(Information for UK- domiciled merchants only)
You've spotted the gap in the market, weighed up the competition, researched your customers and done the finances. You're ready to get your online business up and running. Now you have to form a company.
E-business or not, the start-up process is much the same. In the UK, it's generally straightforward. If you are taking an existing company online, you'll also need to make sure your online store complies with Distance Selling Legislation - see E-commerce Regulations for more information.
For a new e-business, you'll need to register the right legal structure to comply with HM Revenue & Customs (HMRC) and other authorities.
As a small start-up business, the extra financial cost of becoming a limited company meant we chose to register as a partnership. As a dotcom we didn’t think not being a limited company would diminish our brand status in any way and we plan to register as a limited company when our turnover is sufficient to apply to register for VAT.
Gary Cook www.mywoodentoy.com
The following legal structures are most common:
| Legal Type | Features | Registering |
|---|---|---|
| Sole Trader | If you have no employees, registering as a sole trader is the simplest and cheapest way to run a business. There's far less paperwork than for setting up a limited company. You only pay income tax on the company's profits and not on the salary you pay yourself. And you can turn into a limited company at a later date - for example once the business has grown and/or has reached the VAT threshold (see VAT for more information). You'll need to fill in yearly self-assessment tax forms and declare your earnings annually.
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You won't need lawyers or accountants to set up as a sole trader - just register with HMRC. Call HMRC's Newly Self-Employed Helpline - on 0845 915 4515 - for advice on registering. If you don't register within three months of starting to trade you can face a fine. |
| Partnership | A partnership is similar to a sole trader and each partner pays income tax on their percentage of income from the partnership.
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Each partner registers as self-employed with HMRC (as above). Draw up a partnership agreement between you. It's not a legal requirement, but it's worth clarifying the length of the partnership and the responsibilities of the partners. Without a partnership agreement, the contribution, liabilities and assets of each partner is considered to be equal. |
| Limited Company | Setting up as a limited company means the company's finances are separate from your personal finances. It's worth considering if the business is higher risk or involves a large amount of initial capital.
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Use a lawyer or accountant to set up as a limited company - it's more complicated than Sole Trader or Partnership. You'll need to register with Companies House - their contact number is 0870 33 33 636. |
It's important to find out - before you start trading - as much as possible about the legal issues that may affect your business.
Business Link, part of the Department for Trade and Industry, provides a handy interactive tool to help you choose the right legal structure for your business. It's also worth speaking to an accountant to help you make your decision.
