Setting up as a self-employed sole trader is the simplest way to start a business. Paperwork is generally minimal, accounting and record-keeping is fairly straightforward and the benefits of being your own boss are numerous.
When establishing a business on your own for the first time then, being a sole trader is the sensible legal entity to start.
How to become a sole trader
There’s not really a difference between being a sole trader and being self-employed. ‘Sole trader’ describes your business structure, while ‘self-employed’ is a way of saying that you don’t work for an employer or pay tax through PAYE. As a sole trader, you are the legal entity in your own right, employing people and entering into contracts. You have no limited liability; your own assets are at risk should the business fail.
The first step to becoming a sole trader is to choose a name. Make sure you have chosen a name that’s not being used by any other business. If you do then they could stop you using it. With this in mind, it is worth considering registering your name as a trade mark to prevent other people from using it.
You can trade under your own name, or come up with a suitable business name. Bear in mind that if you decide to use a business name, you must make sure that your business stationery displays your own name as well as the trading name of the business. And be careful that the name does not contain words that people might find offensive or misleading.
Have a business plan and a cash flow forecast which will allow you to manage your business. Make sure you are generating enough cash to pay your expenses and tax liabilities.
Tax matters and VAT
As a sole trader, you will have to pay income tax on any profits your business makes. You must fill in a self-assessment tax return each year, detailing your income and expenses. This will change to once a quarter after 2019.
Make sure you register as self-employed with HM Revenue & Customs as soon as you start up in business on your own. If you fail to do this within the first three full months of becoming self-employed, you may have to pay a penalty of £100. You can download a form to register as self-employed from the HMRC website.
If your business has (or you expect it to have) a turnover of more than £85,000 a year, you need to apply for a VAT number, you must charge your customers VAT, complete the relevant VAT returns and send VAT payments to. Always check the current the current level for registration with HMRC.
Watch our video on how to be a sole trader
Remember you will have national insurance to pay for yourself and anyone you employ. Again, check what’s required with HMRC.
Contrary to perceived wisdom, sole traders can take on employees just like any other business. Therefore, you will need contracts of employment and collect income tax and NICs from them and pay these to HMRC. You will therefore need to operate a Pay As You Earn (PAYE) payroll system. You may also have to look at pension provision. Are you ensured for any claims by employees?
Keeping tax records
You must remember to keep all the financial records you will need to fill in your tax returns. It’s a good idea to store all your receipts and transaction records in a safe place and in date order. The more organised you are with your paperwork from day one, the easier it will be to compile your return when the time comes.
Remember as someone who is self-employed you have certain rules for paying tax. Tax is paid in January and July but this will change from April 2019.
Special licences and permissions
Although anyone can set up in business as a sole trader, for certain types of work you may need a licence or permission from your local authority. Restaurants, childminders, cab drivers and street traders, for example, all need to have a local authority licence. In addition, your qualifications and business premises may be inspected beforehand to ensure you comply with certain regulations. Do you have permission to operate as a business from your premises.
The sole trader checklist
In summary, the following are issues you need to consider. Have you:
- Registered as self-employed with HM Revenue & Customs?
- Obtained any permits and planning permission that you may need from your local authority?
- Found out from your local authority whether you need to pay business rates?
- Put the necessary insurance, public liability in place?
- Contacted HM Revenue & Customs to register for VAT if necessary? Set up a financial record-keeping system?
- Made sure that your own name is on all your business stationery, including letters, invoices, receipts and cheques?
- Set terms and conditions for your customers. Such as when your invoices are to be paid?
If you can answer ‘yes’ to all these questions, congratulations – you’re in business as a self-employed sole trader.
This article was updated by Ben Lobel and Nick Johnson, managing partner of Glaisyers Solicitors LLP, on August 16th, 2018.