Do I Need to Register as a Sole Trader with Companies House?

Register a limited company for just £93.99 including government fee + £800 Gifts Apply Now

When starting a new venture, a person can become self-employed or incorporate a limited company. A Sole Proprietorship or Sole Trader is the simplest type of business structure envisaged for individuals wishing to operate a small business without much hassle in terms of administration.
As a sole trader, you are not legally obligated to register your company with Companies House, however, you have to register for Self-Assessment with Her Majesty Revenue and Customs (HMRC) informing them that you are self-employed. 

But why don’t sole traders register with Companies House? This article will focus on the responsibilities of sole proprietors towards HMRC, why they don’t register their business, and when it becomes necessary to register a company with Companies House.

Who is a sole trader?

A sole trader is a person who establishes and operates a business solely on his or her own. A sole trader has total authority in the business and makes all business decisions. A sole trader earns all the profits, accountable for all the losses and debts incurred by the business. Additionally, there is no legal distinction between the owner and the business, meaning the owner’s assets can be used to cover business debts.

As a sole trader, you have several important responsibilities to ensure your business operates legally and efficiently. The duties of a sole proprietor include the following:

•         Register with HM Revenue and Customs: Registering self-employed status with HMRC is important to ensure compliance with the Income Tax and National Insurance responsibilities.
•         Keeping company records: All revenue and costs incurred by any business must be kept in detailed records as that information is critical in ensuring that the fliers do their annual self-assessment tax return transparently as required.
•         Submit Self-Assessment tax returns: You are required to file an annual self-assessment tax return with HMRC, which should include a detailed account of your income and expenses.
•         Pay taxes and National Insurance Contributions: Ensure that you pay Income Tax on your profits, along with Class 2 and Class 4 National Insurance contributions.
•         Register for VAT: If your annual revenue surpasses £90,000, it is mandatory to register for Value Added Tax (VAT) and to submit quarterly VAT returns.
•         Adhere to business regulations: It is important to ensure that your business complies with all applicable laws and regulations, including those related to health and safety.
•         Acquire necessary licenses and insurance: Depending on the nature of your business, you may be required to obtain specific licenses and insurance to operate legally.

Why don’t sole traders register with Companies House?

Sole traders don’t register with Companies House because this registration is specifically for limited companies and limited liability partnerships (LLPs) in the UK. Here are reasons why sole traders do not register their business:

– Different ways of doing business: A sole trader and a private limited company have a different way of operating their business. This is because a sole trader is a business as opposed to a limited company which is a separate legal identity on its own and distinct from proprietors of the business’ owners.

– Simplicity in operations: It is much easier and more convenient to run sole entrepreneurship as there is less paperwork involved. They only can be registered with the HM Revenue and Customs (HMRC) and, unlike other business structures, do not have to bother themselves with the registration with the Companies House and its requirements.

Cost: There are registration and other costs for compliance with Companies House that are incurred by a company which sole traders do not incur.

Limited liability: Sole traders do not enjoy limited liability as they take all personal risks of incurring their business obligations. On the other hand, limited companies provide limited liability protection and that is why they are required to register with Companies House.

When does a sole trader register their business with Companies House?

A sole trader can register their business with Companies House if they decide to incorporate their business into a limited company or limited liability partnerships (LLPs).

Here are some instances wherein an individual proprietor may look to register with Companies House:

Growth and expansion: If the business is prospering and the sole trader wishes to pull in investors or increase capital, registering the business as a limited liability company will be a good decision.

Limited liability: To protect personal assets, a sole trader might choose to incorporate, as a limited company offers limited liability protection.

Professional image: Incorporating a limited company can enhance the business’s professional image and credibility.

Tax efficiency: In some cases, operating as a limited company can be more tax-efficient, depending on the business’s profits and financial situation.

Financial backing: It is easier to secure business loans and investments as a limited company since its structure allows the company’s finances to remain separate from personal funds.

To secure new clients/ investors: When trying to win a potential client or secure new contracts, you will have to shift to a limited company which will increase your professional image.

Why should sole traders register their business as a limited company?

The registration of businesses in the form of limited liability companies has greater advantages than running a business as a sole trader. These are some of the reasons that make an entrepreneur register his/her business as a limited company:

Limited liability: Since a company possesses its legal identity distinct from its owners, business owners, directors, and shareholders cannot be held accountable for any debts that may be incurred by the company or legal action taken against the company.

Tax efficiency: Limited companies are usually more tax efficient. The owners can pay themselves in the form of salary and dividends thus reducing the tax rate they are subject to in comparison to the income tax paid by sole traders about their profits.

Professional image: Conducting business as a limited company can significantly bolster the organisation’s credibility and professionalism. Clients and suppliers may perceive a limited company as more established and trustworthy.

Investment opportunities: Limited companies typically have an easier time raising capital by issuing shares, which can facilitate growth and expansion.

Succession planning: A limited company makes it easier for the transfer of proprietary interest thus, succession planning or sales of a business becomes an advantage. 

Distinct finance: The earnings of a limited company are kept separate from the personal income of its members which helps to make the accounting and financial management processes quite easier.

If you opt for this path, after registering the limited company, you must take the following actions:

•         Notify HMRC regarding the dormant status of the limited company
•         File an annual confirmation statement

Does a sole trader need to register with Companies House? The answer is no, however, they will have to register with HMRC for Self-Assessment to inform them that they are self-employed. As much as being a sole trader has perks, registering a limited or an LLP with Companies House comes with several advantages from limited liability to tax efficiency.

When your sole trader business has outgrown its capacity, then that is the right time to consider transforming your business into a limited company. More so, we have a simple process done online where you enter your company details and we do all the necessary paperwork and submit them to the Companies House for approval.

For more information, contact us at [email protected].