Do Sole Traders Need To Register With Companies House?

Are you unsure if sole trader registration involves companies house? We can help.

Choosing the proper business structure is a crucial first step for aspiring entrepreneurs. In the UK, navigating the options between limited companies and sole traders can be confusing, especially regarding registration processes.

At Your Company Formations, we understand the complexities of business formation. While Companies House oversees limited company registrations, sole traders have a different path.

Sole Traders: Registering with HMRC for Self-Assessment

Unlike limited companies that register with Companies House, sole traders have a more straightforward process. You will not need to interact with Companies House at all. Instead, sole traders in the UK must register for tax with HM Revenue & Customs (HMRC).

This registration process is known as Self-Assessment. Through Self-Assessment, you will declare your business income and pay any taxes due at the end of each financial year directly to HMRC.

When Might a Sole Trader Need to Use Companies House?

While sole traders typically do not interact with Companies House, there are a couple of scenarios where it might be beneficial:

1: Protecting Your Business Name:

Unlike limited companies that gain exclusive use of their registered name, sole trader names have minimal protection. Another business could use the same name for their organisation by forming a limited company.

To prevent this, some sole traders choose to register as a limited company solely to secure their desired business name, which would prevent anyone else from using it. This limited company would not engage in any trading activity but would exist solely to hold the name.

Important considerations after registering a limited company for name protection:

• Inform HMRC that the limited company is dormant.
• File a confirmation statement annually.
• File dormant company accounts annually.

Your Company Formations can assist you with this process through our Dormant Company Accounts service.

2: Transitioning to a Limited Company:

Many sole traders eventually choose to convert their businesses into limited companies. This is often driven by the benefits limited companies offer, including:

• Financial Protection: A key difference is the separation of personal and business finances. With a sole trader, any business debts could impact your personal assets. A limited company, however, shields shareholders' (usually the owner) personal finances from liability. Shareholders are only liable for the unpaid value of their shares, often just £1.
• Enhanced Credibility: Some businesses prefer working exclusively with limited companies, as they are viewed as more established entities.
• Tax Efficiency: Limited companies can offer a more tax-efficient structure, potentially saving the owner money.
• Funding Opportunities: Limited companies may find securing funding from lenders and investors easier due to their perceived stability and structure.

Can One Person Become a Limited Company?

Absolutely! Contrary to the name, a single person can form and operate a limited company. You can fulfil both the director and shareholder roles within the company structure. This allows you to enjoy the benefits of limited liability protection and a more professional image, even as a solo entrepreneur.

If you are considering converting your sole trader business into a limited company, Your Company Formations can guide you through the process.

Dormant Company Accounts Explained: Keeping Your Non-Trading Business Compliant

As mentioned above, you can protect your business name and prevent it from being registered and used by anyone else by forming a limited company and making it dormant until you are ready to use it. Here are the key points:

• Dormant companies can file simpler accounts under the Companies Act (2006).
• The deadline for filing is nine months after your company's accounting period ends, with a £100 penalty for late submissions.
• Your Company Formations can efficiently prepare and submit your dormant company accounts, typically within two business days, for new companies that have yet to trade.
• We handle the AA01 form completion and ensure it adheres to FRS 102 accounting standards.
• This service includes confirmation of submission and notification upon Companies House approval.

Further Considerations:

• Common reasons for dormancy include restructuring, illness, or pre-launch phases.
• Activities like paying dividends, employees, or invoices indicate non-dormant status and require regular accounts filing.
• Up-to-date payments to suppliers and HMRC are crucial, and dormant businesses should still file annual confirmation statements.
• HMRC requires separate notification of dormancy to avoid annual tax returns.

Our Expertise:

Your Company Formations can guide you through the dormant account filing process. Contact us for assistance or to learn more about our services.

Conclusion

In summary, while sole traders operate independently and do not require registration with Companies House, this interaction may be necessary in a couple of scenarios. These include reserving a desired business name through limited company formation or restructuring your sole trader business into a limited company to benefit from its advantages.

We trust this explanation has been informative. If you have any further questions about sole traders, limited companies, or the registration process, please do not hesitate to contact us. Our team is here to assist you on your entrepreneurial journey.

Further recommended reading:

As a contractor, freelancer, or small business owner, you may have considered the benefits of operating through a limited company. Read our post, How to Name Your Business, to learn about the importance of your trading name.

Learn how to sort out how you will take payments from your customers or business clients by reading our post, A Comprehensive Guide For Accepting Payments Online.