Setting up as a Sole Trader
Introduction
When starting a business, it can be an exciting time, but there are lots of decisions to be made and you need to know you have dealt with the legalities. Choosing to trade as a sole trader is a popular choice for many entrepreneurs and it is the simplest and most straightforward business structure available. Here we will walk you through the steps involved in setting up as a sole trader and discuss the benefits and responsibilities that come with this business model.
What is a sole trader?
A sole trader is a self-employed individual who owns and operates their business. Unlike a limited company, there’s no legal distinction between you and your business. This means that you are personally responsible for all aspects of the business, including any debts or liabilities. However, it also means that you keep all the profits after tax.
How to register as a sole trader
To officially become a sole trader, you need to register with HM Revenue and Customs (HMRC). This process is relatively simple:
Register Online: Visit the HMRC website and sign up for self-assessment. This process will require your personal details, National Insurance (NI) number, and information about your business activities.
Choose a Business Name: As a sole trader, you can trade under your own name or choose a business name. If you opt for a business name, make sure it's unique and not trademarked by someone else.
Get a Unique Taxpayer Reference (UTR): After registering, HMRC will issue you a Unique Taxpayer Reference (UTR), which you’ll need when filing your tax returns.
What are my responsibilities as a sole trader?
While being a sole trader offers many freedoms, it also comes with significant responsibilities:
Tax and National Insurance: As a sole trader, you’re required to pay Income Tax on your profits and make Class 2 (only required on a voluntary basis if your profits are below the small profits threshold) and Class 4 National Insurance contributions (NICs). It’s essential to keep accurate records of your income and expenses to ensure that you can correctly calculate your tax liability.
VAT Registration: If your rolling 12 month turnover exceeds the VAT threshold (currently £90,000), you must register for VAT. Even if your turnover is below this amount, you can voluntarily register, which might be beneficial in some cases.
Business Records: Keeping detailed financial records is crucial. This includes all invoices, receipts, and any other documents related to your business income and expenses. These records must be kept for at least five years after the 31 January deadline of the relevant tax year.
What are the pros and cons of being a sole trader?
Pros:
Full Control: As a sole trader, you have complete control over your business decisions.
Simple Setup: The process is quick, with minimal paperwork compared to other business structures.
Keep All Profits: After paying taxes, all remaining profits are yours.
Cons:
Unlimited Liability: You’re personally liable for any business debts, which could put your personal assets at risk.
Limited Growth Potential: Sole traders may face challenges in raising capital or expanding the business compared to limited companies.
In conclusion
Setting up as a sole trader is a straightforward and flexible way to start your own business. It allows you to be your own boss, with minimal bureaucracy. However, it's essential to understand the responsibilities that come with it, particularly in terms of tax and liability. By carefully managing your finances, maintaining accurate records, and considering appropriate insurance, you can build a successful business as a sole trader.
We are here to help you with everything from registering with HMRC to making sure you have the right accounting systems in place.