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Legal requirements to become a sole trader company: obligations to register a business as a sole trader, and how to comply with regulations after a limited company registration. If you're thinking about setting up a business by yourself, there are a couple of ways you can do it.
Become as a sole trader: registering as a sole trader is relatively simple, as long as you follow the rules laid out by HMRC. In order to comply with the legal requirements, you must have registered with HMRC as a sole trader by 05 October in the second year you trade. For example, if you set up as a sole trader in the tax year 2020-2021, you must have registered by 05 October 2021. You may be subject to a penalty fine if you miss this deadline. Your responsibilities towards tax as a sole trader are to send a self-assessment tax return to HMRC every year, pay income tax on any profits made by your business, and pay National Insurance.
Register as a limited company: a private company is a useful way to keep your business separate from your personal life, if you are a sole trader. The company becomes a legal entity in its own right, and its finances become separated from your finances. Additionally, banks and other creditors, and suppliers tend to view a limited company more favourably than a sole trader, so credit arrangements are easier to make. If you register as a limited company, all debts become limited by shares or limited by guarantee, if it is a not-for-profit company. Most limited companies are limited by shares.
A limited company's profit belongs to it (not a single person) after it has paid corporation tax, so it can pay those profits to its shareholders, even if you are the only shareholder. The debts and fiscal responsibilities belong to the limited company, so as a shareholder, your personal debts are limited to the value of the shares that you own but haven't yet paid for. Even as a private company director, you are not personally responsible for your business debts, as long as the law hasn’t been broken.
A limited company must provide a registered business address so that Companies House and HMRC can send official correspondence to you. If you work from home, or in very small premises, and would prefer not to have the risk of inspectors, creditors, or members of the public turning up at your home, Coddan can provide an official registered business address for this purpose.
Your limited company has to be registered at Companies House, and each year, your annual accounts should be filed there. If you make any taxable income on top of profit, you must inform HMRC of this by sending in a Corporation Tax return. This tax must be paid within 9 months of the year-end. Any employees of the sole-trader company must pay income tax and National Insurance on what they earn.