At a glance

Start here

1. You are planning to start a new business and your options are:

1. Going self-employed as a sole trader.
2. Running the business through a new company.
3. Going into a partnership (you need two or more of you to run a partnership).

Note: If you are recruited and paid by an agency the chances are that will not be self-employed but an employee.

2. Once you know that you will be 'self-employed', choose which 'trading style' or 'trading vehicle' is best for you?

• Your options are operating as:
  • A sole trader (running a business on your own or with employees).
  • A partner in a partnership (running a business with someone else).
  • A director and shareholder: running your own company (on your own or with others via a limited company).

3. Do you want to consider tax advantages and cost savings? 

There may be some key advantages, as a start-up in setting up as a sole trader than via a company or partnership: it depends on individual facts and circumstances.

Note that:

• It is very easy to set up as a sole trader: this is the recommended route for someone starting up a small business on their own for the first time.
• Once you have set up as a sole trader, it's easy to change into a partnership (say if a friend comes to join your business) or into a company (if you get bigger and want the protection of limited liability).
• It is less easy to convert backwards: changing from a partnership back to a sole trader is easier than changing from a company back to a sole trader.

4. What are the legal requirements to set up in your choice of trading vehicle?

Sole trader

• There is no legislation that directly describes the operation of a sole trader: sole traders run their business according to the principles of general law. 
• Certain businesses, such as taxis and scrap metal dealers are subject to meeting the rules on tax Conditionality. Licence renewal (which excludes the first issue of a licence) is conditional on the business completing a tax check confirming they are registered in England for tax.
  • 2022 Finance Bill to extend conditionality to licences in Northern Ireland and Scotland.

Partnerships

• Partnerships are governed according to different Partnership Acts and the Companies Act which variously apply to the different types of UK partnerships, these acts setting out various defaults:
  • 1907 Limited Partnership Act.
  • 2000 Limited Liability Partnership Act.
  • 2006 Companies Act.
• It is advisable to draw up an agreement to suit the nature of the partnership.
• We do not provide a template at this time because partnerships vary so greatly in size and activities that we don't think that a 'one size fits all' approach is ever suitable.

See our guide A new Partnership: Start here...

Companies

• If you chose to trade through a company, the starting point is to form a new company with Companies House.
• Companies can be unlimited, limited by guarantee or limited by shares.
• If you are running a non-for-profit organisation then you may consider being limited by guarantee.
• The majority of trading companies are limited by shares.
  • Before you get started you need to plan your share classes, consider whether to modify the Articles of Association and/or draw up a shareholders' agreement. You can also make amendments following formation. 
  • You must also appoint first directors and a company secretary, and decide on the location of the company's official address, the Registered Office.

See our guide Starting a company: Start here... 

5. Trading names

Your business needs a name. It can be just your name or you may want something original to stand out in order to attract new clients online and you will probably require a website.

6. Registration for tax

Registration with HM Revenue & Customs

If you are in business, whether as:

• A self-employed individual.
• An individual in a partnership.
• A company.

You are required to open an account on the Government Gateway www.gov.uk and register with HMRC.

Sole traders

• Under Self Assessment you must notify HMRC if you have taxable income or chargeable capital gains in a tax year for either Income Tax or Corporation Tax.

See Self-employed: Registering for tax

Employers (individuals, partnerships or companies)

If you are going to employ any staff you must register with HMRC and operate PAYE.

• Separate online notification and registration with HMRC are required if you take on workers and employees.
• You must assess any worker's employment status.
• Certain categories of workers are automatically deemed to be employees for tax purposes (this does not always confer any employment rights on them).
• You must pay employees via a payroll and deduct PAYE & Real-Time Information reporting (RTI).
• If you trade via a company and you are paying yourself a salary or any benefits, or if you trade via any type of business entity and you take on employees or pay your directors, or you make available employment type benefits, you will need to set up a PAYE scheme.
• See RTI for employers.

Construction industry Employers: Construction Industry Scheme (CIS) 

If you are a contractor you must operate the CIS on your workers unless they are employees or their work is outside the CIS scheme.

• If you are a sub-contractor you must register with HMRC otherwise you will have tax deducted from your income at 30%.
• See CIS: Contractors and Subcontractors.

VAT

You must register for VAT if:

• You expect your turnover in the next 30 days to exceed the registration threshold of £85,000 in 2020/21 see Registering for VAT. 
• You have taken over a business as a Transfer of a going concern.
• You have taken over the business premises of a VAT registered business and are carrying on a similar trade, see VAT: Taking over an existing business.
• If you register for VAT after 1 April 2019 you are mandated into Making Tax Digital for VAT.
• See MVD tool: who has to join?

If you don't have to register for VAT you can choose to do so if you will be making taxable supplies.

See VAT: Starting in business

Accounting for tax and record keeping: sole traders and partnerships

Measures that are supposed to simplify accounting for tax, but for small unincorporated businesses give you the difficult choice of whether to elect to use cash basis accounting or use a system of fixed-rate expenses.

• Neither method is in practice simple to use: each has several drawbacks.
• We compare the different systems: keep an open mind about which system to use until trading is underway.
• See Accounting: Simpler Income Tax (cash basis)/fixed expenses

Accounting: companies

• Companies file their accounts with Companies House, in different formats according to their size.
• Small companies have the option of filing abbreviated accounts or micro-entity accounts.
• Company accounts are prepared according to Generally Accepted Accounting Practice (GAAP).
• See UK GAAP & FRS 

 Miscellaneous FAQs

• Will I need a pension scheme?

Tax Planning

• Tax planning for directors (index)

See Indexes to essential guides in this series