When you’re setting up your own business, there are a number of different options available to you, including being a sole trader. How is being a sole trader different, though, and how do you get started?
Starting your business, once you know what you want to do, you’ll need to decide on how you want to run it. Do you need to set up a private or public limited company, or a partnership? Or could you work as a freelancer or sole trader?
We’re an entrepreneurial nation in the UK and the FSB reports that, in 2019, there were estimated to be 5.9 million private sector businesses in the UK and 4.5 million of these had no employees. So, trading alone – either as a sole trader or as a limited company with no employees, is a popular proposition.
What is a sole trader?
A sole trader is the most simple business structure available to entrepreneurs in the UK, as there is no difference between the individual and the company. This has the benefit that there’s very little extra paperwork to be done or regulations to comply with.
The sole trader is personally liable for any losses in the company, so if your business hits harder times, you will too. Being liable personally for 100% of any debt your business has, if your business fails, you’ll need to pay any debts from your own pocket.
On the other hand, being a sole trader also means you’ll have greater control, answering to no other directors, with the ability to make your business decisions more quickly.
What do you need to do to become a sole trader?
Sole traders don’t need to register with Companies House. Instead, you’ll need to keep records of your business sales and expenses, enabling you to submit a self-assessment tax return each year. You will need to let HMRC know that you’re planning to start trading. And you’ll need to pay income tax on your profits. To do all of this, of course, you must have a national insurance number.
When it comes to your tax obligations, you’ll need to register with HMRC and pay National Insurance contributions (NICs) and income tax. You’ll also need to complete a self-assessment tax return each year and your tax and NICs will be checked then as well. We’d recommend setting up a separate bank account for your business finances, although this isn’t a legal requirement.
Aside from these financial requirements, you’ll need to ensure you’re complying with any regulatory or legal requirements relating to your trade, for instance, health and safety or food hygiene.
Insurance for sole traders
When it comes to insurance for your sole trader business, aside from the obvious covers you’ll need if you’re driving, there may be some industry-specific cover requirements (such as public liability cover for riding schools) and, if you take on self employed workers who will be working under your direction or control, you’ll also need Employers’ Liability insurance.
You may also need insurance because a client requires you to have cover as a part of your contract with them, or you might simply wish to take some insurance to make sure you’ve covered off your risks.
Insurance to cover off contractual requirements
It’s not unusual for freelancers and sole traders to need insurance as a part of the terms of a contract. Many large corporations (and some smaller businesses), as well as government organisations and local authorities, expect their contractors to be covered, normally with Professional Indemnity and/or Public Liability insurance.
It’s important to make sure you’re covering off both the type of insurance and the amounts or limits that your customer requires. Your insurance broker can help with this.
Insurance for your peace of mind
If you’re a person who’s more aware of risk, and would prefer not to take it, insurance is probably something you’ll be considering. Whether you’re worried about being prevented from working due to illness, accident or incident, or if you’re concerned about professional disputes, you can discuss your concerns with an insurance broker to decide whether taking out cover will be worthwhile for you. They will discuss:
What’s the worst case scenario? How much will be at risk should the worst happen? Adding up how much you could lose may convince you that you really do need insurance, or it may be that you find it’s not needed at all.
Might your home insurance cover business property? While you may be working from home, it may not follow that your home insurance policy will cover your business assets. Your broker can help you to check and will then be able to find business insurance that covers any gaps.
What’s your potential liability? Liability insurance can come with different levels of indemnity so it’s worth making sure you have the right level. This can be based on how much you can afford, as well as your contract values and who you’re working with.
From personal accident or income protection, if you’re unable to work, to professional indemnity and public liability to cover your obligations to others, there are likely to be covers to suit your unique needs.
To find out more from Ryan's, call our Enterprise Division today on 01473 343491.