.
- Self-Assessment Tax Return – Both partners must file self-assessment tax returns.
- NI Contributions- Partners both pay classes 2 and 4.
- Business Records – As always, keep accurate records of your income and expenses.
General Responsibilities For All Businesses
- Business Bank Account – Maintain a separate bank account for your business finances.
- Legal Compliance – Comply with all laws and regulations relating to your business sector.
- Insurance – Appropriately insure business activities, such as public liability insurance.
When Do I Need To Register My Business For National Insurance Contributions?
When you register a new business, you will automatically be registered with the NICS. All payments will be made only when meeting the required threshold. Therefore, you’ll technically need to indirectly register for NICs as soon as you begin your journey as a self-employed person.
Do I Need A National Insurance Number?
Yes. If you do not have one, you can apply for one as a government gateway user.
Conclusion
Small business owners can afford to go unregistered for a while, but it’s always better to ensure that you keep track of your annual income, and when you first organically see that you’ve met the threshold, we recommend making preparations immediately. You may also need to apply as an employer as soon as you start employing people.
Understand that many procedures involve looking for your business address, company’s registered office address etc. that will cause roadblocks if you’re not already a registered company or business in the UK.
Ensure that you are fully informed about when your business needs to be registered. Keeping organised and ensuring that your business is all above board will reduce the stress involved with running a business and help you avoid hefty fines in the future. If you’re ever unsure about what is required from your business in the UK, get in touch with a trusted financial advisor.
