Sole traders are run their business directly; all profits accrue to them personally
Setting up as a sole trader is the easiest and quickest way to start your own business. The administrative burden is minimal but you will need to notify HMRC that you’re self-employed.
What is a sole trader?
Sole traders are individuals that run their business directly, without incorporating or keeping records in any way. There are very few administrative tasks to carry out, but you will need to register as self-employed with HMRC. Once this is done, you can start trading immediately. Sole traders are solely responsible for the management of their business and make all decisions personally.
Sole traders are automatically liable for all debts incurred through their work. In the event of you being unable to cover your liabilities, you could lose your property in order to pay creditors. This is not ideal for many entrepreneurs who cannot afford to take the risk. Consider setting up a private limited company; these offer limited liability against company debts. Read our full guide to limited companies for more information.
Profits and investment
Sole traders accrue all profits personally – with no shares available sole traders cannot transfer part-ownership to another party who then profits from their share. If sole traders wish to gain equity investment, they will need to use a different company structure. Any investment in the company must come from the sole trader directly, whether through savings, sale of assets or bank loan.
Unlike incorporated companies, sole traders do not need to maintain separate bank accounts for business-related activity and personal expenses. However, since you will need to keep reliable profit and loss records to help you fill in your tax return it’s advisable to set up a business bank account in order to more easily track activity. You’re able to open a business bank account in your own name as a sole trader.
Unlike other company structures where you’re required to file separate accounts, business income for sole traders is not separated from personal existing. This makes things easy; you’ll still only pay income tax and national insurance although these will now be applied to a larger amount of money. In some cases business losses can be offset against tax on other income, such as through inheritance or employment. In terms of paperwork, you’ll need to submit an annual self-assessment form to HMRC (or fill one in via their website).
Once you become self-employed you’ll be required to pay Class 2 NI contributions unless you earn under the current threshold (2011-12) of £5315 a year; if this is the case apply for a Small Earnings Certificate. If you pay NI contributions on another job you could delay Class 2 contributions until the end of the year. Some people will need to pay Class 4 NI contributions depending on their income. The taxman will use your self-assessment form to work out if you are eligible.
Will I need to register for VAT?
You won’t need to register for VAT unless you meet the eligibility criteria, which currently stands at a turnover of £73,000 or more in a 12 month period. Once this happens you’ll need to register to pay VAT of 20%.