How to: register a business

Registering your business is a legal necessity. Even if your business is a tiny one-person operation, failing to register your business when you’re selling any services or goods can lead to some pretty eye-watering penalties. So make sure you don’t accidentally sabotage your business before you get off the ground, and be sure to register as soon as possible.

First of all: what are the options?

When you’re registering your business, you have three options – sole trader, limited company, or partnership. Here’s what each involve in a nutshell.

Registering as a sole trader is the easiest option. Doing this lets you have complete control over the business, and lets you keep all the profits after tax. It means, basically, that you own the business, whether you run it alone or employ others. However, legally, there’s no separation between you and your business with this option – so if the business runs into difficulties, you’re completely responsible. Benefits: it’s quick and cheap (you can do it online in just a few minutes).

Registering your business as a limited company separates the personal from the business, creating an independent entity. The profits don’t belong to you, but to the company itself. This can be beneficial from a tax perspective, as you’re paid as an employee. You also have the option to become a shareholder, which entitles you to dividends. It also means that if the business fails, you have less liability.

Registering as a partnership involves deciding what role each partner plays – will they be a ‘general’ partner (a partner that takes equal share in running the business) or a ‘dormant’ partner (one that just provides investment)? This applies when going into partnership with a different business, but with differing tax obligations. There are many forms to fill, and deeds to draw up. Most startups will fall into the first two categories.

Okay, I see my options. But how do I pick between sole trader and limited company?

It’s important to pick the right structure for you, or you could end up paying too much tax.

Operating under a limited company means you’ll need to pay corporation tax, more complicated paperwork, and harsher penalties. You also can’t just take money from the business without recording it as either a loan, a dividend, or a salary. However, your personal assets are more protected, lessening the risk.

Being a sole trader is altogether simpler, and a perfectly viable option for those just starting out. Remember too that just because you start out as one or the other doesn’t mean you can’t change. If your company expands and you take on more risk and want to protect your assets more, or it becomes a better option to pay corporation tax on your profits rather than income tax, as you do when a sole trader, you might decide to take things a step further.

Awesome – I get it. So how do I go about registering as a sole trader or limited company?

Registering as a sole trader is simple – you can literally do it minutes here. You’ll need your National Insurance number, business details, and personal details.

If you’re registering as a limited company, you’ll need to register with Companies House. You need to do this within three months of starting trading. You can do this directly yourself, through a companies formation agent, or through an accountant. The fee for registering is £20 – unless you want to get your business off the ground that day, in which case you can fast-track your application for £50.

You’ll need at least one company director over the age of 16, whose name and address is stated in the relevant documents. You then create a unique digital signature by providing information for each director: the first three letters of your mother’s Maiden name, the town of your birth, and the first three letters of your eye colour (think of it as less hi-tech eye-scanning).

There are a few pieces of paperwork that you’ll be filling out if you register yourself:

  • Memorandum of Association (contains the company’s name, location and function)
  • Articles of Association (describing how the company will be run)
  • Form 10 – or, The Statement of the First Directors, Secretary and Registered Office (says where the registered office is and gives details of directors)
  • Form 12 – or, The Declaration of Compliance with the Requirements of the Companies Act (shows the company meets all legal requirements.)

Once registered, your details will be passed onto HRMC. However you also need to contact HRMC yourself to let them know that your company exists, and if you don’t do this you could face a penalty.

Anything else I need to know?

When you’re a sole trader, you need to register by 5th October following the end of the tax year you need to send a tax return for. If you don’t pay all your tax by 31st January following the end of the tax year you’ll incur a penalty, so watch the dates and don’t leave it too late.

Image credit: Flickr Creative Commons