The United Kingdom encourages and promotes entrepreneurship. According to the Best Countries for Entrepreneurs report done by the US News & World Report, the UK is the fourth-best country in the world for entrepreneurs.
Starting a business in the United Kingdom can be difficult, especially if you are not a European Union citizen. In this article, we’ll cover all you need to know about starting a business in the United Kingdom, including the various forms of company structures, tax, administration, and if you require a visa.
Business Types in the UK
In the United Kingdom, there is a range of different business types, and you’ll need to pick the one that best fits your company’s structure.
- Sole Trader
- Limited Company
- Limited Liability Partnership
The legal business structure you choose will have an impact on many aspects of your firm, including taxation, personal liability, and the amount of administrative work you must perform. There is no “one size fits all” solution to the structure because enterprises come in a variety of functions and sizes.
As a sole trader, you’re going to be a self-employed person and operate your firm.
After you’ve paid your taxes, you can keep all of your business profits. You are individually liable for any losses your company incurs. When it comes to running and naming your company, you’ll be required to follow certain guidelines.
Your duties and responsibilities as a sole trader include the following:
- Keep track of the revenue and expenses
- File a self-assessment tax return every year
- Pay income tax
- Pay Class 2 and Class 4 national insurance
If your annual turnover exceeds £85,000, you must register for VAT. You can also register voluntarily if it benefits you, such as if you sell to other VAT-registered enterprises and want to reclaim the VAT.
Choosing a Business Name
You can either trade under your name or adopt a different name for your company. If you wish to prevent others from trading under your business name, you’ll need to register your name as a trademark.
A partnership is the most straightforward approach for two or more people to run a company jointly.
Partnership business structure has similar duties to sole trader structure with the exception that you have one or more business partners. When you establish a partnership business, you must have a formal agreement describing the agreed-upon split of earnings, losses, liabilities, and ownership between you.
When setting up a business partnership, you’ll need to:
- Choose a name
- Choose a nominated partner
- Register with HM Revenue and Customs (HMRC)
The ‘nominated partner’ is in charge of administering the partnership’s tax returns and keeping track of its finances.
A limited business is a private company that requires an appointed director to administer the company in addition to any shareholders. The finances of a limited company are independent of your finances as the founder.
If you are the sole person employed by the company, you can still register as a limited company by appointing yourself as the director.
Director’s responsibilities include the following:
- Abide by the company’s standards, as outlined in its articles of incorporation
- Keep track of the company’s activities and report any changes
- File the accounts and company tax returns
- Pay Corporation Tax
You can hire employees but a director is still legally responsible for the company’s records, accounts, and performance.
The company has its bank account and is subject to corporate tax because it is a separate legal entity. Corporation tax can be registered at the same time as your business is registered with Companies House, but unlike income tax, all of a business’s profits are taxed, therefore there is no tax-free exemption. The government, on the other hand, allows for expenses and deductions that might reduce the amount of corporate tax owed.
Limited Liability Partnership (LLP)
To conduct a business with two or more members, you can form a limited liability partnership (LLP). An individual or a company, termed as a ‘corporate member,’ can be a member.
As in a ‘regular’ business partnership, each member pays tax on their share of the profits but is not personally liable for any obligations the business cannot pay.
The first steps to forming an LLP include the following:
- Choosing a company name
- Having a registered address
- Having at least two members
- Having an agreement that states how the LLP will be run
- Registering the LLP with Companies House
Members’ Duties and Responsibilities
At all times, you must have at least two “designated members” who will have more obligations than other members.
Responsibilities of Designated Members
- Registering the business with HMRC
- Registering the partnership for VAT if the annual sales are expected to be more than £85,000
- Appointing an auditor (if necessary)
- Keeping accounting records
- Sending yearly accounts to Companies House
- Send confirmation statement to Companies House
If designated members fail to meet their legal requirements, they may be prosecuted. It is also possible to remove the LLP from the register.
Responsibilities of All Members
- Carrying out the duties stated in the LLP agreement
- Registering with HMRC
In some cases, your company may be registered as one of the above-mentioned structures yet operate under a different sub-category, such as:
Franchise: A franchise is a corporation that already exists and has a solid reputation. You own the rights to use the established company’s business plan and operate under their brand if you own a franchise.
Freelancer: A freelancer is someone who uses their skills and experience to deliver a service (such as writing or photography). This type of self-employment works by accumulating clients for whom you will execute work.
Social Enterprise: A social enterprise is a company that works to assist society or the environment in some way. To ensure that they continue to work toward societal or environmental goals, these enterprises must be transparent in sharing the earnings that they reinvest.
Charity: A charity’s aim is similar to that of a social enterprise in that it must function for the greater good of society. It is, however, unique in that its profits are derived from donations.
Every business has its own set of rules and criteria. Before proceeding, you may want to get professional assistance.
Steps To Start a Business in the UK
If you to start a business in the UK as a foreigner, you’ll need to take the following steps:
1. Check your legal status
EU citizens who lived in the United Kingdom before January 1, 2021, may be eligible for the EU Settlement Scheme, however, most foreign people will need to apply for a work visa before they’re able to start a business in the country.
2. Apply for a visa
You should apply for a visa ahead of time if you require one. The start-up visa and the innovator visa are two types of visas available to entrepreneurs.
3. Write your business plan
A business plan is required for UK entrepreneurs. This will assist you in determining whether or not your business ideas are likely to thrive and be long-term viable.
4. Choose your business structure
Before you start a business in the UK, you must select the business structure that best represents your company.
5. Decide on a company name and address
If you’re a sole trader, you’re free to use your name. When it comes to registering your UK business for tax purposes and entering the company register, you’ll need an address.
Only a few companies are required to register their names, but others can do so as a trademark to prevent others from trading under the same name.
You must appoint directors and a company secretary, calculate your shares and shareholders, write your memorandum and articles of organization, open a separate bank account, and register for corporation tax if you’re forming a limited business.
6. Register with HM Revenue and Customs
For tax purposes, you must register your UK business with HMRC. Companies House requires limited companies to register.
7. Review any additional rules that apply to your line of business
There may be extra requirements depending on the type of your UK business, such as permits or licenses. Check if there are additional rules to observe to avoid any problems in the future.
Business Visas in the UK
As long as you have the right to work and live in the United Kingdom, you can work as a freelancer, be self-employed, or start a business. Below UK visa types can be of help on your route to starting your own business in the UK.
This visa is for people who desire to start a new business in the United Kingdom. If you want to apply for this visa type, you have to make sure your business idea is unique and it’s endorsed by an approved body.
To be eligible, you must have at least £50,000 in investment funds and be able to demonstrate where this money came from.
You should also have sufficient personal funds to meet your needs. Before applying for, extending, or switching to this visa, you’ll need to show that you’ve had at least £1,270 in your bank account for 28 days.
Another requirement is that you’re also able to communicate in English at level B2 of the Common European Framework of Reference for Languages (CEFR).
The visa costs £1,021 and is valid for three years. If you meet the requirements, you can renew your visa for another three years.
If you have an endorsement from a UK higher education institution or an organization that has a history of assisting UK entrepreneurs, you can apply for a start-up visa.
You’ll have to show that your business idea is fresh, unique, and has expansion potential. The application fees start from £363.
A start-up visa allows you to stay in the UK for two years. A start-up visa cannot be extended but you can switch to another visa while you’re in the UK.
Global Talent Visa
If you’re a leader either in academia or research, arts and culture, or digital technology, you can apply for a Global Talent Visa in the UK. The application cost is £608.
Under this category, you can work in the UK for up to five years.
Establishing a Branch in the UK as a Foreign Company
Companies House requires foreign companies that want to do business in the UK or form a branch to register as an overseas company.
If you own a company in another country and want to operate a branch in the United Kingdom, you must fill out form OS IN01 and send it to Companies House. The cost of registering is £20.
Managing Your Company in the United Kingdom
For tax and auditing purposes, all UK businesses must keep a record of their accounts. Although self-employed freelancers are not required to keep official accounts, they must keep track of their earnings and tax-deductible costs.
Business Bank Account
A separate UK business bank account is required for many businesses in the UK, except for sole traders and partnerships. But for the sake of keeping accounting operations simple, it’s a good idea to open a separate bank account.
For tax purposes, all UK enterprises and entrepreneurs must register with HMRC and are responsible for filing their tax returns.
Profits earned by self-employed sole traders and partnerships are taxed. Corporation Tax registration is required for limited companies and overseas companies with UK branches. Corporation Tax is levied at a rate of 20% on profits, minus any deductions or exemptions.
If the following conditions apply, you must also register for VAT:
- Your expected VAT taxable turnover is more than £85,000 in the next 30-day period
- You had a VAT taxable turnover of more than £85,000 in the previous 12 months
Depending on the types of goods or services you sell and where you offer them, you may need to register too.
Business insurance is required to stay within the law and protect your business. The following are the most common types of UK business insurances:
Employers’ Liability Insurance
All companies with employees are required to have this insurance, which covers any claims made by employees who become ill or injured as a result of their job for you.
Public Liability Insurance
If you cause injury (including death) to a third party or damage to their property, public liability insurance protects your business from compensation claims and legal fees. Public liability insurance protects you both on-site and off-site. It can pay for legal fees associated with defending claims as well as compensation if your company is determined to be at fault.
Professional Indemnity Insurance
Professional indemnity insurance, commonly known as PI insurance, is a sort of company insurance that protects you against financial and reputational harm if you make a mistake in a piece of work for a customer.
Employing Staff in the UK
If you’re launching a business in the UK that will employ people, you’ll need to register as an employer with HMRC and get employers liability insurance.
You can hire foreign workers in your UK company if they have legal permission to work in the country. When hiring employees, you must follow minimum wage laws and pay social security and pension contributions per the law.
Rules for EU Citizens
Because the Brexit transition period concluded on December 31, 2020, new laws took effect on January 1, 2021.
This means that EU, Switzerland, Norway, Iceland, or Liechtenstein citizens who want to start a business in the UK will need to apply for a visa just like non-EU residents.
Several initiatives specializing in different areas, such as finances, taxation, and business planning, can provide assistance and support for your UK business. The cost of starting a business in the United Kingdom varies based on several factors, however, there are many resources available in the form of UK business grants and loans.
If you’re unsure about something, seek professional legal or financial assistance.
Frequently Asked Questions
Can I open my own business in the UK as a sole trader?
Yes, if you meet the criteria, you can start up a business in the UK as a sole trader. This type of business structure is the most simple.
Do I have to pay income tax if I open a limited company in the UK?
If your company’s business structure falls under a limited company, you’ll need to pay corporation tax, instead of income tax.