How to set up as a Sole Trader
If you want to go it alone in business you’re not alone.
If you want to set up in business for yourself, you are not alone. 71% of all British businesses have no employees according to Department for Business Innovation and Skills (BIS) figures.
The popularity of this type of business reflects the ease with which you can start sole trading. Registration is straightforward, record keeping is simple and you get to keep all the profits after tax.
Starting small by sole trading is a way to test your chosen market – many companies are born this way. But there are pitfalls; if your business fails, you will have to pay for that failure out of your own pocket.
What is sole trading?
There are three basic types of business ownership; sole proprietorship or sole trading, partnership and limited company. Sole trading is when an individual is the only owner of the business and has complete control over the way it is run.
The law makes no distinction between the business and a sole trader. This unlimited liability means that any business debt can be met from the owner’s personal wealth if the business fails. And the business usually ceases on the owner’s retirement or death.
A sole trading business is usually small in size, with a low turnover, and few, if any, employees. There is an estimated 3.7 million active businesses in the UK and over 2.3 million of these are class zero businesses – that is businesses without employees.
This majority of sole traders are in the service sector, including photographers, plumbers, hairdressers, shops, real estate agencies and bed & breakfast hotels. Some 24% of the UK’s 2.3 million size class zero businesses are in the construction sector and 18% are in business-related services.
Before you start
You will need to fulfil certain legal requirements before you can open for business:
Put it on paper:
If you are going to trade under a name different to your own personal name you must display the name/s of the owners and an address where documents can be served on all business stationery and at your premises. Design letterheads, business cards and signage accordingly.
Use the right name:
A business name means the name of your business if it is different to your your own name. It is not compulsory to register a business name but you can do so with the National Business Register.
You also need to be careful about choosing a name since the wrong name can get you into difficulties.
Certain words and expressions like international, federation and registered are restricted under the Business Names Act 1985 and the Company and Business Names Regulations 1995. See also choose a company name
To be absolutely sure that you can use a name, contact a solicitor to perform the checks or register your name with the National Business Register who will do the checks for you and ensure nobody copies it the future or passes it off as their own.
Inform the authorities:
You must register as self-employed with the HMRC within three months of starting up or face a £100 fine. The three month limit starts from the last day of your first month of trading.
A sole trader in the UK can operate a very basic accounting system. Provided supporting evidence is retained to show the basic accounts are realistic and the income and expenditure statement accurate for basic tax purposes sophisticated accountancy, debits and credits are not required. Basic accounts for sole traders do not require the production of a balance sheet.
More detailed financial records are required to be kept by the sole trader if they are vat registered. The vat threshold for the financial year starting April 2008 is £67,000. Part of the vat rules state that when a business is vat registered they should maintain an audit trail of transactions to support the vat return.
A sole trader does not have to operate a business bank account however if a business bank account is used then accounting records should be kept as the taxation authority, HMRC can ask to see details of the account.
Where a sole trader has no employees, is not vat registered and does not maintain a business bank account then formal accounts are not essential and a simple income and expenditure account statement can be produced. It is still essential that those sole trader basic accounts are supported with copies of invoices given to customers or records of amounts taken plus documentary evidence to support the payments made to suppliers.
See other information in this section including: Writing a business plan, Choose a company name, Forming a Ltd company, How to set up as a Sole Trader, 10 reasons to start up a business
