How to register a business

First things first: what type of business are you running?

To register a business in the UK you need to ‘Know Your Business”. When you read on about the different company types you may well jump to a conclusion. But think on. It may seem that as a single person owned business you are a sole trader, however, it might be better to become a limited company.

Most people either set up as a sole trader or a limited company.

Here are three of the basic types of business recognised in the British Isles. GoFounder has listed the main categories below, showing some of the pros and cons to help you make an informed choice:

Sole trader

Sole Trader Pros:

• Easy setup: To register as a sole trader you simply register, via HMRC, as self-employed and use the self-assessment process for tax. Once you have chosen a name you are then up and running. Depending on the sector you are working in, there may be other registrations needed – for example if you sell food you will have to register with your local council.
• Less paperwork: Sole-trader companies have less paperwork than limited companies. The type of admin you will still need to do is self-assessment tax and accurate bookkeeping. If your company makes over £85,000 a year in VAT taxable turnover, you may need to register for VAT. Check out the HMRC VAT calculator to find out if this affects your business.
• Privacy: As a sole trader you won’t need to register your personal and company details on the public facing Companies House website. Your taxes, etc., are covered under the HMRC privacy rules so are not publicly visible.
• Control: You have control over how your business is run. For many people this is a major positive.

Sole Trader Cons:

• Debt liability: Any debt incurred by your business becomes your personal debt. This means your assets are at risk. But it is swings and roundabouts. You don’t share the profit and you don’t share the debt.
• Investment routes are curtailed: A sole trader does not have shares and therefore can’t exchange shares for investment. You can still get investment, for example from banks, but not having shares to bargain with means you can’t easily reach out to angel investors.
• Control: Not having to answer to shareholders or investors has real positives. However, this also means that the buck stops with you. This can cause a lot of stress that can spill over into family life.
• Tax: Sole traders are taxed at the same level as an individual.
• Perception: This one often depends on the sector you work in, but some people perceive sole traders as less reliable and professional as limited companies. This is rubbish, of course, but perception is in the eye of the beholder.

Limited liability companies (‘Limited’ or ‘Ltd’)

Limited Company Pros:

• Limited liability: This is the main advantage of a limited company. If the company incurs debts your personal assets are protected.
• Tax: You can pay yourself the minimum salary before tax (around £12,500) and then pay out ‘dividends’ (special payments to shareholders) to help offset tax commitments as dividends are not taxed. However, it isn’t that simple and there are legal hoops and caveats to go through to do this.
• Separate legal entity: A limited company does business deals company to company, unlike a sole trader where any contracts will be directly with the individual acting as that sole trader.

Limited Company Cons:

• More complicated: The limited liability aspect of an LTD company means that the legalities of registration and the running of a limited company are more complicated. Accounts, shareholder governance, and other admin tasks are much more onerous than a sole trader.
• Ownership: The shareholder position can have an impact on various decisions in the company. This can cause stress and arguments. I know, as I have been there many times. Even the best of friends or family can have terrible arguments over how a company is run. There are ways to establish control in a limited company, but you will need legal advice on this, upfront.
• Lack of privacy: When you set up a limited company it is registered with Companies House. Your personal details, such as name, address, date of birth, are then available to anyone wishing to see them.

Partnership

If you have a company with two or more owners, then a partnership is an option. You share the bills and debts as well as the profits. Each partner is responsible for their own tax.

Partnership Pros:

• A problem shared: Having another (or more) pair of hands can help spread the workload. The responsibility for the running of the business is ultimately a shared endeavour, but you should each focus on what you are best at.
• Easier to register: Registration is simpler than registering a limited company.
• Capital: You can share the costs of running the company. Of course, you share the profits too.

Partnership Cons:

• Arguments: Even the best of friends can come to blows when you share the responsibility of running a company. I ran a company with my brother at one point, the rows were the stuff of legends. It is OK to disagree, but when it becomes toxic, you can end up losing not only the business, but your relationship can be affected too.
• Liability: Each partner shares the liability for company debts. Like a sole trader, if the company defaults, personal assets are at risk. This can cause issues between partners who may place blame on each other. The alternative is a limited liability partnership. This has some of the advantages of a limited company. You should take legal advice to set up a limited liability partnership.
• Tax: Also worth noting, partners are responsible for their own tax in the same way that sole traders are.

One important point to make…registering a business is not a one-way path. You can change the type of business you have if and when you need to… although this can sometimes be a bit complicated and you might need professional help to do so (at a cost!).

What about “trading as…”

When you register a company, you may want to run the company using a different trading name. For example, a company is registered in the name of “Widgets4U Ltd” but the company trades as “AppiNess”. Because a ‘trading as’ name is not protected in the same way a registered business name is, there are several legal and compliance issues that need to be noted if you decide to ‘trade as’:

1. Law: “Trading as” names are not protected under law so you could end up in a name dispute
2. Trademarks: You must make sure a trading name does not impinge on any trademarks
3. Disclosure: You must always put your registered company name and details on any business documentation you create.

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