Form Of Company – Sole Traders

Sole trading is when an individual is the only owner of the business and has complete control over the way it is run.

The law makes no distinction between the business and a sole trader. This unlimited liability means that any business debt can be met from the owner’s personal wealth if the business fails. And the business usually ceases on the owner’s retirement or death.

A sole trading business is usually small in size, with a low turnover, and few, if any, employees. But there are an estimated 3.7 million active businesses in the UK and over 2.3 million of these are businesses without employees (class zero businesses).

This majority of sole traders are in the service sector, including photographers, plumbers, hairdressers, shops, real estate agencies and bed & breakfast hotels. Some 24% of the UK ‘s 2.3 million size class zero businesses are in the construction sector and 18% are in business-related services.

Starting The Business

arrows2You will need to fulfil certain legal requirements before you can open for business:

Put it on paper:

If you are going to trade under a name different to your own personal name you must display the name(s) of the owners and an address where documents can be served on all business stationery (including e-mail) and at your premises. Design letterheads, business cards and signage accordingly.

Use the right name:

A business name means the name of your business if it is different to your your own name.

It is not compulsory to register a business name.

You also need to be careful about choosing a name since the wrong name can get you into difficulties.

Certain words and expressions like international, federation and registered are restricted under the Business Names Act 1985 and the Company and Business Names Regulations 1981.Companies House  have lists of these words and details of how to obtain approval to use them.

Your business name can not be the same or too similar to that of another business, trademark or company. If it does conflict you could face legal action from its owner. Check phone books, trade journals and magazines to ensure against clashes. You can run free name checks against all these  as well as the Trade Marks Register and the Patent Office and the limited companies names index at Companies House.

To be absolutely sure that you can use a name, contact a solicitor to perform the checks for you and ensure nobody copies it the future or passes it off as their own.

Inform the authorities:

You must register as self-employed with HMRC within three months of starting up or face a £100 fine. The three month limit starts from the last day of your first month of trading.

Tax And VAT

As a sole trader your profits are taxed as any other income by the Inland Revenue. And as you are self-employed your tax will be self-assessed. The amount you owe is calculated after business expenses and personal allowances have been deducted. Your income will fall under tax Schedule D and as you will be paying income tax twice a year so it will pay to put money aside.

As a self-employed person many of your business expenses can be deducted from your taxable income, such as overheads on your premises, travel, delivery costs and trade association subscriptions. But you will have to pay capital gains tax if you sell or give away any assets.

You will also be paying National Insurance Contributions (NICs) to the Department of Social Security. Class 2 NICs are charged at a small weekly rate and the level of Class 4 contributions you pay depends on your profits.

If your taxable turnover exceeds £82,000 in the past 12 months or will do so in the next 30 days you must apply for value added tax (VAT) registration.

This means you will be collecting VAT from your customers and paying it to Customs and Excise less the VAT you have paid out in the course of business.

Form of Company – Limited Liability Partnerships

What Is A Limited Liability Partnership?

Since 2001, businesses can be run as limited liability partnerships (LLPs) – a limited liability partnership offers ‘members’ of the partnership reduced personal liability if the business gets into financial difficulties, with the liability limited to the amount they have invested in the business and to any personal guarantees they may have given to, for example, banks.

The partners in an LLP will however, be liable in the same way as company directors for fraudulent trading.

LLPs are taxed differently to companies – profits are treated as the personal income of ‘members’ in the same way as are the profits of a normal partnership. But LLPs have to produce detailed accounts for the Inland Revenue and Companies House which are similar to those required of companies.

Click on the links below if you wish to view a specific section of the information.

Who Can Form A Limited Liability Partnership?

Generally two or more persons (For this purpose persons can mean an individual or a company) who are associated for the purpose of carrying on a lawful business with a view to profit, may form an LLP. LLP�s are not available for non profit-making activities.

All LLP’s must have at least two, formally appointed , designated members at all times. In a situation where there are less than two designated members then all members will be classed as designated members.

Designated members will have the same rights and duties to the LLP as any other member, however in law the designated members have extra responsibilities which are :

Appointment of auditors (If required) Signing the accounts on behalf of the partnership members Ensuring that signed accounts are delivered to companies house Notifying the registrar of any changes to the membership, a change of registered office address or a change to the LLP name. Ensuring that an annual return is completed and delivered to the Registrar Acting on behalf of the LLP in the event of dissolving and winding up the partnership

Designated members are accountable in law for failing to carry out these legal responsibilities.

Naming The LLP

All limited liability partnerships must end with the words Limited Liability Partnership or the abbreviation LLP. Similarly to limited companies they should not be ‘the same as’ a current LLP. If the name is sufficiently different to be accepted on registration it can be objected to by a second LLP on the basis that it ‘too like’ a registered name. In such cases the partnership can be directed to change its name by the Secretary of State who has statutory powers to do so.

It is the best interest of a partnership to ensure that the name chosen is sufficiently different from a currently registered one so that it can avoid any confusion and the possibility that…

  • Someone will raise an objection to the name
  • They are not confused with another partnership with a poor trading record
  • A ‘passing off’ action is brought against them in civil law

Deed Of Partnership

Although not a legal requirement it is advisable to have a written deed of partnership which is a legally binding agreement between the partners that are setting up in business.

The deed will describe what rights and duties the partners will have and how the partnership is to be run and will help avoid any misunderstandings or disputes in the future which may have costly legal consequences.

If members do not have a deed they will be governed by the terms set out in the Partnership Act 1890 which will not offer solutions to many of the problems which can be encountered and may not suit the way that the partnership wishes to operate.

As it is a legal document, the deed of partnership should be drawn up by a solicitor in consultation with the partners.

LLP Requirements

  • Complete and sign an incorporation document (Form LLP2) and send to companies house with the incorporation fee (Or get your advisor to do it for you)
  • Receive a certificate of incorporation from companies house wich should be displayed inside the registered office.
  • Contact HMRC on formation
  • Set up a deed of partnerhip (recommended)
  • You must clearly display the LLP name outside its office and all places of business
  • Clearly display the LLP name and the registered office on all business stationery (Letter heads, order forms, invoices etc)
  • Each year a set of accounts need to be filed at companies house
  • An annual return should be completed and filed with companies house to ensure that the filed records are up to date
  • Companies house should be informed of any changes to the membership, the personal details of the members and the address of the registered office.
  • Companies house should also be informed of any change in the name of the LLP. This can be done on form LLP3 and should be accompanied by the relevant fee (currently £10) or it can be done on the same day for a fee of £50.

Taxation Of A Limited Liability Partnership

Unlike a limited company profits earnt are shared between the individual members in proportion to their agreed percentages and it is the individuals who are responsible for paying the income tax on these profits via the partnership pages of their self assessment return.

Self employed partners are responsible for paying their own national insurance and therefore must be registered as self employed with HMRC. Companies can also be members of a LLP and if so they will pay corporation tax on their share of the profits and therefore should show these details on the CT600 return.

Where a LLP has (or has a reasonable expectation of having) a turnover in excess of £82,000 per annum it will need to register with HMRC for VAT.

LLP’s that have employees must deduct and pay over income tax and national insurance which means operating a PAYE scheme and registering with HMRC.

When the LLP is set up it should notify HMRC that the business exists. This will then mean that the LLP can be sent a partnership return on which the income and expenditure for the year can be recorded and a statement showing how the profits/losses are split.

We can setup an LLP on your behalf and provide you with all necessary guidance. Please call us on 01384 468320.

Form of Company – Limited Company

What Is A Limited Company?

There are two types of limited company – those that are publicly traded (known as a public limited company or plc) and those that are privately owned (identified by the abbreviation Ltd at the end of their name). We will focus on the latter.

The term limited refers to limited liability and there are around 1.7 million in the UK . If you’re a sole trader or partner, you can be held personally liable for it – outstanding debts can be met from your personal assets.

A limited company, however, is a separate legal entity and can own property, incur debts, sue and be sued. Any business dealings are made on behalf of the company, rather than you. Its owners are liable only for the amount invested.

You must have at least one director to manage the business. It is no longer neccessary to have a seperate company secretary, however the business needs to ensure that all the rules are followed and official records maintained.

How Do You Set It Up?

If you want to trade as a private limited company, there are three things you need; payment to the registration body Companies House, a company name and a UK address. This is the address of your registered office – somewhere to keep official documentation, to receive official correspondence and where court documents can be served.

There are several methods of setting up a company. The first is to deal directly with Companies House. At £15, or £80 for a same day service, it is the cheapest option and there are staff give guidance on general matters such as filling in forms or company names. It usually takes around 24 hours and must be 1) A company limited by shares, 2) Uses model articles of association and 3) doesn’t contain a word that you require permission to use (see Choosing a name for company, partnership or business)

However, registration can be time-consuming, especially if you make a mistake, and Companies House staff will not advise you about specific matters such as the content of the memorandum and articles. If you need to enlist some help, a company formations service, solicitor or accountant can help you form a new company for a fee.

Many company formation services also provide sameday online processing from around £15 plus vat.

Finally, you can buy an ‘off the shelf’ or readymade company. You simply transfer your name to an available one. The process can be completed on the same day but the choice of names may be limited.

Memorandum Of Association

Part of the registration process involves stating the nature of your new company. This is done in a Memorandum and Articles of Association, sets of which can be bought from legal stationers. The Memorandum describes what your company is and does, by outlining the following:

  • Company name : There are some restrictions – you can’t include sensitive words like international and federation. It must finish with the word limited but not have it elsewhere. Also, it must not be offensive or imply criminal activity and cannot have been registered by anyone else. You can check for individuality by searching the Company Names Index at Companies House and the Trade Marks Register at the Patent Office. Refer to the Business Names Act 1985 and the Company and Business Names Regulations 1981 for more information. Name changes at Companies House cost £10, or £80 for a same day service.
  • Location of the registered office: This is the UK country in which your company’s registered office is located.
  • Objects of the company : Here is where you describe what your company does. You must limit your business activities accordingly, so make it a wide statement, such as “general commercial trading company”.
  • Limiting the liability of the members: This means each owner of the company has to contribute no more than the value of their shares. Share capital . You must state the amount of capital in the company and how it is divided.

Rules For Running A Limited Company

Articles of Association

Here’s where you set out the rules for running your company. You must state how shares will be allocated and transferred, how the directors, the secretary and your meetings will be governed. And if you decide not to adopt the standard articles of the Companies Act in full – known as Table A – you have to submit your amended version when registering. Once your company is incorporated you can only make changes if the holders of 75% of the voting rights in your company agree, so it pays to get this right at the outset.

Sets of memorandum & articles of association can be purchased from a legal stationers or formation agent for £20-£30. Submitting your Memorandum of Association to the Company Registrar costs £20. Once processed, you will receive a Certificate of Incorporation and copies of your memorandum and articles of association.

Issuing shares

Shares have a nominal value and the money paid for the shares is held by the company as assets. Shares can be held by individuals or other companies, with the balance of power reflected in share ownership. So if someone has a 51% share they effectively have control of the company.

If a company winds up, the value of its assets is shared amongst the shareholders according to how many shares they hold. A shareholder can sell their shares at a price agreed with the buyer.

Although there is a limit to the number of shares that can be issued – as stated in the memorandum – there is no limit to the number of shareholders. Each one receives a share certificate as proof of ownership.  A form with the total number of shares allotted and to whom, must be submitted to the Registrar of Companies within 21 days.

Directors and company secretaries

You must have at least one director to manage the business. The secretary can also be a director, provided there is at least one other director. Their personal details and occupations must be submitted to the Registrar of Companies. A director must also detail any other directorships held in the last five years. There are no maximum age limits for being a company director however s157 CA2006 imposes a minimum age of 16 years old . Undischarged bankrupts or those disqualified by court from holding a directorship are not eligible.

The company secretary makes sure company rules are followed and official records maintained. They must keep Companies House informed of changes of directors or secretary, annual returns and resolutions to change the memorandum and articles. Failure to do so can result in a heavy fine or being struck off the register.

Meetings and resolutions

A company must hold an annual general meeting for the benefit of shareholders, where directors report the company’s performance. It is an opportunity for review for shareholders and a time for decision-making through voting. Extraordinary general meetings can be called to deal with pressing issues. Each meeting has a chairperson and a stated number of shareholders need to be present for any decisions to be made.

Decisions reached by voting at meetings are known as resolutions. The resolutions from extraordinary, special and elective meetings must be filed with Companies House within 15 days of being passed.

Displaying your company’s details and certificate of incorporation

Once you get the all-clear on your name, you must show it on business stationery as well as on the outside of each place of business. Letterheads must also show the country of registration, registration number, the registered office’s address as well as your VAT number – if applicable. Your Certificate of Incorporation should be displayed prominently in your main place of business.

You must also keep statutory registers, such as registers of shareholders and directors, that anyone can access. Certain registers must be kept at your registered office, with others at Companies House available for public inspection for a small fee.

Pros And Cons

The pros

  • Liability :
    Financial liability is limited to only what has been personally invested.
  • Transfer :
    The shares of a company are more easily transferred than a partner’s interest in a business.
  • Longevity :
    A company is more than just the people in it, and still exists even when members resign, retire or die.
  • Money-lending :
    Companies can create mortgages or floating charges over assets, making it easier to borrow money.

The cons

  • Administration :
    Setting up a limited company means a lot of paperwork. And there is ongoing maintenance – for instance, you must file your annual accounts at Companies House every year.
  • Privacy :
    For a fee, anyone can look at your company accounts (although many companies can file abbreviated accounts which provide very little information) or check your shareholder’s identities.
  • Guarantees :
    Shareholders and directors may have to personally guarantee contracts entered into with lenders or suppliers.
  • Closure :
    Winding up a company is more complex and expensive than sole trading or a partnership.


Basis of Charge

Value Added Tax (VAT) is charged on the supply of goods and services in the UK and on the import of goods and certain services into the UK.

Special rules are applied to transactions within the European Union (EU), these are outlined below.

Taxable Supplies

All supplies of goods and services to UK and overseas customers are taxable supplies, apart from items which are specifically exempt (see below). Goods taken for own use are also classified as taxable supplies valued at cost.

Business gifts are taxable supplies except where the gift is valued at 50 or less and does not form part of a series of gifts to the same person. These gifts would be valued at cost. Vat is not normally charged on gifts of services.

There are currently three VAT rates, a standard rate of 17%, a zero rate, and a reduced rate of 5%.

Zero rate

There are 16 groups of zero rated items, the main ones are

  • Food, except when supplied in the course of catering or a non essential item such as chocolate,
    ice cream, alcoholic and fruit drinks and crisps.
  • Water and sewerage services except where supplied for industrial purposes.
  • Books (but not stationery)
  • Construction of buildings for residential or charitable use.
  • Children’s clothing and footwear.
  • Transport (but not taxis or hire cars)
  • Drugs and medicines on prescriptions
  • Exports

Reduced rate

Items currently charged at the reduced rate of 5% are

  • Fuel and power for domestic and charitable use
  • Installation of energy saving materials eg. Loft insulation in residential or charitable buildings
  • Grant funded installation of central heating systems, water heating systems and home security goods
  • Children’s car seats
  • Women’s sanitary products
  • Certain residential conversions, renovations and alterations.

Exempt Supplies

Broadly speaking supplies categorised as exempt are

  • Betting, lotteries and Gaming (Except takings amusement machines).
  • Burial and Cremation
  • Charity fund raising events
  • Education
  • Financial services
  • Health and welfare services
  • Insurance
  • Investment gold
  • Land
  • Postal services
  • Supplies of goods on which no input tax was recoverable
  • Supplies to members by trade unions and professional bodies

If a business makes only exempt supplies it does not charge vat but cannot recover input tax charged to it therefore its prices need to be set to recover the vat suffered.

Some businesses may make both taxable and exempt supplies and are therefore partially exempt. A business that is partially exempt can still recover all of the input tax despite the exempt supplies IF the input on exempt supplies does not exceed 50% of the total input tax and does not exceed “625 per month on average.

If these limits are exceeded there are rules to determine how much of your input tax can be recovered:-

All of the input tax directly attributable to taxable supplies can be recovered but none of the input tax attributable to exempt supplies.

As to the remainder of the input tax that relates to overheads, under the standard method input tax is deductible in the proportion that taxable supplies bear to total supplies.

Who should register?

Businesses are liable to register for VAT if the taxable turnover of the business in the last 12 months exceeds £83,000 unless they can satisfy Customs and Excise that their taxable turnover in the next 12 months will not exceed the de-registration threshold of £81,000.

The business must notify Customs and Excise within 30 days of the end of the month in which the yearly limit was exceeded and will be registered and required to charge VAT on all your invoices from the beginning of the next month.

There is a penalty of 15% of the net tax due for failure to register, with a minimum penalty of £50.
Registration is done on form VAT1 which can be ordered from Customs and Excise, downloaded from their website at   or complete the form online.

Voluntary Registration

A business can voluntarily register if it makes taxable supplies even though it may be below the statutory limits.

Once it is registered it will charge VAT on its supplies (Invoices) and reclaim input tax that it is charged on purchases. This would be beneficial if all or the majority of its customers are VAT registered but not if it deals mainly with the general public. By registering it will have the administrative burden of complying with the VAT scheme and therefore this may not be worthwhile even if there is a cost advantage.

Intending Trader Registration

If you have started in business but are not currently making taxable supplies but intend to do so in the future, you may apply for registration and Customs and Excise are required to register. This enables you to recover any input tax even though no supplies are being made.

Cancelling a VAT Registration

There are a number of situations where a business can apply to cancel its VAT registration

  • The business stops making taxable supplies
  • The legal status of the business changes e.g. a sole trader becomes a limited company. The old registration will be cancelled and a new one applied for. The new legal entity can retain the previous registration number by completing form VAT68. (If the new legal entity is a partnerships it will also need to complete form VAT2)
  • The business can satisfy Customs and Excise that its taxable turnover in the next twelve months will be below the current VAT de-registration threshold of £81,000.
  • The tax-exclusive turnover of the business in the past 12 months has been below the current registration threshold of £83,000.
  • The business turnover exceeds the registration threshold but its taxable supplies are wholly or mainly zero-rated
  • If the business is sold and the new owner does not wish to retain the registration number

VAT Schemes

There are a number of schemes available to simplify VAT administration.

Optional Flat Rate Scheme

Businesses with a taxable VAT exclusive annual taxable turnover of up to £150,000 and whose total VAT exclusive turnover (including the value of exempt and non taxable income) does not exceed £187,500 can join the flat rate scheme. (subject to certain exclusions , such as those using the second hand or capital goods scheme, those convicted of VAT offences and group companies).

Instead of calculating input and output VAT those using the scheme calculate the VAT payable by applying the appropriate flat rate for their trade sector to the VAT inclusive value of their business supplies in the period including reduced rate, zero rate and exempt supplies.

Supplies are invoiced in the normal way showing the normal VAT rate.

The business retains any VAT charged to its customers but does not make a separate claim for input tax charged as this is covered by the flat rate.

If the business acquires capital goods in the period with a tax inclusive value of more than £2000, it may recover the input tax on them. If the goods are subsequently sold, VAT must be accounted for at the full rate not the reduced rate.

Once the scheme has been joined a business may stay on this scheme providing its turnover does not exceed £225000 in any 12 month period. If a business expects to exceed £225000 turnover in any 3 month period it must leave the scheme immediately.

Who cannot Join the scheme?

You cannot join the scheme if any of the following apply:

  • The business is not registered for VAT
  • The business is using the second-hand margin scheme
  • The business is required to operate the tour operators margin scheme
  • The business is required to operate the Capital Goods Scheme for certain capital items
  • The flat rate scheme has stopped being used in the 12 months prior to the date of a new application
  • In the last 12 months before an application the business has either accepted a compound penalty or been convicted of an offence in connection with VAT or been assessed with a penalty for any conduct involving dishonesty
  • The business is or has been, within the last 24 months, registered for VAT in the name of either
  • a VAT group
  • a division

The business is associated with another in any of the following ways

  • A business is under the dominant influence of another
  • Two businesses have close financial, economic and organisational links or
  • Another company has the right to direct the business applying
  • In practice the business complies with the directions given by another. The test involved here is one of commercial reality rather than legal.


  • There is no need to separate out gross, VAT and net in the business accounts
  • No problems in deciding what input tax can and cannot be reclaimed
  • Less chance of making mistakes in calculating VAT liability
  • Less work doing the books
  • Can be used in conjunction with the annual accounting scheme


  • The business cannot claim input tax so it loses some cash flow in VAT on stock waiting to be sold
  • The lesser requirements to keep VAT records make it more difficult to continue to monitor whether the scheme is still advantageous

Annual Accounting Scheme

Businesses with an annual tax exclusive turnover of up to £1350000 that have been registered for at least one year may apply to join the annual accounting scheme. The business agrees a provisional VAT liability with Customs and Excise based on the previous year.

Businesses with a taxable turnover of £150,000 or less can join the scheme as soon as they are registered with their provisional figure being estimated.

For businesses with a turnover above £150,000, the agreed provisional liability is divided by ten. Nine equal monthly payments are made by direct debit starting four months after the beginning of the year.

Businesses with a turnover below £150,000 can make quarterly payments that are 25% of the provisional VAT liability.

The annual return and the balancing payment has to be made within two months of the year end. Once a company joins the scheme it can remain in it unless its annual turnover reaches £1600000.


  • An eligible business can choose an annual accounting year which best suits its business needs
  • The annual VAT return and balancing payment will be due two months after the end of the annual accounting period instead of one with the standard scheme.
  • A business will only have one vat return to complete rather than four on the standard scheme.
  • The business can measure its cash flow with more certainty by paying a known set amount each month rather than having the potential surprise of a large bill at any time.


  • Traders who are due a repayment will not need to make monthly repayments but will not receive a repayment until their return is made
  • The business still has to maintain its VAT records (compare with flat rate scheme)

Cash Accounting

Providing a business is up to date with its tax returns, has paid over all of their VAT or have made arrangements to pay the outstanding VAT by installments and has a turnover which is not more than £660,000, it can improve its cash flow by not having to account for its output tax until the cash is received. On the other hand input tax is not recoverable until suppliers are paid.

Businesses cannot use the scheme for hire purchase, goods and services invoiced in advance of the supply or where payment is not due for more than six months after the invoice date.


If a taxpayer fails to make a return or Customs and Excise considers that the return is incomplete or incorrect, they may issue assessments of the amount of VAT due. These assessments must normally be issued before the expiry of two years from the end of the return period or within twelve months after the facts become known, whichever is the later.

Where a taxpayer has died, no assessment can be made later than three years after death nor relate to a period more than three years before death.

Where an assessment has been made the taxpayer must still provide a return and should notify Customs and Excise within 30 days where the correct amount payable exceeds the assessment.

Interest, Penalties And Surcharges

In addition to their right to commence criminal proceedings (for other than regulatory offences), Customs and Excise can charge interest on overdue tax and can impose penalties for

  • Late, incorrect or incomplete returns
  • For failure to notify liability to be registered for VAT
  • Issuing unauthorised VAT invoices
  • Failure to keep proper records (which have to be retained for six years

European Union Single Market

Supplies of goods between EU countries are not regarded as imports and exports but as acquisitions and supplies. If a supplier in another EU country supplies goods totaling more than £70,000 in a calendar year to non-registered persons in the UK (known as distance selling), the supplier is liable to register in the UK within 30 days of exceeding the limit.

If a UK non-registered business makes acquisitions from other EU countries in excess of the stipulated threshold, the registration and de-registration provisions stated above apply.

When a VAT registered person acquires goods in the UK from an EU supplier, output tax must be accounted for on the next VAT return, but wit an equivalent amount being deducted as input tax on the same return.

Supplies by a UK supplier to VAT registered EU customers are zero rated. A UK seller must state both his own and his customers VAT number on VAT invoices. In addition to his normal VAT return the supplier has to submit a return of all supplies to VAT registered customers in the EU for each calendar quarter (known as an EC Sales list)