You’ve got a great idea for a business and you’re all set to get started. But can you just start trading or do you need to register a business? In this blog, we explain what you need to do, and what you don’t need to do, and when. Let’s get started.
Earning less than £1,000? You don’t need to register your business
If you’re running a business as a hobby or side hustle, and initial income is likely to be minimal, you may not need to do anything – yet. This is because of the trading income allowance, a tax exemption that allows small business owners to earn up to £1,000 a tax year before they are required to register their business.
This is good news for anyone who’s flexing their entrepreneurial muscles, but isn’t ready to go full-time with the business endeavour, or for individuals who provide a casual service every now and then.
Perhaps you’re a graphic designer considering going freelance, a babysitter with a steady stream of clients, or an artist who sells a few pieces on Etsy semi-regularly. In each of these instances, provided that you don’t make more than £1,000 in a tax year (income, not profit), there’s no need for you to notify HMRC and declare your turnover.
Of course, you should still maintain detailed records of all the income made through your product/service. These records should consist of:
- A description of the service or product that has been supplied
- Dates these were supplied
- To whom they were supplied
- Money received
This is to ensure that you are adequately prepared if HMRC does come calling.
When you need to register a business and your registration options
If you are going to earn more than £1,000 in a tax year through the product or service that you are offering, you will need to register your business. Before this threshold, it’s optional but not compulsory.
Failure to register when necessary could result in you receiving a significant fine and other legal penalties. Because of this, we recommend registering your business as soon as you know that you’re going to exceed the £1,000 allowance.
Sole trader vs limited company
In the UK, the two most popular ways for an individual to register a business are to:
- Set up as a sole trader
- Set up a limited company (specifically, a private company limited by shares)
The structure that’s right for you and your business will depend on your circumstances. There are, however, general advantages and disadvantages to both models.
The advantages of registering as a sole trader
- Registration is simple and free
- Bookkeeping, accounting and filing requirements are minimal
- Changes to the business can be easily implemented
- All profits once taxed are yours
- Personal details are not available to the public
The disadvantages of registering as a sole trader
- Typically not as tax efficient as a limited company
- No financial protection for the owner, business debts are your debts
- Seeking outside investment can be challenging
- Sole traders are often perceived as ‘small’ which can deter customers and partners
- Any taxable income is liable for NIC and Income Tax
The advantages of registering a limited company
- Registration is simple
- Financial protection for owners, business debts are the company’s debts and not yours
- Generally a more tax-efficient business model than a sole trader
- Level of prestige connected to the structure that is attractive to investors
- Company status elevates a business and makes it appealing to customers and partners
The disadvantages of registering a limited company
- Registration fee required (albeit a small one)
- Information about the company and the people within it is placed on a public register
- You can’t withdraw money as and when you want
- Strict procedures must be followed when you want to make changes to the company
- Accounting and filing requirements can be complicated and assistance is often required
For further insight into the pros and cons of the two business structures, take a look at this article: Sole trader and limited company – what’s the difference?
How to register a business
Once you’ve decided on your business structure, the next step is actually to register your business. Fortunately, as discussed above, the registration process for both sole traders and limited companies is relatively simple.
To register as a sole trader
You must notify HMRC that you will be paying tax via Self Assessment. This can be done online directly with HMRC.
You will require the following information to register as a sole trader/register for Self Assessment:
- Government Gateway user ID and password
- National Insurance (NI) number
- Full name
- Business name
- Postal address
- Telephone number
- Email address
- Description of business
- Business start date
Once submitted, it normally takes approximately 10 working days for the application to be processed. You will then receive a unique taxpayer reference (UTR) for your business.
To register a limited company
You will require the following information to register a private company limited by shares (there are several types of limited company, but this is the most popular):
- Company name
- SIC code(s)
- Registered office address
- Details for at least one director, including the service address, residential address, date of birth, occupation and nationality
- Details for at least one shareholder (this can be the same person as the director), including the service address, residential address, date of birth, occupation, nationality, number of shares to be held and the value of these shares
- Details for at least one person with significant control (typically this person is also a shareholder), including the service address, residential address, date of birth, occupation, nationality and the nature of their control
- Memorandum and articles of association (this is automatically provided as part of the registration process)
To confirm, a private company limited by shares can be formed with just one person or multiple people.
We can help you register your limited company
As a company formation agent, we are experts in the company registration process. As well as being able to guide you through the online registration, we can also offer additional services that will help you and your business, such as:
- Registered Office Address Service to protect your residential address from the public register and boost the status of your business
- Full Company Secretary Service that ensures all changes made to your company are legally compliant
- Confirmation Statement Service whereby company specialists prepare and submit this annual filing obligation for you
We offer a range of company formation packages, with prices starting at only £12.99. Take a look at your company registration options now and please get in touch if you have any questions.
Your other registration requirements
As well as the core registration of your business, you may also need (or want) to:
- Register for VAT – When your turnover exceeds the £85,000 VAT threshold in any rolling 12-month period, you must register your business for VAT. However, there are benefits to doing this voluntarily before the threshold has been met.
- Register as an employer – If your business will be employing other people or even yourself in the role of company director, you will need to register for PAYE (Pay As You Earn).
- Register for Self Assessment – Whilst sole traders will already be registered for Self Assessment, there will be scenarios when company directors and shareholders will also need to register for Self Assessment. For example, when a dividend payment that goes over the dividend allowance is rewarded to a shareholder.
- Register with the ICO – You will need to register your business with the Information Commissioner’s Office and pay the necessary fee (£40 – £60 per year for small businesses) if you electronically process any personal information about other people.
- Register a trade mark – Registering a business or company provides a certain amount of protection for your business’ name, but by registering a trade mark, you are steadfastly locking down your brand and preventing anyone else from profiting off the back of it.
- Register a domain name – Any business that requires a website will need to register an appropriate domain name. Here’s how 1st Formations customers can claim their free domain name.
Finally, it’s important to discuss business licences. Depending on the industry in which you’ll be operating, you may be required to register your business with a local authority or professional body to gain a business licence.
- If your business is going to make and sell food, you will need to ‘Register a Food Business’ with your local authority
- If you will be running a hairdressing salon or barber shop, you will need to go through ‘Hairdresser registration’ with your local council
- If you are a plumber, you may need to ‘Register to carry out gas work’
Not all industries will require you to operate with a licence. However, you may be surprised by how even the smallest thing – such as playing music in your office – will require you to register and apply for a licence. Check if your business needs a licence now.
So there you have it
We hope this article has answered all of your business registration questions. If there are any details that you are still unsure about, please leave a comment and we’ll get back to you as soon as possible. Thanks for reading.