Sole Trader

The great majority of new businesses set up each year in the UK choose to do so as sole traders. This arrangement has the advantage of being reasonably free of formalities and restrictions, unless you intend to register for VAT, there are no rules about the records you have to keep. Other than you do have to keep records.

As a Sole Trader you take complete responsibility for the running of the business. Your business is one of your assets just like your house or car. An important consequence of this is that if your business fails, your creditors have a claim not only on the assets of the business, but also on your personal assets, subject only to the Bankruptcy Act.

Note that being a Sole Trader does not imply that the business only employs one person, If your business grows you may employ extra staff however you will still be a Sole Trader, because it will be your business and your liability.

Setting Up

You can start today. Offer your services, agree a price, start work and you are in business.

Although there is nothing you are required to do legally as a Sole Trader, it is worth considering the following:

Open a separate bank account for your business

Inform the Inland Revenue

Take out full insurance cover against possible loss or damage to any equipment

Take out personal injury/illness insurance

As a Sole Trader you may find yourself affected by legal requirements if the following apply:

If you have a turnover in excess of £50,000 you must register for VAT

If you employ staff you must comply with the statutory provisions relating to employment protection

Advantages of being a Sole Trader

The ability to start immediately
Total Responsibility
Minimal Formalities
No Audit Fees
No requirement to disclose trading information through the publication of accounts
Schedule D Tax benefits
Profits/losses in one area can be 'set off' against profits/losses in another area operated by the Sole Trader
Past PAYE can be claimed to help with trading losses
Ease of winding up

Disadvantages of being a Sole Trader

Unlimited personal liability for trading debts
A lack of equity capital as there are no shareholders
Progressively higher tax on higher income bands
No corporate pension provision
Loss of some social security benefits

You should consider every aspect carefully before making any decision.