People running a business sometimes wonder which option is better – a sole trader or a limited company? Or would it be better to choose a different type of company? You may face a similar dilemma when registering a company in the UK. In this case, you will be choosing between a sole trader, a limited company and several other options. So which is the best form of sole trader in the UK?
Running a business in England – what options do you have?
When setting up a business, you can choose to be a sole trader or one of the legal types of company – for example, a general partnership or a limited company.
Although the types of companies in the UK can take the form of companies in England:
- self-employment;
- Limited Company (LTD);
- Partnership;
- Limited Liability Partnership (LPP);
- Public Limited Company (PLC).
Company in the UK and the type of business – what to consider before making a decision?
Before deciding on a particular type of business in the UK, you need to analyse your situation carefully. Your business model and budget will be important. Much will also depend on your plans for running and developing the business in England. The situation is very different if you are planning to run a small local business, and you will need different solutions if you intend to employ at least some staff from the outset.
Also, the fixed costs and turnover that your business will generate in England are significant. Of course, you can change your business and the way it is run over time. However, it is best to set up your business in the most advantageous way for you from the outset. So if you’re not sure which solution to choose, it’s best to seek the advice of an experienced accountant who can ask the right questions and point you in the right direction.
Most people who set up a business abroad choose self-employment. However, not everyone analyses this decision carefully. Many entrepreneurs assume that since the majority of people choose this option, it must be the best one. However, this is not always the case. Much depends on the individual case, and the most popular solution is not always the best. Sometimes a limited liability company can be more advantageous. So what are the differences between these two types of company, and how can you choose the better option for yourself?
What is a Limited Company?
An LTD company is not only less formal. There are many other advantages:
- there is no minimum share capital required to start the business,
- you do not need to be a UK resident or resident to set up an LTD company,
- you can run such a company on your own, as long as you also serve as the director and shareholder of your company,
- you are only liable up to the amount of your contribution to the company (you are not liable with your private assets).
What is self-employment?
Self-employed, or self-employment, can be considered the equivalent of a Polish sole proprietorship. The rules are very similar – you run a business in your own name and for your own account. This primarily means that if you fall into debt related to the business, you will be liable for it with all your private assets.
On the other hand, there are advantages to registering as a self-employed person in the UK, such as minimal bureaucracy, ease of registration and very simple accounting. This type of business is usually used by freelancers (e.g. programmers, graphic designers, copywriters) and those working on B2B contracts. As a self-employed person, you can also hire your own employees.
Limited Company or self-employment?
Many new entrepreneurs choose self-employment, but not necessarily because it is the best way to do business in England. It just seems the easiest.
However, there are several significant differences between self-employment and a Limited Company that you must consider before deciding on one of these solutions.
- liability – in the case of a Limited Company, it is limited to the capital contributed to the company. In self-employment, you are liable with all your private assets, meaning the financial risk is higher,
- the ability to choose this form of business – to run an LTD company, you do not need to be a UK resident or resident. The important thing is that the company’s residency is in the UK. Self-employment, on the other hand, is only available to UK residents.
- bureaucracy – running an LTD company involves more paperwork and accounting obligations than self-employment,
- registration process – it is easier to register a business as self-employed than as an LTD company.
- business profits – in the case of an LTD, you are subject to a lower tax rate (Corporation Tax),
- credibility – those running an LTD company are usually seen as more credible by banks.
- dependence of the business on one person – in self-employment, the business = you. The whole business depends on you. So there will be significant problems if you want to sell or split the business. A limited company is relatively easy to convert. You can take on more shareholders without too much trouble. The whole business does not have to depend on you.
Therefore, before you even start thinking about how to start a business in the UK, make sure you’re choosing the right form of business.
Self-employment registration step by step
Registering a sole trader is not a complicated process. It boils down to a few simple steps.
STEP 1: check if self-employment is for you
Before you start the registration process, make sure that self-employment is a better option for you than, for example, a limited company. Pay particular attention to accounting issues, business development plans and taxation. If you are unsure, you may wish to seek advice from an accountant.
STEP 2: choose a business name
Check whether the name you want to operate under is available. Consider whether you want to operate under your own name or add an additional name that will distinguish you.
STEP 3: check the obligations related to running a business
Starting a business in the UK mainly involves documentation and tax obligations. As a self-employed person, you have to:
- keep records of income and expenses,
- decide whether you want to be a VAT payer (in many cases, this is not mandatory),
- file tax returns – of course, you don’t have to do it yourself, you can hire an accountant,
- obtain the required licenses (in some cases).
STEP 4: register with HMRC
Starting a business as a self-employed person also involves the obligation to register with HMRC (HM Revenue & Customs). It is best to do this as soon as you start working for yourself.
However, registering a company with HMRC is not enough. You will also need to register for Self Assessment (if you have not already done so) and obtain a NINO number (if you do not already have one).
As you can see, starting a business in the UK after Brexit is not particularly complicated, at least in the case of self-employment. However, if you want to make sure that you have completed all the formalities, you can seek the help of an accountant already at the registration stage.
Limited Company registration step by step
However, if you decide that a limited company is a better option for you, you will probably be wondering how to get started. As mentioned above, you will have to deal with a few more formalities, but this does not mean that it is a very complex process. It still boils down to just a few steps.
STEP 1: check if this form of business is right for you
As you will see from the previous paragraphs, much depends on the type of business you intend to carry on. So first make sure that LTD registration is the best solution for you.
STEP 2: choose a business name
In the UK your company cannot have a name that is identical or confusingly similar to the name of another limited company. So you need to check that the name you choose is available. You should also consider registered trade marks.
STEP 3: choose directors (and company secretary)
In a Limited Company, you must also appoint a director. Their tasks will include:
- keeping company records,
- filing accounts and tax returns,
- paying corporation tax.
STEP 4: determine who the shareholders are
A limited company in England must have at least one shareholder. This can be the person who is also the director of the LTD.
STEP 5: choose persons with significant control over the company (PSC)
A PSC will be anyone who owns at least 25% of the shares in the company.
STEP 6: prepare documents related to the Limited Company
Registering a company in the UK in the form of a Limited Company also requires providing documents such as:
- memorandum of association – a document approved by each of the original shareholders who agree to form the company,
- articles of association – the rules for running the company (they can be changed in the future).
It should also be added that, in addition to the above documents, running a limited company also involves keeping records such as
- financial and accounting records,
- records related to directors, shareholders, voting on resolutions, transactions related to the purchase of shares in the company, and loans or mortgages secured on the company’s assets,
- PSC register,
- accounting entries.
STEP 7: company registration
The final step is to register the LTD company at Companies House. From this point, you have 3 months to register the company with HMRC in order to comply with the requirement to file and pay corporation tax in the future.
