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.

What’s a sole trader and who can become one?

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.

Advantages and disadvantages of a sole proprietorship

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.

Advantages Disadvantages
Easy to set up. A sole proprietorship requires no starting capital. Set-up costs are usually minimal depending on your business, but there are no registration fees. Personal liability. As a sole trader, there is no separation between you and your business. That means you can be personally held accountable for any debt or employee issues.
Control. You are the sole owner of the business which means that you will have full control over any business decisions you make. Decisions. Because you have sole control over the business, any decisions you make are your responsibility. That means you are fully responsible for the failures and successes of the business.
Simplified accounting. Tax returns by sole traders are a lot less complicated than for other business structures because you’re not taxed separately. Limited investment opportunities. Sole traders have a much harder time raising funds because there’s a greater risk for shareholders and investors if the business is not profitable.

How to set up as sole trader– step-by-step

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.

Step 1: Choose a name

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.


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Step 2: Register with HMRC

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 5th after the end of the tax year. In the UK, a tax year runs from April 6 to April 5.

Step 3: Business bank account

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.

Step 4: Get a business license

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.

Step 5: Accounting

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.

Step 6: Paying taxes

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.

Risks involved when setting up a sole proprietorship

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.

Checklist for registering as a sole trader

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.

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