How to set up in business as a Sole Trader

For information only. To discuss the best structure for your small business you should seek guidance from a qualified accountant or from your legal adviser.

It’s not necessary to set up a formal Ltd company to be in business.  Most small businesses start life as a sole trader and many continue with that status indefinitely.

However there are some circumstances under which you are better advised to set up a limited company. 
See our article how to set up and run a limited company for more information on what’s involved.

What is a Sole Trader?

If you decide being a sole trader is the best option for you it is a very quick and simple process.  A simple definition of a Sole Trader is 'a person who is the sole owner and decision maker of a business'. 

As a Sole Trader you will be classed as self-employed and will pay personal income tax on any profits made by your business.

You will need to submit an annual tax return each year showing your income from self-employment and your business expenses.  You can take your personal allowance into account unless it has already been used.  See Tax basics for sole traders for more information.  If you still have income from paid employment, your income from self-employment must be declared and the necessary tax and NI paid.

You will pay Class 2 and Class 4 National Insurance contributions unless your income is very low (below £5,075 in 2010/2011) in which case you can apply for an exemption.  Class 2 payments (£2.40 per week in 2010/2011) can either be paid by monthly direct debit or you can choose to be billed quarterly.  Class 4 contributions will be calculated and paid as part of your annual tax return.

Contrary to popular belief, you can employ staff  but you will need to set up a formal payroll system to manage the tax and National Insurance (including employers’ National Insurance) contributions.

You will need to register for VAT if your turnover (not profit) reaches the threshold, or is likely to very soon.  For more information on VAT see our article VAT basics.

How to set up a Sole Trader business

• Inform HM Revenue and Customs of your intention to become self-employed.  You MUST do this within 3 months otherwise you will be fined.  The easiest way to register is to call the newly self-employed helpline on 08459 15 45 15.
• Choose a business name – for advice on choosing a company name, and guidance on a few restrictions you need to be aware of see our article on Choosing a business name.
• Have a method of invoicing your customers.  There is very specific information that needs to be displayed on an invoice.  You may like to consider buying a pre-prepared invoice template. 
• Have a way of keep a record of income and costs so you can monitor your profit and loss, and have the information you need to complete your tax return (you should keep these records for at least seven full tax years)
• Have a business bank account
• Have basic terms and conditions of business in place 
• Consider what type and level of business insurance you should have in place to protect yourself and your business.  More information on business insurance.
  
• If relevant for your industry, obtain the necessary licences and get clearance to operate your business. Restaurants, child-minders, cab drivers and street traders, for example, all need to have a local authority licence which may include assessing your qualifications and your business premises.

Advantages of being a Sole Trader

• Very simple to set up
• No need to file formal account or Annual Returns at Companies House
• No need to run a payroll, unless you employ staff
• You can adapt very quickly to changes without needing approval from shareholders, or making changes to the company’s constitution

Disadvantages of being a Sole Trader

• You are personally liable for any debts the company incurs
• Your company may not have the prestige that a Limited Company can have

If you would like any assistance in setting up your business please give us a call on 0207 111 7761 and ask about our Ultimate Business Start-Up Kit.

How to set up in business as a Sole Trader

For information only. To discuss the best structure for your small business you should seek guidance from a qualified accountant or from your legal adviser.

It’s not necessary to set up a formal Ltd company to be in business.  Most small businesses start life as a sole trader and many continue with that status indefinitely.

However there are some circumstances under which you are better advised to set up a limited company. 
See our article how to set up and run a limited company for more information on what’s involved.

What is a Sole Trader?

If you decide being a sole trader is the best option for you it is a very quick and simple process.  A simple definition of a Sole Trader is 'a person who is the sole owner and decision maker of a business'. 

As a Sole Trader you will be classed as self-employed and will pay personal income tax on any profits made by your business.

You will need to submit an annual tax return each year showing your income from self-employment and your business expenses.  You can take your personal allowance into account unless it has already been used.  See Tax basics for sole traders for more information.  If you still have income from paid employment, your income from self-employment must be declared and the necessary tax and NI paid.

You will pay Class 2 and Class 4 National Insurance contributions unless your income is very low (below £5,075 in 2010/2011) in which case you can apply for an exemption.  Class 2 payments (£2.40 per week in 2010/2011) can either be paid by monthly direct debit or you can choose to be billed quarterly.  Class 4 contributions will be calculated and paid as part of your annual tax return.

Contrary to popular belief, you can employ staff  but you will need to set up a formal payroll system to manage the tax and National Insurance (including employers’ National Insurance) contributions.

You will need to register for VAT if your turnover (not profit) reaches the threshold, or is likely to very soon.  For more information on VAT see our article VAT basics.

How to set up a Sole Trader business

• Inform HM Revenue and Customs of your intention to become self-employed.  You MUST do this within 3 months otherwise you will be fined.  The easiest way to register is to call the newly self-employed helpline on 08459 15 45 15.
• Choose a business name – for advice on choosing a company name, and guidance on a few restrictions you need to be aware of see our article on Choosing a business name.
• Have a method of invoicing your customers.  There is very specific information that needs to be displayed on an invoice.  You may like to consider buying a pre-prepared invoice template. 
• Have a way of keep a record of income and costs so you can monitor your profit and loss, and have the information you need to complete your tax return (you should keep these records for at least seven full tax years)
• Have a business bank account
• Have basic terms and conditions of business in place 
• Consider what type and level of business insurance you should have in place to protect yourself and your business.  More information on business insurance.
  
• If relevant for your industry, obtain the necessary licences and get clearance to operate your business. Restaurants, child-minders, cab drivers and street traders, for example, all need to have a local authority licence which may include assessing your qualifications and your business premises.

Advantages of being a Sole Trader

• Very simple to set up
• No need to file formal account or Annual Returns at Companies House
• No need to run a payroll, unless you employ staff
• You can adapt very quickly to changes without needing approval from shareholders, or making changes to the company’s constitution

Disadvantages of being a Sole Trader

• You are personally liable for any debts the company incurs
• Your company may not have the prestige that a Limited Company can have

If you would like any assistance in setting up your business please give us a call on 0207 111 7761 and ask about our Ultimate Business Start-Up Kit.