Sole trader businesses give you the flexibility and autonomy of running everything yourself; from hiring staff and entering contracts to overseeing them yourself. However, this type of structure also poses more risk; should your business run into debt, you’ll personally take on all its liabilities.
As a sole trader, it’s imperative that you register with HMRC as well as keep records. Failing to do so could result in penalties from them.
1. Decide on a business name
Starting a business requires having a clear idea of how you envision its development. Naming your business is an integral component of that process, so take time to carefully consider it – brainstorm, iterate and gather feedback from friends and family before running potential names through trademark search databases (and domain search databases too) to verify they’re available.
Sole traders are personally liable for income tax and National Insurance contributions on business profits as well as debts incurred by their business, so keeping track of income and expenses to claim back on a Self Assessment tax return each year is of great importance. A tool such as FreshBooks makes this job much simpler.
2. Register your business with HMRC
if you intend on running your business as a sole proprietor, HMRC registration is an absolute requirement. While you can register as soon as trading begins, legal requirement states this should happen no later than October 5th following the end of your first tax year. As a sole trader you’re accountable for both profits and losses; any untaxed profits will go back into your pocket once tax has been deducted while any debts that arise will fall upon yourself personally.
Being a sole trader offers many advantages, including choosing your own hours and working on projects you find fulfilling. But you also must keep accurate records and file annual self-assessment returns, which requires keeping accurate records and filing returns every year. A good accountant can assist in this regard and may advise whether switching your business structure into limited liability with greater borrowing power and limited liability protection. Keeping accurate records can be daunting task – software like FreshBooks can make this task simpler by automatically recording income and expenses throughout the year and calculating tax bills live!
3. Set up a business bank account
If you’re running or planning to start a business, establishing a separate bank account for it is absolutely essential. Not only will this keep personal and business expenses separate but it is an essential step toward creating legal entities and building company credit histories – both requirements for qualifying for loans from small business lenders. Opening such an account may require more paperwork than regular accounts such as incorporation documents and Employee Identification Number (EIN), similar to Social Security numbers but specific for each entity.
Dependent upon the nature of your business, additional accounts such as savings/investment accounts and corporate credit cards may be necessary. When selecting a bank for your business account needs, compare features and fees in order to find an ideal fit – many banks provide cash bonuses or fee waivers to make your selection process simpler. It might also be worthwhile considering digital business banking services like Novo that can assist with automating payments while enabling online financial management and monitoring.
4. Create a business budget
One of the worst feelings in business is uncertainty over money issues, and budgeting can provide peace of mind by giving an accurate snapshot of income and expenses.
Start by compiling all of the sources of income your business receives (bank statements, invoices and till rolls are suitable records). Next, total up all fixed costs such as rent or utilities which remain constant from month-to-month – these expenses should then be subtracted from income in your budget.
Add up all of your variable expenses – these expenses vary with your business output and production, such as costs of goods sold and commissions paid to staff. Don’t forget any one-off expenses or start-up costs associated with starting up your new business venture!
Once you’ve added up all of the fixed and variable costs of running your business, subtract them from total income to gain an idea of its financial health. A positive number should result; however, it is also wise to monitor variations between actual income and spending over time.
5. Tax & Insurance for your business
Sole traders don’t necessarily require a separate business bank account, but it is highly advisable as it helps distinguish personal from business expenses and also makes filing their tax returns easier, since HMRC can access accurate financial records more quickly.
Registering for VAT can be easily and quickly completed online, enabling you to charge customers VAT on goods or services and then claim it back from HMRC.
Your business must keep clear and accurate work records, such as invoices and cashbooks, that can help reduce its tax bill. As a sole trader you remain personally liable for any debts your business accrues; therefore a limited company might be more suitable, or alternatively purchasing insurance to reduce some of the risks involved with being self-employed.