Setting up your own business and becoming a sole trader is always an exciting and challenging scenario all at the same time.
You may have some unique and adventurous plans to create what you hope will be a successful and lucrative business for yourself, but the process of setting up as a sole trader and the legal requirements surrounding this move are the same for everyone following that path.
This means that you have to fulfil certain legal obligations such as registering your sole trader status with HMRC and might require getting some professional business advice from someone like Slater and Gordon.
Understanding your responsibilities
Sole traders who start a business in the UK will need to register with HMRC and follow specific rules regarding the naming and subsequent running of their business.
If you register as a sole trader, this means that you are classed as self-employed and deemed to be running your business as an individual, although it does not mean that you have to work alone, so you can take on staff and remain the person who is ultimately responsible.
One of the first things to sort out is what trading name you intend to use for your business. There are certain rules regarding naming your business and you will have to check whether your trading name will be permissible.
Even if you are going to trade under your own name, this needs to be included on any official paperwork such as invoices or letters.
Advantages of being a sole trader
There is marginally more administration and paperwork involved in running a limited company and initial set-up costs can be higher, which is just a couple of reasons why you might choose sole trader status.
Setting up as a sole trader is definitely easier and quicker than forming a limited company and it is a good move if you are initially setting up your business on a part-time basis and continuing to work elsewhere until you build the turnover up to a reasonable level.
If this is your approach, you will still need to tell HMRC that you have set up a business, even if it is only part time.
Tax & NI
A sole trader will be taxed on any business profits you generate and either you or your accountant will have to complete a self-assessment form each year to provide details of your income and expenses for that period.
In addition to income tax, you will also have to make flat-rate Class 2 National Insurance Contributions (NICs) of £2.80 per week, although these are now collected at the same time as your tax via your self-assessment payment.
The level of National Insurance contributions rises if your annual profits exceed a figure of £8,060 on current rates. Once you pass this threshold, you will have to pay Class 4 NICs as well, which is the equivalent of 9% on profits up to £42,385.
If your business grows and you start to employ people to work for you, this means you will have to collect income tax and NICs from them and pay these to HMRC through a PAYE payroll scheme.
Setting up as a sole trader will involve a certain amount of paperwork and bureaucracy, but once you get to grips with legalese of the process, you should soon be on your way to getting your business off the ground.
Evan Willis is a small business loan officer. He enjoys writing about how to get startups off the ground. His articles can be found on business and financial websites.
