Guide to Setting up as a Sole Trader

Thinking of setting up as a sole trader? This handy guide should be all you need

By Adam Pescod

Definition of sole trader

Sole trader is the name given to a business structure whereby one person owns and runs the entire company. The owner of the business can also be described as a sole trader, or self-employed.

Unlike limited companies, sole traders don’t have to be registered on Companies House, and there is no legal distinction between the owner and the business. This means that the owner keeps all of the profits made by the company, but is also liable for all of the losses. The latter is commonly known as unlimited liability.

How to register as a sole trader

Registering as a sole trader is a relatively easy process, and entails less paperwork than registering as a limited company or limited liability partnership (LLP).

If you’ve not been self-employed before, you’ll just need to register for Self Assessment with HMRC. You can do this online or over the phone, but it must be done within three months of the date you started trading or working for yourself, otherwise you could face a fine.

These are the details you’ll need to provide to HMRC when registering as a sole trader:

Name	Email address
Address	The nature of your business
National Insurance number	Start date of self-employment
Date of birth	Business address
Telephone number	Business telephone number

Depending on your circumstances, you might also need to provide the following information:

Your Unique Tax Reference (UTR) – if you’ve previously been self-employed
The company’s UTR – if you’re joining a partnership
Name and date of birth of any business partners – if you’re setting up a partnership

Advantages of being a sole trader

Becoming a sole trader is a popular choice for many people in the UK. Here are some of the key advantages of sole proprietorship, compared to other traditional business structures.

Simple to establish

Setting up as a sole trader is the most hassle-free way of starting a business. The registration process is quick and easy, and there’s no cost involved, as there is when setting up a limited company. Most sole traders also use their personal bank account for all business transactions, saving them the time and administrative burden of opening a separate business bank account.

Keeps you in control

As the only person to own and invest in the business, a sole trader doesn’t have to consult anyone else when making decisions. Quite simply, they have total control of the company and the way that it operates. This can be beneficial when new opportunities arise, with the business able to move quicker than a limited company that may need to seek the approval of directors, investors and shareholders before committing to a lucrative new contract.

Ideal for first-timers

Because it doesn’t entail any registration costs, starting out as a sole trader can be a good way of testing a business idea before pitching it to investors or incorporating as a limited company. Not having to register your business on Companies House means you can keep the details of your business private for a period of time, before establishing a limited company at a later date.

Disadvantages of being a sole trader

Despite the various benefits of operating as a sole trader, it’s also worth considering the potential pitfalls that come with this type of business model.

Unlimited liability

As sole traders are not separate legal entities, it means the owner and business are effectively treated as one and the same. Whilst this arrangement allows a business owner to keep hold of their company’s profits (after tax), it also makes them personally liable for the losses, plus any debt owed to suppliers. If they’re unable to repay their business debts, a sole trader might have to sell their personal assets, including their home, to cover the cost.

Difficult to take time off

With nobody else to pick up the slack, it can be tricky for sole traders to find time for a holiday, or take a day off when they’re ill. Doing the job of five or six people can also mean working long hours on a regular basis, potentially at the expense of time with loved ones. For this reason, many business owners choose to set up with a partner, or hire a part-time accountant to take care of the finances.

Limited access to finance

Because their accounts aren’t disclosed publicly, sole traders can often struggle to raise additional funding to grow their business. Most lenders like to see evidence of a healthy revenue stream, which will give them confidence in a company’s ability to repay a loan. However, if a sole trader’s business transactions are made through their personal bank account, it can be difficult to get an accurate picture of a company’s performance.

That being said, there are a number of alternative lenders offering sole trader loans of over £25,000. As long as a sole trader can demonstrate their ability to meet the cost of repayments, and is willing to offer a personal guarantee on the funding, it might stand a chance of being approved for a loan.