Starting your own business as a Sole Trader
You don’t need to set up a Ltd Company to be in business!
Many small businesses start life as a sole trader and carry on that way for ever. But there’s nothing to stop you setting up as a sole trader now and changing to a Limited Company later on.
Sometimes it’s more sensible to set up as a Limited Company right from the start. See our article How to set up and run a limited company for more information.
It’s very important you seek advice from a qualified accountant or legal adviser on this matter.
What is a Sole Trader?
A Sole Trader is someonewho is the sole owner and decision maker of a business.
As a sole trader you may be the only one working in your business but sole traders can employ staff. If you employ staff there’s quite a lot you need to consider, including the need to set up a formal payroll system to manage your employees’ tax and National Insurance contributions.
Sole traders and registering a company name
Unlike a Limited Company sole traders do not have to register a company name a Companies House. You simply come up with a name for your business and, once you’ve covered all the steps below, you’re ready to start trading! Here’s some ideas on how to choose a good business name.
Sole traders and VAT
It’s not just Limited Companies that pay VAT, as a sole trader you will still need to register for VAT once you reach the VAT threshold, or you can also register voluntarily for VAT. Find out more about VAT
Being a sole trader : the advantages
- It’s very simple and very quick to set up
- You keep all the profits your company makes
- The administration is simple
- There’s no need to file formal accounts or an Annual Return at Companies House
- There’s no need to run a payroll, unless you employ staff
- You’re free to make any changes you want to, without needing approval from anyone
Being a sole trader: the disadvantages
- You’re personally liable for any debts the company incurs
- Your company may not have the prestige that a Limited Company has
- There’s no-one to share your ideas and suggestions with
- It can be lonely and stressful – everything depends on you!
- It may not be tax efficient
How to set up a Sole Trader business
- Register with HM Revenue and Customs as self-employed. You need to do this within 3 months otherwise you’ll be fined. The easiest way to register is to call the newly self-employed helpline on 0845 915 4515
- Choose a name for your business. There’s a few restrictions you need to be aware of, see our article Choosing a business name for more information and guidance.
- Have a way to create invoices and, to increase your chances of being paid on time, make sure they display the right information! See our article Information that needs to be displayed on an invoice.
You can get a FREE invoice template here or use an online accounting package like KashFlow that creates invoices for you.
- Create a system for keeping clear records of all your income and costs. It’ll help you monitor your business finances, and it’s much easier to complete your tax return if you have all the information readily accessible.
- Have a business bank account – see What to consider when choosing a business bank account
- Have basic terms and conditions of business. A simple document containing details of what you do, what you charge and your payment terms will do. You can create your own or buy a ready made terms and conditions of business template here.
- Have the right business insurance in place to protect yourself and your business. Find out more about business insurance and what business insurance is compulsory.
- Have the correct licences and permissions in place before you start. Restaurants, child-minders, cab drivers and street traders, for example, all need a licence from the local authority. If this applies to you be prepared to provide proof of qualilfications, proof you are up to date with current industry standards, and your business premises may be checked too. For any business working with children or vulnerable adults you’ll also be CRB checked. Contact your local Trading Standards office for information.
If you can’t decide what’s best for your business here’s a comparison between being a sole trader or ltd company