Whether you’re just starting up your childcare business, or wondering if making the leap from sole trader to a limited company is right for you, there’s a lot to think about.
The legal structure you choose will have an impact on important areas of your business, such as how much tax you pay, what paperwork you need to fill out and the level of risk to your personal assets.
We’ll explain what being registered as a sole trader or a limited company will mean for you.
If you're an individual and run your own business, you can register as a sole trader. When you're self-employed, you own all the assets and have the right to make all decisions affecting the business.
Self-Assessment Tax Returns
Every year, you’ll need to fill out and submit a Self-Assessment Tax Return to HMRC. Keep all your documentation organised, like receipts, invoices and proof of expenses, as you’ll need these.
HMRC offers a calculator to help you budget for your tax payments as a sole trader.
You are personally liable for any debts of the business and responsible for any losses your business makes. Liability insurance can provide cover if you’re being sued for negligence or in connection with accidents, but it doesn’t cover your trading losses.
A sole trader’s name and business address must appear on communications such as letters, orders, invoices and receipts. If you have a business premises where customer or suppliers have access, notice should be displayed here too. This doesn’t apply if you trade under you name, but does if you have a trading name, for example Jenny’s Day Care.
You can keep all your business’ profits after you’ve paid tax and National Insurance contributions on them.
Working for yourself doesn’t mean you have to work alone! Sole traders can employ staff - you’ll just need to register as an employer with HMRC, get familiar with payroll and PAYE, and check your insurance covers you for any employees.
One of the main differences between being a sole trader and setting up a limited company is that you need to register with Companies House as well as HMRC.
As a director, you run the company as the business’ agents, and you can have more than one director. Limited companies often operate under a trading name, which is usually the name of the business.
A company limited by shares operates for the purpose of profit and keeps any profits after paying tax. On the other hand, a company limited by guarantee is not for profit and invests all profits back into the company.
Running a limited company comes with a lot more forms to fill out than if you are a sole trader. Under the Companies Act 2006, you’ll have requirements to maintain registers, minutes and file annual returns. It also sets out directors’ duties.
Some of this information will also be available to the public on Companies House.
The company is liable for its debts as it has a legal personality separate from directors or shareholders, so the only risk is price paid for shares. This means your business’ finances will be separate from your own personal finances.
All of your company stationery, including website and emails, should have:
- Company name and trading name if applicable
- Place of registration
- Registered number
- Address of registered office
Even if you're only employing yourself as the director, you still need to register with HMRC as an employer.
What about a partnership?
A partnership is where you and one or more individuals (or a limited company) share responsibility for running the business. It can be a great way to combine skills. For example, you might handle the day to day running of the business whilst your partner works behind the scenes.
If you enter into a partnership, all partners are jointly liable for costs and losses. Sometimes starting a partnership is informal, but it’s always best to get a partnership agreement drawn up.
Factors like decision making, rights to ownership and distribution of assets or property should all be set out in your agreement.
Much like a sole trader, business affairs such as taxes, accounts and profits are not available to the public.
Whether you set up as a sole trader, company or partnership, you will also need to consider whether you are required to register for VAT if your income exceeds the VAT threshold.
Supplies of childcare by a “state-regulated” (e.g. Ofsted, CIW or Childminder agency) provider are exempt from VAT, but if you have other income, this may require you to become VAT registered and thereafter pay a proportion of your income to HMRC as VAT.
Download a free guide to small business taxes from FSB, which includes the process of registering your business, the taxes you need to be aware of and key dates for your diary.
About the Federation of Small Businesses
Established over 45 years ago to help small businesses and the self-employed achieve their ambitions, FSB is a non-profit organisation that’s led by our members, for our members.