Setting up as a sole trader

A lot of self-employed entrepreneurs start out as sole traders because it’s a fairly simple and straight-forward business structure that doesn’t include mountains of paperwork and admin. Nevertheless, there are some things you need to keep in mind, so here we’ll give you the full rundown and advice on setting up as a sole trader.

Becoming a sole trader

If you’re starting up on the self-employed path then becoming a sole trader is the simplest way to begin. Being a sole trader only refers to the legal structure of your business; it doesn’t necessarily affect your day-to-day working life.

Sole traders are fully responsible for their own business success and failures. You’ll get to take home all your business profits (after tax), but you’re also personally responsible for any loss or debt as there is no limited liability. Limited liability generally means that your liability as a business owner is limited to the amount that you’ve invested in the company.

Becoming a sole trader is probably the easiest and fastest way forward if you’re exploring a new business idea, but there are some requirements and regulations that must be followed.

How to register as a sole trader

As soon as you’ve become self-employed, you should let HMRC know that you’re operating as a sole trader by registering for their online services. You also need to notify HMRC that you intend to pay your taxes through the Self Assessment tax return. As a sole trader you’ll need to file this tax return on a yearly basis. When registering as a sole trader, you typically have to provide your name, address, date of birth, phone number, NI number, business name, business type and start date.

How to choose a sole trader business name

As a sole trader, you need a trading name for your business. You can use your own name or get as creative as you like. But remember that your business name (along with your own name) will be visible on any official documents, such as letters and invoices. Also, make sure that you don’t choose a business name that already exists and if you need a website, do make sure your chosen domain name is available.

Read more about choosing a name for your business.

Sole trader tax

All sole traders have to pay income tax on their profits, which is collected through the Self Assessment tax return. As a sole trader you are likely to pay tax using the cash accounting method, which is suitable for most sole traders earning less than £150,000 per year. Therefore, it’s very important that you keep a record of all your business expenses and income from the very beginning. Starling’s Business Toolkit, which comes complete with accounting tools and a self-employment tax estimator is designed to help with all of this.

Do sole traders pay VAT?

As a sole trader, you are not obliged to register for VAT unless your annual turnover exceeds £85,000. However, you can become VAT registered at any time if it suits your business needs. Once you become VAT registered you have to start charging VAT on goods and services sold to your customers. Then, you’ll be able to reclaim the VAT by submitting a VAT return to HMRC. Read more about becoming VAT registered.

Cost of setting up a sole trader business

It doesn’t cost anything to set up as a sole trader, but keep in mind that there can be a personal financial risk if your business goes into debt. Some sole traders hire accountants to help with the admin such as keeping track of invoices and expenses, bookkeeping and tax matters. If you don’t want to hire an accountant just yet, you can explore Starling’s Business Toolkit, which has features to help you take care of your own books.

Sole trader set up checklist

• Notify HMRC. This must be done by 5 October following the end of the tax year in which you set up. In other words, if you set up your business between 6 April 2019 and 5 April 2020 (the 2019/20 tax year), you will need to register with HMRC by 5 October 2020 and your first tax return and payment will be due before 31 January 2021. If you register straight away they will send you reminders when your tax return is due.

• Think of a trading name for your business, or use your own name. Any paperwork can have your trading name emblazoned in large letters but must also show your own name as you are legally responsible.

• If you need a website do make sure that the domain name is free.

• Check what licences and insurances you will need for your business, if any.

• Open a sole trader bank account so that you can track your business finances separately from your personal ones. This makes it easier when preparing your accounts and tax return, and it’s also good to see how well your baby business is growing.

• Start recording your income and costs for the business. This can be done through Starling’s Business Toolkit or other third party bookkeeping software. The toolkit maps your expenses to HMRC’s categories which will help you fill in your tax return at the end of the year.

• Open a savings account or use the savings Spaces on your Starling account to set aside money to pay your tax bill.

• Let everybody know that you’re open for business. Encourage your friends to support you by sharing on social media, looking out for opportunities for you, and even buying from you themselves at full price (now may not be best the time for mates rates).