Sole Trader Business Type / Structure
“Only when you are self-employed do you fully realize how much more efficient you become when your output directly correlates with how much money you make.” – Ronald Kessler
A sole trader business does involve some financial risk as you are totally responsible for any debts the business incurs and should the business fail. You are personally liable for all debts in regard to the business and from your personal assets if necessary.
If the costs of starting and running your business are relatively low, this could be the easiest and most viable initial option. If not, maybe it would be better to consider forming a limited company and having the level of personal financial protection this can offer.
The advantages of becoming a sole trader are its simplicity to set up and the relatively lower on-going cost of administration and financial accounting required. Setting up requires no cost at all and just involves registration with HMRC as a self employed individual (or partners). Apart from any other legal or regulatory requirement (licences, permits, registration etc) that may needed for your type of business, that’s about it.
Sole traders can employ people (and have to comply with every aspect of what that entails!) and there is always the option to change your business structure and incorporate as a limited company at a later date if this becomes necessary or there is a desire or benefit to do so.
Prior to trading, you must register your self employed business with HMRC to ensure you are compliant with business legislation and your obligations to the state in regard to undertaking activities for financial gain. Failure to do so can result in hefty fines and tax penalties and it certainly wouldn’t be the best way to operate your new business venture! This must also be a consideration even if you are running a business as a sole trader on a part time basis.
Many new business owners start their businesses alongside their employed job until the business grows to a level that will provide fully for their needs. Whilst there is nothing wrong with this (providing there is no conflict of interest with the employer) you still have an obligation to register with HMRC if you are self employed for some of the work you undertake and the income you receive.
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It is very easy to register and there is a wealth of guidance on all things related to registering as a sole trader/self employed via this link: HMRC self employed
Information you will need to provide to register as self employed will include –
- your name and address
- Contact details
- N.I. number
- Type or description of the business
- Sole trader or partnership (and the partner/s details if this is the case)
- Start date for the business (either actual or proposed)
As a sole trader business you will pay income tax on any business profits. You (or your accountant) must fill in a self-assessment tax return each year, detailing your income and expenses.
You’ll also have to make flat-rate Class 2 National Insurance contributions (NICs) of £2.85 per week. Class 2 NICs are now collected at the same time as your tax via self assessment.
If your annual profits exceed £8,164, you’ll also have to pay Class 4 NICs (9% on profits between £8,164 and £45,000 and then 2% on profits over £45,000 – correct as of 2017/18).
You pay this with your income tax and the figure is calculated from your self-assessment tax return. It is very important you keep detailed financial records for your business, as well as proof of any expenses (e.g. receipts, invoices, all bills, etc).
These will be invaluable when it’s time to fill in your tax returns each year and ensuring you only pay what you are liable for and that you can legitimately claim any entitlements.
If you employ people in any way, you must operate like any other business. In this respect you should collect income tax and N.I. contributions from them and pay these to HMRC as required. You’ll need to operate a PAYE (Pay As You Earn) payroll scheme to manage this correctly from both a compliance and internal requirement point of view. For more information see our own guide on employing staff or visit the HMRC employing people site.
In addition, if you expect your business to turn over (that’s total sales NOT profit) more than £85,000 (2017/18) a year, you must register for VAT, charge it to your customers and pay it to HMRC. If you are VAT-registered, you can reclaim the VAT you pay to your suppliers. You can register for VAT even if you don’t anticipate reaching this level of turnover but this is normally done for specific reasons (high start up costs where VAT can be reclaimed for example) and you do actually expect the business to exceed the VAT threshold sometime in the not too distant future anyway. You can also see our guide on VAT and financial compliance here.
Speak to an accountant or another professional to ensure you’ve registered properly to save any headaches in the future.