When starting your own business, company formations is one of the most important things to consider: i.e. how the company is going to be legally structured. You can either: be Self Employed, or Form a Company and register it with Companies House.
Self-employment can be set up as a sole trader or a partnership with one or more other people. If you form a Limited Company, you are not classed as self-employed: you become an employee of your own company.
Company Formations – Sole Trader
Becoming a Sole Trader is the simplest business formation to run and set up. It is easier to set up records and accounts. You are responsible for making any decisions. You will also be responsible for any debts which the business occurs. It means that your own personal assets including your home may be at risk if the business runs up debts.
As a sole trader, you must complete an annual self-assessment and keep records of your business income and expenditure. Profits on a sole trader are taxed as income. You will be required to pay Class 2 National Insurance Contributions and Class 4 contributions on any profits the business makes.
If you are self-employed, then you must register as self-employed with HM Revenue and Customs.
A partnership is where two or more people set up a business. Each partner of the company needs to register as self-employed. It is also a good idea to get a written agreement drawn up with a solicitor. The partnership is responsible for any debts incurred
The partnership and each partner must make self-assessment returns and keep records of the business’s income and expenditure. Each partner takes a share of the profits and will be required to pay Class 2 National Insurance Contributions and Class 4 on any share of the profits.
In a partnership, you are responsible for any debt run up by the business. If the business gets into trouble, each partner is liable for the debt in the business. If one partner cannot pay, the other partners are legally responsible for making up the shortfall.
Company Formations – Limited Liability Partnership
A Limited Liability Partnership is formed when two or more partners set up a business. A partner can either be an individual or a company. In an ordinary partnership, you share the risks and profits. In a Limited Liability Partnership, the risks are restricted to the amount of money invested and to any personal guarantees used to raise finance. A written agreement should be drawn up with a solicitor.
Limited Liability Partnerships must be registered with Companies House and file annual accounts, for which a fee is payable. The LLP and each partner must make self-assessment returns.
Each partner takes equal shares of the profits unless the written agreement states otherwise. If the partner is a company, then the company pays Tax and NI according to their business structure. An individual will pay income tax and NI, and a Limited Company will have to pay corporation tax.
Limited Liability Company
Limited Companies exist in their own right, so the company’s finances are distinct from the personal finance of the owners. The shareholders can be either individuals or other companies. Limited Companies must be registered with Companies House and have at least one Director and a Company Secretary. Money is raised by shareholders, borrowing and retained profits.
There are two main types of Limited liability companies:
In Private Limited Companies, shares cannot be offered to the public but can have one or more shareholders.
Public Limited Companies (plc), shares can be offered to the public. Share issue must be at least £50,000 before it can trade. There must also be at least two shareholders.
In both instances, accounts must be filed with Companies House and an annual return completed. Profits are paid out to shareholders by dividends. Companies pay corporation tax. Company directors must pay Class 1 National insurance and tax on their salaries.
There are companies who can do the complete process of company formation for you. It normally will only take a couple of days to complete.
If you are unsure of the best company formation, then request some help from either your local tax office or Business Link.
Return from Company Formations to Starting a Small Business page