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How Do I Set Up as a Sole Trader

The process of setting up as a sole proprietor is a quick and simple one. But, you must register with HMRC and keep records when running a self-employed business.

This section explains when to set up as a sole trader, how to register, and the legal responsibilities of running a business through self employment.

Running Your Own Business as an Individual

Running your own business as an individual means you are the sole trader of that particular micro business or enterprise.

As a result, you would be:

  • Classed as a self-employed person.
  • The exclusive owner.
  • The sole proprietor of the business.

However, it is important to be aware of the key differences between running a limited company and sole trader businesses.

For instance, some of the most noticeable advantages and disadvantages of being the proprietor would include:

  1. Being able to keep all the profits (after paying any tax liabilities).
  2. Having to take personal responsibility for any business losses.
  3. Needing to follow the rules for naming and running a UK business.

Furthermore, being the individual dealer is not the same as being in charge of a company. Instead, it is a single person carrying on a business, very often in their own name.

In fact, registering as sole trader is the most common method of starting a business in the United Kingdom. Out of all UK registered businesses, more than 75% are sole traders.

But the bottom line is this:

As a rule, sole trader businesses are customarily used by operations with a low turnover. In most cases, they are low risk ventures run by a single owner.

You would need to notify HM Revenue and Customs if you set up as a sole trader. Why? They would need to know if you intend to start working for yourself.

In essence, you would be informing HMRC that you plan on having ‘self employed status‘. They would then need to know if the sole trader business will have a ‘business name’ or a ‘trading style’.

Note: A ‘sole proprietor’ would own the business 100%. They cannot have any partners, and there would be no directors or shareholders. Different rules apply if you are setting up a business partnership.

Registering as a Sole Trader

You would need to register for Self Assessment and then file a tax return. So, you must register a business as a sole trader with HMRC if you (any):

  • Earned more than £1,000 from self-employment in the current financial tax year (from the 6th of April to the following 5th of April).
  • Would like to have the option of paying voluntary Class 2 National Insurance payments to help you qualify for welfare benefits.
  • Need to provide proof that you are actually engaged in self-employment activities (e.g. to claim Tax-Free Childcare).

Sole Trader Responsibilities

Anyone who is moving to the United Kingdom to set up a business would need to apply for a National Insurance number (NIno).

Additional obligations and responsibilities for all sole traders, includes:

Registering for VAT

If the business turnover goes over the current VAT threshold you will also need to register for Value Added Tax.

You can choose to make a voluntary registration. Doing so might suit your trading circumstances better if you are selling to other VAT-registered businesses. It means you would be able to reclaim the VAT.

Working in the Construction Industry

Many sole traders work in the construction industry as either a contractor or a subcontractor. If this is the case, you would need to register with HM Revenue and Customs for the Construction Industry Scheme (CIS).

Naming the Business

You may be wondering whether a sole trader can have a business name. In fact, you can choose to trade under your own name or under another chosen name for the business. There is no need to register your name (e.g. at Companies House).

Nevertheless, you must include your name and business name if you have one (the trading name), on any official company paperwork (e.g. invoices and letters).

Note: What you choose to name the business could be a crucial part of setting up as a sole trader. It is wise to do some research on website design and search engine optimisation if you are including them in your advertising and marketing campaigns.

Sole trader business names must not:

  • Be offensive.
  • Be the same as any existing trade mark (you can perform a search for a trade mark to check).
  • Include any of these words or phrases ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’.

You can stop other people trading under your business name if it is important to your situation. In this case, you would need to follow trade mark rules and apply to register it to stop it happening.

Important: The business trading name must not contain a ‘sensitive’ word or expression. Likewise, it must not suggest a connection with any government or local authorities (unless you have permission to do so). Further guidance is available about incorporation and names for companies in the United Kingdom.

Extra Help and Support

Sole trader workers can sign up for business support emails sent from HMRC (e.g. a free service tailored to your individual needs).

Another section contains a help guide for anyone who wants to start a social enterprise (e.g. businesses that help people or communities, such as co-operatives and CICs).

Businesses affected by the coronavirus pandemic (COVID-19) may be able to claim a grant through the Self-Employment Income Support Scheme.

Registering as Sole Trader with HM Revenue and Customs