Are you considering expanding into the United Kingdom? The UK offers a great consumer market, has a modern and comprehensive business infrastructure, and boasts a highly skilled talent pool, all of which make it a great first stop when expanding into Europe. When expanding your business into the United Kingdom, one of the first things you will have to do is decide what type of business entity you want to create, including whether or not you will create a new entity. This article will go through the different types of business entities available in the UK, explain some of the advantages and disadvantages of each, and how to set up or register a business of each type.
There are three main types of business entities available in the UK. These entities are very similar to US entities. Keep in mind, you are not required to create a new entity at all. If you want to expand into and carry out business from a UK address without setting up a UK business, you can and are required to register your overseas company in the UK. Because this is such an important decision, we recommend that you seek the advice of an attorney and/or an accountant.
Sole Trader
If you work for yourself, you are classified as a self-employed sole trader. A sole trade is comparable to a sole proprietor in the United States. As a sole trader, you run your own business, which means you can keep all of your business profits, but you are also personally responsible for all business losses. As a sole trader, you are permitted to have employees. You are required to pay personal income tax on business profits, therefore, the business itself is not taxed on profits. If you expect to make more than a specific threshold amount, you must register for value added tax (VAT).
Although this is one of the most popular business entities in the UK, it is likely not the most appropriate choice for fast growing startups or SMBs expanding abroad. Because a sole trade is so similar to a sole proprietor in the US, the advantages and disadvantages almost mirror that of a US sole proprietorship.
Advantages
- Owner has complete control over the business
- Owner keeps profits
- Owner, rather than the business, is taxed
Disadvantages
- Owner has unlimited personal liability (for debts, obligations, and employee actions)
- It’s harder to raise money because there are no shares to offer and the sole trader’s personal assets are often the only thing on the line
- Owner is solely responsible for the business
Sole traders must register their business with the HM Revenue and Customs (HMRC), the UK tax authority, and follow specific rules on running and naming the business. You can register for and file your Self Assessment tax return online. Along with taxes, you must also file for and pay National Insurance. If you expect to make over £83,000 a year, you are required to register for and collect VAT. You can register for VAT online.
Business Partnership
A UK business partnership is like a US partnership, in which you and your partner(s) share profits, losses, and personal responsibility for the business. Each partner pays taxes on his share of profits personally. In an ‘ordinary’ business partnership, the partners are responsible for their share of losses. However, you can set up a limited partnership or a limited liability partnership if you do not want personal responsibility for business losses. Furthermore, a partner does not have to be a person, for example, a limited company can be a partner. Partnerships in Scotland, known as firms, are different than those in the rest of the UK in that they have a legal personality separate from the individual partners.
Advantages
- Easy to form, manage, and run
- Shared responsibility (among the partners)
Disadvantages
- Partners have personal liability (in an ordinary partnership)
- Disagreements among partners can arise and cause problems
- Partners share profits
- Personal tax rates are often higher than company tax rates
To set up a business partnership you must choose a name and a ‘nominated partner’ who will manage business tax returns and keep business records. Partnerships must be registered with HMRC, which can be done online. All partners must pay income tax on their share of the business’ profits, which can also be done online. Business partnerships are also required to register for and collect VAT if they expect to make more than £83,000 per year.. There are different rules for limited partnerships and limited liability partnerships.
Limited Company
A limited company is most similar to a US corporation. A limited company is the most common entity foreign businesses choose when expanding into the UK. A limited company is a business that is separate from you as an individual, therefore, everything, including profits and losses, belongs to the company. A limited company has members, which are the people (or organizations) that own shares in the company. Directors are responsible for running the company and often own shares, although they are not required to. Being a director comes with many legal responsibilities. There are different types of limited companies, including private and public. Public limited companies are generally set up for a very specific reason and are not very common. The discussion and information below pertains to private limited companies.
Advantages
- Limited liability for members (shareholders)
- Easier to raise funds: Limited companies are preferred by investors because they can give the company money in exchange for stock.
- Business tax treatment: Limited companies file taxes separately from their owners (business income tax), which is generally a lower (often much lower) rate than personal income tax.
Disadvantages
- Slightly more costly and time-consuming to form and operate: Limited companies cost a little more to create, if you do not do it yourself. However, the cost is not prohibitive and shouldn’t be a deterrent. Online companies generally charge between £10-60 plus VAT for the formation, and if you use a law firm, accountant, or agent, it will cost a bit more. You can learn how to do it yourself with the information and links below. Limited companies also have more filing requirements, which take 2-10 days to complete if you don’t make any mistakes.
- More paperwork and recordkeeping required: Limited companies are more highly regulated, so that means more paperwork and recordkeeping is required.
To set up a private limited company, you must register your company with Companies House, a process called ‘incorporation’. In order to register a limited company you will need the following:
- A company name
- A company address
- At least one director
- At least one shareholder and details of the company’s shares
- Shareholder agreement to create the company, including the written rules (aka ‘memorandum and articles of association’
- Details of all people who have significant control (more than 25% of share or voting rights) over the company
You may be able to register your company online. You can also register through the mail or through a registered agent. Once you have registered, Companies House will send you a ‘certificate of incorporation’ and a 10-digit Unique Taxpayer Reference (UTR). After you have registered your company, you must register for taxes, which can also be done online. You will need your UTR to register. You must register for taxes within 3 months. Limited companies that expect to make over £83,000 per year are also required to register for and collect VAT. You should register for VAT right away because you may need your VAT number for others things, such as Amazon store registration.
Although a limited company is most likely the appropriate business entity for startups and SMBs expanding into the UK, having an understanding of your options is important. You should think through the advantages and disadvantages as they apply to your specific business and strongly consider speaking with an expert who can advise you.
Related Articles And Content You Might Like:
Hiring And Visa Options In The UK
Globig Virtual Trade Tour London
The UK government has great resources available. Gov.uk has compiled helpful information to assist in your overseas expansion, including how to decide what (if any) UK entity is right for you, how to create that entity, and where and how to register your overseas business.
About Globig
If you have international offices with employees and business teams focused on foreign markets, the Globig platform is a must for saving valuable time and money, and for managing risk.
{{cta(‘4835880f-bd99-432f-9a80-b3e5f8e03cca’)}}
