When you have a great idea for a new business the easiest way to get started is to set up as a sole trader, but what does this really mean?
The main thing you need to be aware of is the difference between being a sole trader and having a limited company. Limited companies are a way of providing you with some protection if the company incurs debts or liabilities. If your limited company has financial problems, the company is liable, whereas if you operate as a sole trader and you have problems, you are personally fully liable.
This may sound a little daunting, but the flip side is that it is very easy and simple to set up and you are accountable to no-one but yourself. You should make a judgement about whether the nature of your business is one where there is a significant risk that you could become liable for large amounts of money. If you are working on a relatively small scale, not employing any or many staff and do not need to invest heavily in premises, equipment or stock, you may well be better off as a sole trader.
Registering As A Sole Trader
For sole traders there is no formal company registration like there is with a limited company, you just have to register for self assessment with HMRC so that they know you are trading and then be sure to submit a self assessment tax return at the end of each tax year. You can register for self assessment online on the HMRC website. As soon as you have done this you are ready to trade.
Choosing A Name
As a self employed person you can either just trade under your own name or create a new business name. You can call your business anything you want, provided you follow a few basic rules about what you are not allowed to do:
- It may seem obvious, but because your company is not limited, you cannot add Ltd, LLP or PLC as part of the name.
- Ensure your name does not suggest a connection with government or a public body.
- The name cannot be offensive.
You must avoid anything that is trademarked or anything which is very similar to a trademark. Check what is trademarked here: www.ipo.gov.uk
When you produce stationary or any official documentation, you will need to include your own name as well as any company name on it.
Benefits Of Being A Sole Trader
The main advantage to this type of self employment is that you really are your own boss and do not have to answer to anyone else. You make all the decisions without having to consult with investors or other directors, so you can dictate how fast your business grows, which direction your business develops in and whether to move into new markets or withdraw from others.
- Any profit you make after tax is entirely your own.
- Take time off when you decide it is OK.
- Greater and more direct control generally means you can offer a more personal service for your customers.
- The requirements in terms of end of year accounts are simpler so your professional fees for this will be less.
- Keeping it lean and mean will result in having less red tape to deal with.
With Great Power Comes Great Responsibililty…
As we have already suggested, there is a flip side to the freedom that being a sole trader brings. The main one being full responsibility for any liabilities. As well as straightforward business debts, you could be sued by a customer or someone else in connection with your business. If a claim is made against you, you are personally liable for this too. If your business became bankrupt your own assets would be at risk.
You can mitigate against some such issues by taking out appropriate insurance of course, in particular Public Liability Insurance.
While it is great that no-one is telling you what to do and when to do it, that is only a good thing if you are motivated and organised enough to do that yourself. You will have to be a jack of all trades and must be prepared to put in long hours to make your business work. If you do choose to take time off you get no income for that time, so you need to budget for that.