Becoming ‘self employed’ is the most popular means of starting up a new business; sole traders make up over 62% of all UK businesses, and partnerships account for another 9%. Here we look at the basics; what a sole trader is, and things you should consider before taking the leap.
Being a sole trader – the basics
- Being a sole trader is the same as being ‘self employed’.
- As a sole trader, you run your business as an individual.
- A ‘partnership’ is an agreement between two or more sole traders to set up a business together.
- You can choose a business name (subject to certain rules), or your own name.
- You don’t need to have a separate business bank account, however there are many benefits to doing so, such as keeping your personal and business expenditure separate.
- You will need to register for self-assessment with HMRC, and if you’re a partnership, the partnership itself must file a separate tax return.
- You can keep all your business profits after you’ve paid the tax you owe.
- You must pay your tax and National Insurance liabilities on time.
- The self employed pay Class 2 (weekly) and Class 4 (annually) National Insurance Contributions.
- If you employ other people, you will need to operate a PAYE payroll scheme, and collect taxes from your employees on behalf of HMRC.
- You must register for VAT if your annual turnover is £82,000 or more (2015/16 tax year).
- You must keep accurate records of all your business transactions, including all sales and expenses, and bank records.
- Your business records should be kept safe for a minimum of six years.
- You are personally liable for any business debts you may incur (unlike the limited company structure).
- If you set up in business with other people, you should draw up a ‘deed of partnership’ to detail who does what, and what happens if things go wrong.
Sole Trader vs. Limited Company
The easiest, most ‘hassle-free’ route to starting a new business is to become self employed. You need to register to pay tax as a sole trader or partnership with HMRC, and can start trading right away (subject to any specific regulations which may apply to your trade).
There is certainly less ‘red tape’ being a sole trader compared to the limited company route. As long as you file your annual self-assessment form, pay your tax liabilities, and comply with business and employment laws, the ‘self employed’ are not regulated by Companies House, and the overall administrative burden for sole traders is less.
However, unlike the limited company business structure (where the liability of directors is limited), as a sole trader you and your business are treated as a single entity, so you are personally liable should things go wrong with your business.
For an in-depth comparison between setting up as a sole trader, or forming a limited company, click here.
The next steps – getting started as a sole trader
We’ve covered the steps you need to take to register as self employed in our dedicated article here.