Law guide: Business start-up

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The basics

The basics

A sole trader doesn't really have a formal legal structure. You work for yourself and trade under whatever name you choose (subject to certain rules – see below). The business has no separate legal status, and it's normally used by one-person businesses with no employees, but you can employ others if you wish.

If you start trading as a sole trader, you must register with HM Revenue and Customs (HMRC) by 5 October in your business's second tax year. You must pay Class 2 National Insurance contributions unless your profits are below a certain threshold. You may also have to pay Class 4 National Insurance contributions if your profits exceed a certain amount. If you employ staff, you'll need to deduct Class 1 National Insurance contributions from their income and pay it to HMRC. All income from the business will be taxed along with your personal income and must be declared on your personal tax return.

See Income tax and Capital Gains Tax for more information on taxes.

Advantages

  • You don't need to register with Companies House - you just need to tell HMRC that you're a sole trader.
  • No need to comply with the large amount of legislation that controls companies.
  • National Insurance contributions are usually lower than what you'd have to pay as a company.
  • You can keep simple accounts that don't need to be prepared by an accountant.
  • You're entitled to all the profits the business makes and can make all decisions on running your business yourself.

Disadvantages

  • You're personally responsible for all liabilities. This means that if your business incurs debts, your personal assets, including your home, are at risk if you can't repay those debts. This is often the primary reason why people decide to start a limited company.
  • There are fewer social security benefits.
  • It can be more difficult to raise finance, as lenders often prefer to lend to companies or partnerships.
  • It's harder to sell the business or pass it down to children, as there is no separate legal entity to transfer.
  • Some say that potential customers and suppliers prefer to deal with limited companies than with sole traders.

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