Registration of Sole Traders, Limited Companies, Partnerships

Self employed

The beauty of being self-employed is how quickly you can get set up and in business.
Even if you are currently employed by someone else, you can also become a sole trader to run your own business in your spare time. This makes it a safe way to test a business idea and see if you like being your own boss. There are five essential things you must do when you first start working for yourself.

Register as self-employed

As a self-employed person it is your responsibility to pay your own tax and National Insurance contributions on your earnings. Her Majesty’s Revenue and Customs (HMRC) requires that you register as self-employed within three months of starting up. You have to do this even if you already fill in an annual tax return - otherwise you may be fined £150.
Registering is easy.
You must also start paying what are known as Class 2 National Insurance contributions. These are set at a flat rate (currently £2.20 a week) if you earn more than £4,635 a year. You just set up a simple Direct Debit.
If you earn less than £4,635 a year, you don’t have to pay these contributions. Just apply for a certificate of small earnings exception (PDF). Some people continue to pay contributions to keep their entitlement to a state pension and other benefits up-to-date.
If you make a yearly profit of more than £5,225 you will also have to pay Class 4 National Insurance contributions, at 8 per cent of profits. You’ll work out how much to pay on your tax return.
If you’re just starting out and aren’t sure whether or not to register, it’s pretty simple to work out whether you are employed or self-employed.

Get a bank account

Even though you are a sole trader working for yourself, it’s vital to keep your business’s financial affairs separate from your personal affairs. So open a business bank account. You can do this with your existing personal bank, or pick another bank that has a business account offers. Your new account should reflect the name of the business, for example cheques should say “your name trading as Business Name”. This will ensure you are a professional.

Limited company

Aside from sole trader status, most small businesses set up as Limited Companies. The term ‘limited’ derives from the fact that the company’s finances are distinct from the personal finances of their owners (unlike the sole trader arrangement).
Shareholders in limited liability companies are not responsible for company debts, although if required, directors may be required to guarantee loans or credit granted to the company.

The higher level requirements for limited liability companies are as follows:

Company must be registered at Companies House
Annual accounts must be filed at Companies House
Annual Return must be completed each year to update Companies House with basic details relating to the company. Also requires a small annual fee
Inland Revenue must be informed if the Company has any profits or taxable income in a Company year
Company must complete an annual Inland Revenue corporation tax return and pay the due taxes within nine months of the Company year end each year
Anyone employed by the Company must pay income tax and national insurance on their income.

Companies House is responsible for company registration in Great Britain. It also has a key role in providing information about British companies. Before a business can set up as a limited company (or become “incorporated”), it must be registered with Companies House.
The following documents must be completed by you (or quite commonly, an intermediary) and returned to Companies House to complete the Incorporation Process:

Memorandum of Association – Includes Company Name, Location and Type of Business
Articles of Association – Outlines Directors’ powers, shareholder rights, etc
Form 10 – Provides Directors’ and Company Secretary’s Names & Addresses, together with the Registered Company Address
Form 12 – States that the Company complies with the terms of the Companies Act

These documents are often prepared by private sector formation agents (or your accountant), but there is no requirement in law to use an agent.

If you're a sole trader or partnership, there's no better time to convert your business to a limited company. Here are some reasons why:

1.The principal benefit of trading as a limited company has always been the limited liability bestowed upon the company's officers and shareholders. As a sole trader or other non-limited business, personal assets are at risk in the event of failure of the business, but this is not the case for a limited company. As long as the business is operated legally and within the terms of the Companies Act, directors' or shareholders' personal assets are not at risk in the event of a winding up or receivership. And as often happens on occasion, such events are not always under our own control.
1.Company profits may be distributed as dividends to shareholders . Presently, National Insurance is not applicable to dividend payments, effectively reducing your tax liability still further.
1.Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Quite often, larger organisations in particular will prefer not to deal with non-limited businesses.
There is no obligation for a limited company to commence trading within any set time period after its incorporation. This means that the formation of a limited company is one simple and low cost method to protect a business name. Whilst this does not in itself give any rights to use of the business name, many clients form companies in anticipation of future development of new businesses or in order to protect the limited company name of an existing non-limited business for the future. No two limited companies can exist with exactly the same name.

See our notes on which is best for a comparative guide to the various types of corporate entities that can be incorporated.

Partnership

An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits.

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labour or skill, and expects to share in the profits and losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.
Partners are not employees.