How to Set Up an Entity In the UK
Throughout history, the United Kingdom (UK) has championed global trade.
Today, the situation is no different. Indeed, the World Bank touts the UK as one of the best places in the world to start a business.
It’s no surprise that entrepreneurship is flourishing.
If you’re looking to set up your own company in the UK, you’ll have to navigate the administrative and legal system before successfully incorporating your own company.
This article will explain everything you need to know about setting up an entity in the UK.
This article at a glance
If you’re a business owner, sole trader, or freelancer looking to set up an entity in the UK, the processes and paperwork can be confusing.
Step 1: Choose an entity structure
Before setting up a new entity in the UK, you will have to choose the type of legal entity. Additionally, you should make sure that you are clear about your legal obligations.
There are 4 main types of entity structure, with various liability and tax implications for owners and shareholders. Your chosen entity structure will affect everything — your company’s daily operations, the paperwork required, taxes, your funding ability, and your personal assets.
1. Sole trader
3. Limited liability company (Ltd)
4. Limited liability partnership (LLP)
Let’s go into more detail about each of these entity structures.
A sole trader is an individual running a company alone, with no legal formalities. There is no distinction between the ownership and management of the business since the sole trader personally owns all the assets with full control over the company. However, the sole trader is also liable for the company’s losses.
A partnership involves two or more partners. If you’re working with reliable individuals, a partnership might be feasible. Imagine partnerships as an extended model of the sole trader entity structure — one where two individuals join forces to build a business.
You will have to pick a company name and a nominated partner and register with Her Majesty’s Revenue and Customs (HMRC). Your chosen partner can either be a limited company or a legal person. This 'nominated partner' will be responsible for record-keeping and management of the partnership’s tax returns.
Limited liability company (Ltd)
This is the most popular entity structure in the UK. The business is a legal entity that is separate from the individuals managing it. Furthermore, this entity lets you raise capital with shares, with limited liability protection given to shareholders. To set up a limited company, you will need at least one director and one shareholder.
Limited liability partnership (LLP)
A limited liability partnership doesn’t limit the number of partners, but at least two ‘designated members' are required to set up the partnership. All members are able to participate in the company’s management, and their liabilities are limited to the amount they contribute. A written LLP agreement will have to be drawn up, outlining members' profit share and responsibilities. This entity structure is usually driven by profit and favoured in industries like law and accountancy.
Let’s make things simple. Here are the advantages and disadvantages at a glance:
Entity structure Description Advantages Disadvantages Sole trader An individual running the business, entitled to all company assets but also responsible for any losses incurred Minimal paperwork
Full management of the company
Doesn’t require much capital to set up Liable for company’s losses
Lack of credibility in the market
Higher taxes incurred Partnership Two or more partners working together, involved in management responsibilities, as well as profits
Minimal barrier to entry and minimal paperwork
Doesn’t require lots of capital
Extended structure of the sole trader model, with an additional partner Partnership dissolution can be challenging
Lack of credibility in the market
Higher taxes incurred Limited Liability Company (Ltd) Legal entity separate from owners managing it Most popular entity structure in the UK, with market credibility
Favourable tax regime Expected transparency, with annual financial reports and accounts published in public domain Required amount of paperwork can be tedious
Limited Liability Partnership (LLP) No limited number of partners but requires at least two members to form. Some or all partners have limited liabilities.
Advantages of LLP and Ltd combined
Responsibility of members can be clearly outlined in LLP agreement Partners must reveal their income
Profit taxed as income Step 2: Submit the required documents to Companies House
An entity structure is a formal set of agreements protected by law with other involved parties — from ownership, responsibility, participation in decision-making, and paying debts. Once you have decided on your entity structure, incorporate your company by registering with Companies House.
1. Register as a Sole Trader
Simply submit a Self Assessment tax return to HMRC and make sure you pay the correct amount of income tax. You will require a National Insurance number. UK-based foreigners with a right to work can apply.
2. Set up a Partnership
Submit two documents:
- LP5 form
- Registration fee of £20
3. Register as a Limited liability company (Ltd)
You will have to submit four documents:
- IN01 form
- Registration fee of £12
- Articles of Association
- Memorandum of Association
4. Register as a Limited liability partnership (LLP)
You will have to submit three documents:
- LL IN01 form
- Registration fee of £40
- LLP agreement
Step 3: File company tax returns
All businesses and entrepreneurs in the UK are required to register with HMRC for tax returns.
Sole traders and partnerships will have to pay taxes on business profits, which can be calculated here. On the other hand, limited liability companies and limited liability partnerships with UK branches will have to register for corporation tax. Corporation tax is charged at a rate of 20% on profits, after deducting any relief and allowances.
If your annual turnover is more than £83,000, you must register for value-added tax (VAT). Moreover, if your business assets are sold for a profit, you might have to pay capital gains tax.
Setting up an entity in the UK doesn’t have to be challenging
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