So, you want to be your own boss, answer to no-one and work when you want? If so, setting up as a sole trader might be the right move for you.
Working for yourself for the first time can be a daunting proposition. There is a huge amount of advice out there, much of which can leave you feeling overwhelmed and discouraged. But fear not – here is a simple guide to what’s what, so that you can decide whether setting up as a sole trader is right for you.
What is a sole trader?
Setting up as a sole trader is the simplest and most popular way to start up a new business as there is very little to stop you from just getting going, but what does being a sole trader mean? Simply put, a sole trader is a self-employed individual who both owns and runs their own business. Call your business what you will, as a sole trader you are the business.
Whats the difference between being a sole trader and self-employed?
Many consider being a sole trader and being self-employed as the same thing. Actually, the two terms are like different sides of the same coin. If you’re self-employed, the chances are that you’re a sole trader. If you’re a sole trader, then you’re definitely also self-employed.
Being a sole trader means that you own and run your business yourself, with no other owners or appointed directors. You have full legal responsibility for the success of your business, receiving all of its profits, and being personally responsible for any financial losses, or legal actions brought against it. By setting up as a sole trader, you can also trade under your own name without registering it, which is one less piece of red tape to contend with!
If you’re self-employed, that just means that you’re your own boss, and that you own and run your own business, being responsible for its success or failure. You don’t receive holiday pay, or sick pay, and you don’t pay PAYE. The two terms are (in broad terms) two sides of the same coin; with the first (sole trader) referring to the corporate structure of your business and its legal standing, and the second (self-employed) referring to you as an individual, and your own employment status, including the fact that you (as sole trader and owner of your business) pay your own national insurance and income tax (as your own employee), via self-assessment.
Some may find that setting up a limited company is too big a step for them, especially if they are new to starting a business or just testing the waters of a business idea they have. Setting up as a sole trader gives you the ability to set up a business without the same level of commitment and responsibility of that of a limited company owner. However,there are plenty of advantages of setting up as a sole trader, but its main advantages include:
Setting up as a sole trader is quick and simple
To become a sole trader you don’t to register the company with Companies House and you can trade as almost any name you wish as long as it doesn’t infringe copyright or trademarks of others. As you don’t need to go through a registration process, you can pretty much start trading as soon as you like. However, certain types of work (such as restaurants, child care, taxi drivers, etc) may need a licence or permission from your local authority. In addition to this you will just need to tell HMRC that you’re self-employed and operating your business as a sole trader for tax purposes.
Be your own boss and work how you want
As a sole trader you have complete control over your business to run it in any way you want. What you say, goes. You only need to worry about keeping your clients and customers happy. You don’t answer to anyone else and this means you can work however you like, giving you the flexibility to work around your lifestyle and other responsibilities or commitments (such as child care).
Simplified accounting and form filling
As a new business owner, accounting may not be your strength or something you relish. Regardless of the business structure you choose, you will have to do some degree of accounting and form filling. As a sole trader, this process is far simpler than as a limited company as you only need to submit an annual personal Self-Assessment Tax Return which will include details of profits from the trading you’ve undertaken as a sole trader. You will need to keep a record of all income and expenditure but other than that, its a relatively simple process.
Despite its clear advantages, setting up as a sole trader does come with some major downsides vs that of a limited company – a big one being personal liability. That is if your business builds up debt then you as an individual also have that debt which could put your home and any other assets at risk, so it’s worth careful consideration whether this is the right move for you or whether setting up a limited company is more appropriate.
How do I register as a sole trader?
As a sole trader, you’ll need to register with HMRC as Self-Employed, and you’ll need to report your work-related income and outgoings. It’s advisable to keep copies of all your VAT receipts for these purposes. Whilst you may not be VAT registered, some of your business expenditure will not require you to pay VAT, and some types of expenditure are tax-deductable (meaning that you’ll have to pay less tax to HMRC overall).
All this paperwork may sound a little daunting, and if that’s really not something you’re comfortable with doing, then it’s wise to find yourself an accountant and start keeping your receipts. But if you’re computer literate and don’t mind working with figures, you might want to try starting a simple spreadsheet each financial year, including a column to mark down different types of expenditure and whether you paid VAT on the purchases. That can also be a good way to get a ballpark forecast of expected business spend, and expected income for forthcoming clients on the horizon.
How do I pay tax when setting up as a sole trader?
As a sole trader you pay income tax based on your business profits, along with National Insurance contributions (NICs) through a self assessment tax return. This is a simple process of completing and submitting a form each year to HMRC that calculates what you owe in tax and then paying the required amount. Once you’re registered as self-employed you’ll get a letter, usually in April, telling you when you need to complete your first self-assessment form.
Do I need to pay VAT as a sole trader?
As a sole trader you won’t legally need to register for VAT until your profit reaches £85,000 – which is a hefty sum that most won’t ever need to worry about. However, it may be that you’d prefer to do so, if you’re selling services or goods to clients, and want to be able to charge them VAT, yourself. There’s a wealth of information and guides on this on the www.gov.uk website, or if you’ve taken on an accountant you could take advice directly from them.
Where can I get help as a sole trader?
As a new business, your local Council may have resources available to help new businesses that could be helpful for you. Things like startup schemes, networking groups, grants and loans, or other help for new businesses can be available via local authorities. It’s worth a few hours or minutes, trawling your council’s website, or picking up the phone, and picking the brain of one of your local business unit officers. If you can’t find anything from your council, then there could be other public/private sector partnerships and organisations that might be more helpful. Try using Google to get a start, and find out what’s out there. Your local community centre or college might also have business/startup courses that would be useful – if not immediately then you might consider putting them onto your forecast spend for further down the line.
Depending on the type of business you run, it’s likely to be a good idea for you to register with any professional associations or guilds for your trade or service. Membership of a professional association is not only reputationally a good move, but you could benefit from other members’ experience and connections, not to mention things like significant reductions on your professional indemnity insurance, which can be negotiated by your professional association.
Do I need a premises as a sole trader?
If you own your home, then you may be able to trade from your home address, if that’s suitable for your line of work. Always check local licensing regulations (again, with your local council) and ensure that you obtain any necessary permissions first, before you start publishing your business address on Yell.com or Google. You will also want to check the terms of your mortgage agreement and home insurance. If you rent your home, then check your lease carefully to see whether you have permission to trade from your home address. If you don’t and you’re on good terms with your landlord, it might be worth checking to see whether they’ll grant you written (or emailed) permission to do so. Otherwise, you’ll probably find yourself in the position of needing to rent a business premises.
The good news is that unless your work requires it, you won’t need to go to the expense of renting a whole building – there are plenty of individual offices/suites to let out there, at a range of prices and terms. Check out property websites like Zoopla. When starting up, it’s definitely worth going for flexibility, and finding somewhere with reasonable service charges, and low/no business rates payable. Until you’re established, you won’t know for sure whether the location of that premises is right for you and your clients, so there’s little point in committing yourself for the long-term until you have more concrete experience to draw on.
Choosing the right business structure is crucial to a good start for your business as it paves the way for smooth operation. Every situation is different and there is no one size fits all, but if reading the above on setting up as a sole trader still leaves you unsure as to whether it is for you, you may want to look at the advantages of being a limited company can provide you so you can make an informed and balanced decision.