All legal profit-seeking businesses fall into one of two broad categories: unincorporated and incorporated. The difference is that incorporated forms have what is called a ‘separate legal personality’. The business is considered its own entity under the law.
This means that those in charge of unincorporated businesses bear full responsibility for the company’s debts. The people running incorporated businesses, on the other hand, have what is called ‘limited liability’ – they only stand to lose what they have already invested.
To incorporate or not?
The most important difference between being self-employed and running a limited company is liability and the amount you are taxed. As explained above, self-employed individuals have full responsibility for any losses, while shareholders in a limited company only lose as much as they paid (or promised to pay) for their shares.
Company income is not taxed at the same level as personal income tax paid by employees and people that are self-employed. At under £50,000 annual income, corporate tax is only 1% lower than the standard 20%.
But above £50,270 your personal tax rate jumps to 40%. Even the highest corporate tax rate is only 25%, which means gaining income from a limited company more tax efficient no matter how much you earn.
Company formation agents
Company formation agents are independent, professional firms that specialise in company formation and registration with Companies House.
We at CIGMA Accounting specialise in helping sole traders incorporate their businesses. If you’re looking to take advantage of the lower tax rates for companies, our CIMA-registered accountants would be happy to assist with company formation in London and across the UK.
Contact us here or scroll to the end of this page to get a free quote.
These businesses are not considered as separate entities from the owners. This means that owners have full responsibility, i.e. ‘liability’, for the company’s debts and legal obligations. Owners are considered self-employed and must submit annual self-assessment tax returns.
This is the simplest way to set up and run a business. Ownership and control of the business rests solely with a single person. Regulation for the Sole Trader is minimal. There is no requirement to write a formal constitution for the business, and no need to register with the government’s Company House.
Profits are treated as personal income which is subject to income tax as well as national insurance contributions. Being a Sole Trader is risky by nature, as the owner has unlimited personal liability for the business’ debts and contracts.
Of course they also own all of the business’ assets, and can employ staff. It is unlikely that being a Sole Trader is best for any businesses that need more than small amounts of external investment. Being unincorporated puts limits on borrowing money and raising money by selling shares.
Unincorporated Associations are groups of people that agree, i.e. ‘contract’, to work together for a specific purpose. These businesses usually have a constitution setting out its purpose, rules, and members.
They are usually run by a kind of management committee, all of whom have unlimited liability (unless specifically made immune in the constitution). They are subject to the same restrictions as the Sole Trader.
A partnership is a relatively simple way for two or more people to set up a business aimed at making profit. While formal agreement isn’t needed for a partnership to form, it is usual to draw up a legally binding ‘partnership agreement’. This sets out things like the capital put in by each member, and how profits will be shared.
Partners share all the risks and responsibilities of the business. Partners do not need to be individual people, they can also be any ‘legal person’ – such as a company. In these cases, the partners have extra tax and reporting obligations.
This is not to be confused with the similarly named, but incorporated, Limited Liability Partnership. These businesses have two kinds of partners: general partners and limited partners.
Limited partners may not be involved in the management of the business and their liability is limited to the amount they have already invested. Unlike other unincorporated businesses, Limited Partnerships must register with Companies House.
Trusts are essentially legal tools for holding assets with the aim to separate legal ownership from economic interest. A trust holds assets on behold of another person or business, and is run by a small group of trustees.
Trusts usually just manage assets and do not give out profits. They are often used alongside unincorporated associations which can’t own property themselves.
Incorporated forms of business are considered their own legal persons. This gives the owners of the business limited liability for its debts and obligations, but they are subject to stricter regulations.
The Limited Company is the most common kind of legal business, and is subject to corporate tax rather than personal income tax. They must have two constitutional documents:
- A Memorandum, which records the fact that the founding members wish to form a company together. This cannot be amended.
- Articles of Association, which sets out legally binding rules regarding decision-making, ownership, and profit sharing.
A Limited Company is owned by members, who have all invested in the business. The company’s finances are separate from the members’ personal finances. There are two ways to determine members: shares and guarantees.
Most companies are Limited by Shares. This means members own one or more shares in the company and are known as shareholders. If the company must be liquidated, the shareholders only stand to lose the amount still unpaid on shares. Shareholders also have voting rights, which may depend on the kind of share they own.
A company can also be Limited by Guarantee. This is where members give a guarantee to pay a set amount if the company fails and goes into liquidation.
The day to day management of a company, performed by a ‘director’ or board of directors, is in principle separate from its ownership. However, directors can also be members, meaning that the simplest Limited Company is a single member who owns and directs the whole company.
Limited Companies have a greater ability to finance themselves as they can use their assets as securities for loans. The stricter regulation on Limited Companies includes accountability to both shareholders and the public, as well as the need to provide annual reports to Companies House.
While Private Limited Companies are most common, Public Limited Companies are also possible. These companies can sell shares to the public, but attract even more regulation. This is to protect the public investor who is usually much less involved in managing the business than a private investor.
Limited Liability Partnership
A Limited Liability Partnership (LLP) is similar to a normal partnership, but with limited liability for the partners. Each member must register as self-employed with the HMRC and submit annual self-assessments. At least two members must be ‘designated members’, who are responsible for appointing auditors and filing accounts at Companies House.
LLPs have much more freedom than companies in arranging their internal affairs, making decisions, and sharing profits.
Community Interest Company
A Community Interest Company (CIC) is a form of company (limited by shares or guarantee) created for ‘social enterprises’. They want to use their profits and assets for community benefit. CICs have the flexibility and limited liability of companies, but also special features to make sure they serve the interest of the community:
- CICs must submit statements and evidence every year to satisfy the ‘community interest test’.
- CICs have an ‘asset lock’ to restrict the transfer of the company’s assets.
- CICs have caps on profits paid to members
WHAT DO YOU NEED TO INCORPORATE YOUR BUSINESS?
In order to make your application to Companies House, you will need the following:
- A company name
- Your business activity (SIC) code. You can find it here
- A registered office address. CIGMA accounting offers a service for using our address if you do not have a registered office.
- List of shareholders or guarantors
- List of directors
- List of people with significant control (PSCs)
- Details about your capital investments
is a company registration number the same as a VAT number?
No, your Company Registration Number (CRN) is not the same as your VAT registration number (VRN). Neither of these are to be confused with your Unique Taxpayer Reference number (UTR). The UTR is a 10-digit number issues by HMRC. The CRN is an 8-digit number assigned by Companies House to all new limited companies or LLPs.
What is a company registration number?
The Company Registration Number (CRN) is an 8-digit number assigned by Companies House to all new limited companies or LLPs.
You can find your CRN on your company’s Certificate of Incorporation or by using this online tool from Companies House.
What is a vat registration number?
A VAT registration number contains 9 digits and is issued by HMRC. You must register for VAT is your total VAT taxable annual turnover is greater than £85,000. You can check wich products and services are exempt from VAT here.
Need Assistance from an Accountant?
No matter your type of business, CIGMA Accounting can help manage your finances and tax obligations. Our organisation is registered with the Chartered Institute of Management Accounting (CIMA), and our accountants specialise in personal finance and cooperating with business management.
We believe small businesses can change the world, and love helping them work in the most tax-efficient way.
Reach out to us by completing this form and one of our staff members will get in touch within one business day.