A limited company must register with Companies House because a business cannot operate as a limited company until it has been incorporated at Companies House under the Companies Act 20061, However a sole trader is not required to register with Companies House.
If you opt to operate as a sole trader, you will still need to tell HMRC that you are self-employed so you can fill in Self-Assessment tax returns and pay the correct amount of tax owed. You might also be required to register for VAT.
What are the differences between a sole trader and a limited company?
Being a sole trader is a simpler business structure, which can be limiting, and it places you (the business owner) at a higher level of risk. As a sole trader you have sole responsibility for business decisions, debt, and taxes.
If you register your business as a private limited company you will legally separate the business from you as an individual, taxes, liabilities and public transparency will change2.
The fundamental differences between the two business types are:
Liability – If your business accumulates debt as a sole trader, you are personally liable for the amount owed, which puts your personal assets such as your property at risk should your business fail. In short, as a sole trader you are the business.
Tax status – As a sole trader, all profits after tax belong to you. As a limited company director the profits belong to the company and you are paid as an employee. However, as a sole trader you are subject to income tax on profits. As a limited company, it is the limited company that will be subject to income tax on profits.
Public record – Sole traders enjoy a great degree of privacy when it comes to the information about their business.
Private limited company:
Liability – If you run a limited company it is the company that is liable for the debt. You may still be pursued in your capacity as a company director if you are alleged to have committed wrongdoing.
As a limited company the business is a separate legal entity in which you are a shareholder.
Tax status – Once you reach a certain level of income you might decide it makes financial sense to register as a limited company. Instead of paying income tax, limited companies pay corporation tax, which has a lower rate. However, if you pay yourself a salary from your limited company you will still be required to pay tax and National Income contributions, hence why many limited company owners pay themselves minimum salary plus dividends for tax efficiency. Limited companies can also benefit from several allowances and tax-deductible costs that are not available to sole traders.
Public record – Limited company owners must publish their company earnings and other details which are available to the public to view.
The simple step-by-step guide to registering with Companies House
If you choose to register your business with Companies House yourself, the process is simple.
Before you start you will need to ensure that you have a few pieces of information to hand including:
Your company name (It is advisable to choose an original name that is relevant to your business operations)
Details of the company directors and secretary where relevant.
Memorandum and articles of association – Click here for memorandum of association templates3.
As part of the registration process you will need to identify with SIC code (Standard Industries Classification of Economic Activities) your business will operate under.
How much does it cost to register with Companies House?
Online registration costs £12.00. If you decide to register by post it will cost £40.00, payable by cheque. Registration can be accepted within 24 hours if you registered online. If you registered by post it can take up to 10 days.
You appointed another company as the sole director, or you appointed a person under the age of 16 as an officer – both are not permitted under the Companies Act 2006.
The certificate of incorporation
Once your registration is complete you can download your Certificate of Incorporation from Companies House.
The Certificate of Incorporation is the official document that you will need to retain and which you will need to show to banks as proof that your business is a separate entity to its directors.
Changing from a sole trader to limited company will mean new ways of working that you will need to get used to. It will also change the way you are perceived by your clients and contacts and by potential clients, especially when you pitch for work. Before you make the change, it is advisable to seek professional legal advice.
Final points to remember
If you change from operating as a sole trader to a limited company, you will be required to take on extra responsibilities. These include:
You will be required to submit annual financial records to Companies House.
You will need to appoint a company secretary, who can keep an eye on what is happening within your business and is prepared to countersign paperwork.
You will have the responsibility to set up Pay As You Earn “PAYE”.
You have a legal duty to manage your company’s finance and resources.
As a company director you will also be required to agree on a list of terms including:
Who will be responsible for what aspects of company operations?
What happens if a director decides to leave the company.
How the company is divided in the event you should sell the company.
What amount each director can expect to receive from the company profits.