Registering as a sole trader: what is a sole trader?
Setting up as a sole trader is the most popular way to start up a business. Find out how to register a business as a sole trader
See also: how to register as a sole trader
If you want to go it alone in starting a small business, you’re not alone. A massive 75% of all British businesses have no employees according to Department for Business Innovation and Skills (BIS) figures. So you could say that sole traders pretty much drive the UK economy.
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The popularity of this type of business reflects the ease with which you can start sole trading. Sole trader registration is straightforward, record keeping is simple and you get to keep all the profits after tax.
Starting small by sole trading is a way to test your chosen market – many companies are born this way. But there are also disdavantages as well as advantages of being a sole trader; if your business fails, you will have to pay for that failure out of your own pocket.
What is a sole trader?
There are three basic types of business ownership; sole proprietorship or sole trading, partnership and limited company. Sole trading is when an individual is the only owner of the business and has complete control over the way it is run.
The law makes no distinction between the business and a sole trader. This unlimited liability means that any business debt can be met from the owner’s personal wealth if the business fails. And the business usually ceases on the owner’s retirement or death.
A sole trading business is usually small in size, with a low turnover, and few, if any, employees. But there are an estimated 4.8 million active private sector businesses in the UK and 3.6 million of these are class zero businesses – that is businesses without employees.
This majority of sole trading enterprises are in the service sector, including photographers, plumbers, hairdressers, shops, real estate agencies and bed & breakfast hotels. Approximately 1 million size class zero businesses are in the construction sector and 1.1 million are in business-related services.
Becoming a sole trader
You will need to fulfil certain legal requirements before you can open for business:
Put it on paper: If you are going to trade under a name different to your own personal name you must display the name/s of the owners and an address where documents can be served on all business stationery and at your premises. Design letterheads, business cards and signage accordingly.
Use the right name: A business name means the name of your business if it is different to your your own name. It is not compulsory to register a business name but you can do so with the National Business Register.
You also need to be careful about choosing a name since the wrong name can get you into difficulties.
Certain words and expressions like international, federation and registered are restricted under the Business Names Act 1985 and the Company and Business Names Regulations 1995. Companies House and the National Business Register have lists of these words and details of how to obtain approval to use them.
Your business name can not be the same or too similar to that of another business, trademark or company. If it does conflict you could face legal action from its owner. Check phone books, trade journals and magazines to ensure against clashes and you can run free name checks against all these via the National Business Register as well as the Intellectual Property Office and the limited companies names index at Companies House.
To be absolutely sure that you can use a name, contact a solicitor to perform the checks or register your name with the National Business Register who will do the checks for you and ensure nobody copies it the future or passes it off as their own.
Inform the authorities: You must register as self-employed with the HMRC within three months of starting up or face a £100 fine. The three month limit starts from the last day of your first month of trading. Find out more about registering as self-employed here