Why is company registration important?

Although sole traders and freelancers rarely feel the need to form a limited company, it can be a good idea. A company formation does not mean you are obliged to become registered. Many associations, partnerships and sole trading enterprises function perfectly well never using the term ‘limited’ in their title. That said, if you would like your company to become limited in terms of its liability, then this can certainly offer certain advantages. Official registration in the UK is not a long process. Nor is it particularly costly in the grand scheme of things. However, there are long-lasting consequences and, as such, no non-registered company should proceed with registration unless all the key decision-makers involved are fully aware of them.

So, why is company registration helpful to business owners and why might they do it? To answer this question, it is important to consider the advantages and disadvantages of company registration, and what do you need to do if you want to proceed.

The advantages of company incorporation

Many people who are self-employed pay less tax if they are a director of a limited company in the UK. This is because you can pay yourself with dividends rather than assessing the company profits as the basis for your income tax. In addition, National Insurance contributions are settled differently for company directors compared to sole traders.

The next big plus point is that the debt liability of a limited business is separated from the owner of it. Sole traders might have to sell personal assets to pay business debts but registered company directors don’t face the same rules which means they can trade with greater confidence.

In some cases, company formations take place simply to give customers greater confidence. In certain business-to-business environments, a private company that is limited gives potential customers a feeling of greater professionalism.

In addition, share certificates can be issued following a company registration. More crucially, share certificates can have different values to suit different types of shareholders. It also becomes legally simpler for a business which has gone through the incorporation process to be passed from one owner to another and to document the process for having done so.

The disadvantages of company incorporation

You are not as free to use the company name you might want if your non-profit association or enterprise applies for registration. Simply put, if the name you want is already taken, then you won’t be able to make use of it yourself.

Secondly, there is an application fee that will need to be paid to Companies House, the organisation that is where all company registers are held. Although it is modest, some entrepreneurs pay an agent to do their application for them which pushes the cost up.

Additionally, certain company records will be made publicly available on the company registers at Companies House. This might only detail the most basic financial data and your office address. However, the statutory requirement to list some details of limited companies on a public company register puts some businesspeople off.

In the UK, formations of limited businesses also have an impact on the way that accounts must be kept. Sole traders can use the simplest accounting methods but company records of limited companies must include accrual accounts for customer purchases as well as supplier invoices.

Finally, anyone who decides that a registered business formation is for them should know that corporation tax will apply. This form of UK business taxation does not apply to sole trader enterprises until a full company formation process is completed. However, the rules concerning VAT are not affected. VAT applies in the same way in the UK whether you are registered or not.

How to complete the registration process

Firstly, as a business principal, you don’t need to conduct your own firm’s incorporation process yourself. You can use an authorised agent who will prepare the necessary documents needed by Companies House. He or she will subsequently produce the printed certificate of your company register with the government which allows you to use ‘Ltd’ after your company name. In fairness, agent’s fees can be worth it if you have complex internal contracts between partners and shareholders or you have a professional association that is non-standard in some way. However, for most business owners, the process is relatively simple.

To register a private company with Companies House, all you need to do is to head to the government agency’s website. Postal applications are also accepted but there is a greater charge. This is set at £40 as of 2019-20 for organisations which choose to send a paper document instead of completing the online process.

Firstly, you must choose a name that is not already on the company registers and which does not match an official trademark, nor that is close to it. You can search for what is allowed and what is not before proceeding. Using ‘Ltd’ at the end of your name – or ‘LLP’ in the case of partnerships – is a consequential requirement of law following incorporation. However, you can be exempt from this if, for example, your shareholders are not paid.

All business which apply for company registration will need to supply a confirmation statement, usually referred to as ‘articles of association’. This document lists all of the interested parties that have a stake in the business, including people who might be non-residents of the UK. In many cases, the confirmation statement simply states that the business is in the sole ownership of a single individual. It is important that the articles of association are detailed truthfully, or you could face investigation by the authorities. Finally, you will be obliged to list all of the company directors, even if it is just one, plus another nominated individual who will serve as the company secretary.