Setting Up as a Sole Trader
Sole trading is the simplest business structure and the default when an individual starts working for themselves. Registration requirements are minimal in most jurisdictions.
The defining characteristic
There is no legal separation between you and the business. Business debts are your debts, and business liabilities reach your personal assets.
This is the essential difference from an incorporated company, and it is the reason to consider incorporating as activity grows or risk increases.
It also means the business cannot be sold as an entity, only its assets and goodwill.
Getting started
Register with the tax authority within the required period, which is typically specified and carries penalties for lateness.
Check whether any licence or permission is required for your activity, which applies to more trades than people expect.
Open a separate bank account. Not always legally required and enormously helpful for record keeping and for demonstrating the business is genuinely separate in practice.
Arrange insurance appropriate to the work: public liability, professional indemnity, tools and equipment cover.
Tax and contributions
You pay tax on profit, which is income less allowable expenses, through a self-assessment or equivalent process.
Social security or national insurance contributions are usually payable separately and matter for state pension entitlement.
Set aside a percentage of every payment received into a separate account from the first day. Erring high is more comfortable than the alternative.
Payments on account, requiring advance payment toward the following year, exist in several systems and make the first bill considerably larger than expected.
Records and expenses
Keep records of all income and expenditure with supporting documents, retained for the statutory period.
Allowable expenses are those incurred wholly for the business. Mixed-use items — phone, vehicle, home working — are apportioned on a justifiable basis.
Simplified expense schemes exist in some systems for mileage and home working, which reduce record keeping.
When to consider incorporating
Rising profits, where the tax treatment of a company may be more efficient, though this depends heavily on jurisdiction and how profits are extracted.
Increasing liability exposure, where limited liability becomes valuable.
Client requirements, since some organisations only contract with incorporated suppliers.
Intention to sell the business or bring in investment.
Take accounting advice on timing rather than assuming, since incorporation carries additional cost and administrative obligations.
This article is general information and not tax or legal advice. Requirements vary considerably by jurisdiction.
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