The simplest way to start a business is to set up as a sole trader. There is minimal paperwork to take care of, and you don’t have to pay any company formation costs.
However, you do need to formally register as self employed with HMRC, and assume responsibility to pay your own income tax and National Insurance liabilities.
Here are the steps you must take to get started as a self employed sole trader:
Pick a business name
What are you going to call your business? For many new entrepreneurs, this is the most exciting start-up task and one that lots of time is spent on!
Some people simply trade under their own name, or say they are; ‘Your Name trading as Business Name‘. For example, if you were John Smith you could opt for, ‘John Smith trading as John Smith Plumbers’.
Don’t forget to check that no-one else is using the same name. There is no register of business names used by self-employed people so you should do an online search to see whether someone is already running a business with your preferred name.
If someone has beaten you to it, then you’ll need to think again, and come up with an alternative name for your new business.
Tell HMRC you are becoming self employed
You must notify HMRC within 3 months of becoming self-employed. You can do this via any of the following ways:
a) Register online here.
b) Call the Newly Self Employed Helpline on 0845 915 4515.
c) If you want to register by post, fill in Form CWF1 here (PDF).
Don’t forget though, or you will be fined £100.
Once you have registered as self-employed you will pay tax each year by submitting a self-assessment tax return to HMRC. A smart move is to keep tax money aside in a separate account from day one – then you will never find yourself scrabbling to meet a tax payment. Your accountant will advise how much tax you can expect to pay.
As a sole trader, you will also be responsible for paying your own National Insurance contributions (NICs). You will need to pay Class 2 NICs – currently £2.70 a week, and also extra Class 4 contributions which is currently 9% of your business profits between £7,755 and £41,450, and 2% on profits above £41,450 (2013/14 tax year).
The rules aren’t straightforward, so it’s wise to consult your accountant for advice specific to your financial situation.
Register for VAT
If your business has a turnover of more than £79,000 (from April 2013) in a rolling 12 month period you will need to register for VAT. So keep an eye on how well your new business is doing. As soon as you do pass the limit, you have 30 days to register.
With some types of business, you need to get a licence before you can start working. For example, if you want to set up as a taxi driver you will need to apply for a licence from your local authority.
It’s the same for many other types of work, including being a child minder running a restaurant or pub, or being a market trader. And to get a licence, you will typically have to do some specific training and gain relevant qualifications. You may also have to go through an inspection to ensure your business is shipshape and legal.
When you are starting in business the decision on whether to go down the self employment route or to form a limited company is an important one. You should carefully consider the benefits and drawbacks of the options, and discuss with your accountant before jumping in.
For more information on the topic you should also read,
- What is a sole trader?
- 5 things you must do when you go self employed
- 10 advantages of running your business as a limited company instead of being self employed
- Sole trader self assessment tax guide
- ByteStart’s Complete Start-Up Guide
Duport also offers a Sole Trader Package which will help you get up and running as a sole trader in a matter of hours (including the forms you need to register with HMRC).