3.3 | Register your business
There are several ways your business can trade. But before your business idea can become a reality, the relevant authorities must be informed.
There are 2.9 million sole traderships in the UK - and that number has grown over recent years.
The majority of what I call "lifestyle businesses" are sole traderships. It makes sense and is probably more tax efficient to take sole trader status if profits are likely to be lower than £50,000 per annum. Beyond this, you should consider becoming a limited company or a partnership.
At headline level, here are the main tax issues to consider:
- Sole traders, partners and employees pay income tax.
- A director of a limited company pays income tax (as an employee of the limited company).
- A limited company also pays corporation tax
If you set up as a sole trader, you need to inform the Inland Revenue and register as self-employed. (The telephone helpline for the newly self-employed is 08459 154515.)
Setting up in business as a sole trader is a viable option to test the market, before incorporating as a limited company, once the idea has proved viable. Once tested, you can invest in creating a company. Record keeping is simpler with no PAYE and there’s no corporation tax to pay, so sole traders retain all profit after tax.
By registering as self-employed with HM Revenue & Customs you can claim many pre-trading costs (except training) as allowable business expenses in your first year of trading.
The personal risk, however, is higher. If the business fails, a sole trader is liable to pay for business failure from their own pocket.
Setting up a Limited Company from the outset, gives entrepreneurs a shareholding director position within the company. Despite increased paperwork and corporation tax liability (a director pays income tax as an employee of the company; the company pays corporation tax on its net profit), you and your business are viewed as separate entities, so the liability for business debts is reduced.
It can be easier to borrow money as a director of a Limited Company and entrepreneurs can establish improved credibility within their marketplace by operating as a company.
If setting up a Limited Company, you need to register the company with Companies House and pay a registration fee. You must also notify the Inland Revenue.
A partnership can also be set up with one or two others, giving each partner a percentage of the return of the business, depending on how much time and money they’ve invested. Partners are classed as self-employed. Each partner is personally liable for debts incurred by the business. Partners share the profits, but also the burden and risks involved, so, if one partner incurs business debts, other partners are liable for them as well.Return to Categories