How to register as a sole trader

Anyone looking to take the leap and become self-employed can register as a sole trader in the UK. You don’t need a massive budget nor any potential business partners to get going. Whether you’re in the business of selling or providing a service – once you know what you want to do, it’s easy to become a sole trader. An estimated 60% or 3.4 million busi­nesses in the UK are sole traders. But it’s important to un­der­stand the re­quire­ments, taxation rules and li­ab­il­it­ies of a sole pro­pri­et­or­ship.

A sole trader is a legal business entity that is set up and main­tained by a single person. But before you opt to register as a sole trader, you should consider the al­tern­at­ives such as a limited company (LLC), which can be run by a single person. The main dif­fer­ence between a sole pro­pri­et­or­ship and the LLC is that the latter exists as a separate legal entity from the owner. As a sole trader, you’re also fully liable for your business. Neither of the two options requires you to have any capital to launch with. However, although there are legal benefits to re­gis­ter­ing as an LLC, the process requires con­sid­er­ably more paperwork and time. Because of that, self-em­ploy­ment is still the most common business form in the UK.

Although you can always revert to a different legal business structure later on, it’s worth having an overview of the ad­vant­ages and dis­ad­vant­ages of a sole pro­pri­et­or­ship. You may find that a limited company suits your business needs a little better.

There are many different types of in­dus­tries in which you can become self-employed. For example, you could start a catering business, run a tutoring service, offer your skills as an ac­count­ant or land­scaper. You may even realise that you’re already running your current business as a sole trader. That’s because becoming self-employed is so easy to do in the UK. If you’re planning to register as a sole trader, here’s what you need to do.

Most sole traders operate their business under their own name. But it can be worth choosing a more dedicated name that ac­cur­ately describes what services or products your company provides. A strong name is one that reflects your business purpose, is easy to remember and that is not re­gistered already. Once you’ve made your choice, you can register a web domain under the name. Most busi­nesses today have their own website and social media presences. If your business name is not your actual name, you should double-check that it’s not already re­gistered as a trademark. You must register your business name as a trademark if you don’t want others to use it.

It’s important to register your business with the HMRC as soon as you establish it. In the case of a sole trader, you would register for self-as­sess­ment. The re­gis­tra­tion is a quick and easy online ap­plic­a­tion and HMRC will send you a unique taxpayer reference there­after. It’s important to register because otherwise you could be fined. The deadline for re­gis­ter­ing is usually October 5^th after the end of the tax year. In the UK, a tax year runs from April 6 to April 5.

Although it’s not tech­nic­ally necessary to have a separate business account, it could save you some hassle down the line. Keeping your business finances separate from your personal finances makes it easier to retain an overview of profits and losses. You can open a separate business account and get a dedicated business credit card, which you only use for your company expenses.

In certain business sectors, you may need to register for an op­er­a­tion­al licence or a permit to operate. For example, you will need to register for a business license if you’re working within the private security sectors such as sur­veil­lance. En­ter­tain­ment busi­nesses that sell alcohol or adult en­ter­tain­ment and gambling require a special license. Where your business involves the keeping of animals you will need a special permit. Speak to your local council to find out whether you need a business licence to operate.

In most cases, sole pro­pri­et­ors’ accounts are fairly simple. If, for example, you’re a graphic designer, you may only work with a few clients a year and write invoices to each at the end of each month or when a project is finished. It’s a good idea to keep a record of your invoices and any expenses (for example, new software or hardware you need to operate your business) using an Excel spread­sheet. If you write a lot of invoices, employ con­tract­ors or need more advanced ac­count­ing tools, you can try one of many useful ac­count­ing apps.

Just like any other business, sole pro­pri­et­ors must pay taxes. The dif­fer­ence between being employed and being self-employed is that you will be required to list your profits but also your losses when sub­mit­ting your annual self-as­sess­ment to HMRC. You can deduct business expenses and will be taxed on your net income. It’s important that through­out the year you set aside enough money to pay your taxes.

The rates in the UK are

• 0% on net income up to £12,500,
• 20% on net income between £12,501 to £50,000,
• 40% on net income of £50,001 to £150,000 and
• 45% on earnings over £150,000.

This means that sole traders have a personal allowance each year and only pay taxes over income above the threshold. The personal allowance varies each year and usually increases. Self-employed people also pay National Insurance con­tri­bu­tions.

If your business has employees, you must register as an employer. You will also be required to collect income tax and National Insurance Con­tri­bu­tions from your employees.

Although there are lots of benefits of being a sole trader, there are several risks involved. Firstly, sole pro­pri­et­ors are per­son­ally liable for any debts the business produces. They cannot file for bank­ruptcy and depending on the amount of debt owed, may have to sell personal assets to settle overdue payments. Where sole traders put everything on the line, they may end up losing everything in a worst-case scenario.

Because in­vest­ments are harder to secure when you’re self-employed, there’s a danger that you may lose your own money in the long run where a business idea doesn’t take off. Al­tern­at­ively, you may not be able to sustain your business if you cannot secure funding.

You can also be held ac­count­able for any injuries you may cause during business op­er­a­tions. It’s best to purchase liability insurance if your business involves physical activ­it­ies that could po­ten­tially harm yourself or others.

Starting a business is risky, no matter which legal structure you choose. If you want to test the waters with an idea that doesn’t require too much cash in­vest­ment, self-em­ploy­ment offers a good structure. Nev­er­the­less, you should create a realistic business plan that assesses any com­pet­it­ors as well as your potential customers. Having an in-depth un­der­stand­ing of your potential customers will make it easier to weigh the risks and determine how likely you are to succeed. Whether you ul­ti­mately do succeed depends on your goals, your efforts and of course the market.

The following steps are necessary to set up a sole pro­pri­et­or­ship:

1. Business idea and drafting a business plan
2. Deciding on a name for your business and register trademark
3. Re­gis­ter­ing with the HMRC
4. Opening a business bank account
5. Where ap­pro­pri­ate, re­gis­ter­ing/applying for permits and business licenses
6. Keeping accounts (you can download an ac­count­ing app or software to help with invoicing)
7. Pay taxes

Please note the legal dis­claim­er relating to this article.