It is very easy to start a business in England. There are few formalities and many individuals start a business from their own homes. An individual in business is called a Sole Trade; two or more individuals in business together are a Partnership, and the usual form of company is a company limited by shares.
- A sole trader can trade under his or her name, or under a business name
- All the rights and obligations of the business are those of the sole trader
- There is no limit of liability
- The sole trader is responsible for his own accounts, and he, or his accountant must file a tax return each year stating his taxable profits
- Similar to an individual, but two or more individuals collaborate together in a Partnership
- The Partnership can be unwritten, or can be covered by a formal legal document
- The liabilities of each Partner are unlimited
- Each Partner has full joint-and-several liability for all the debts of the business
Company Limited by Shares (LTD)
- A new corporate entity in law
- Usually limited by shares, but can be limited by guarantee, eg charities
- Number of Shareholders and Directors can range from a minimum of one person upwards, without limit
- Minimum share capital £1, no maximum
- Must be formally incorporated, and must submit annual returns to Companies House
- Is liable to Corporation Tax on its taxable profits
- Can pay dividends to Shareholders
- Liability limited to share capital, and individual Shareholders/Directors have no liability unless they have personally guaranteed the debts
Company Limited by Shares (PLC)
- A large company, often one listed on the Stock Exchange
- Minimum share capital is £50,000
- Special rules apply to share listings etc
- May be governed by Stock Exchange requirements as well as Company Act laws
Setting up a Company
If an individual, or several individuals, want to set up a new company for business purposes, it can be done quite quickly and easily.
- Companies can be bought “off the shelf” for around £200, or can be purpose-built for not much more
- A purpose-built company can choose a name, but it must not be a name which is already in existence. Certain words are not allowed, such as “Royal” without special permission
- When it is formed, the company can start business straight away. Only certain businesses need additional licensing, eg consumer credit, sale of alcohol, food registration etc
Taxation on individuals and partnerships is at Income Tax rates. The starting income for payment of tax at 20% is £11,000, and income over £43,000 is taxed at 40%. A higher rate of 45% applies to income above £150,000. In addition to Income Tax, earnings are normally charged to National Insurance of 12% above a certain threshold. However, rents, interest and dividends do not attract NI. To counter tax avoidance, dividends are now taxed at an additional rate in excess of £5,000.
Companies are taxed at a flat rate of 20% on their profits and capital gains. It is often advantageous for business to change into companies to achieve lower tax rates.
A shareholder agreement is like a partnership agreement, except it is between shareholders in a limited company. Typically, a shareholder agreement enables a minority shareholder to ensure that he has a right to be a Director, a right to receive dividends, and an exit strategy if he wants to sell his shares.
Employment laws are quite relaxed in England and Wales, and generally employees do not have security until they have been employed for at least two years. Many lower paid workers are also employed on so-called zero hour contracts, which means they can only work when asked to do so. So, the labour market is quite flexible in England and Wales, and it is not so expensive as in other jurisdictions to take on and dismiss employees.
Currently, an employee who wishes to make a claim on dismissal must pay an up-front fee to bring his claim. This has deterred many employees from making a claim, and has reduced the number of employment claim cases for lawyers.
Scotland and Northern Ireland
The rules are very similar in Scotland and Northern Ireland, but they each have their own company registration office, and their laws are different. They have solicitors practicing in the special laws and procedures which apply in their jurisdictions.
Doing business in England and Wales is not difficult. It is easy to start up, the regulatory environment is quite relaxed, and so are the employment laws. It is important to get advice at the beginning to make sure you start with the right business structure.
Publisher: Graham & Rosen Solicitors