It’s simpler to set up as a sole trader, but you’re personally responsible for your business’s debts. You also have some accounting responsibilities.
If you form a limited company, its finances are separate from your personal finances, but there are more reporting and management responsibilities.
If you’re a sole trader, you run your own business as an individual and are self-employed.
You can keep all your business’s profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes. You must also follow certain rules on running and naming your business.
When you need to set up as a sole trader:
You need to set up as a sole trader if any of the following apply:
you earned more than £1,000 from self-employment between 6 April 2020 and 5 April 2021
you need to prove you’re self-employed, for example to claim Tax-Free Childcare
you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits
How to set up as a sole trader
To set up as a sole trader, you need to tell HMRC that you pay tax through Self Assessment. You’ll need to file a tax return every year. Register for Self Assessment.
You’ll need to:
keep records of your business’s sales and expenses
send a Self Assessment tax return every year
pay Income Tax on your profits and Class 2 and Class 4 National Insurance - use HMRC’s calculator to help you budget for this
You’ll need to apply for a National Insurance number if you’re moving to the UK to set up a business.
You must register for VAT if your turnover is over £85,000. You can register voluntarily if it suits your business, for example if you sell to other VAT-registered businesses and want to reclaim the VAT.
Working in construction industry
Register with HMRC for the Construction Industry Scheme (CIS) if you’re working in the construction industry as a subcontractor or contractor.
Naming your business
You can trade under your own name, or you can choose another name for your business. You do not need to register your name. You must include your name and business name (if you have one) on official paperwork, for example invoices and letters.
Sole trader names must not:
include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
be the same as an existing trade mark
Your name also cannot contain a ‘sensitive’ word or expression, or suggest a connection with government or local authorities, unless you get permission.
If you move to becoming a limited company, as a Director, there are a few more responsibilities to take on.
Records about the company
You must keep details of:
directors, shareholders and company secretaries
the results of any shareholder votes and resolutions
promises for the company to repay loans at a specific date in the future (‘debentures’) and who they must be paid back to
promises the company makes for payments if something goes wrong and it’s the company’s fault (‘indemnities’)
transactions when someone buys shares in the company
loans or mortgages secured against the company’s assets
Register of ‘people with significant control’
You must also keep a register of ‘people with significant control’ (PSC). Your PSC register must include details of anyone who:
has more than 25% shares or voting rights in your company
can appoint or remove a majority of directors
can influence or control your company or trust
You still need to keep a record if there are no people with significant control.
Read more guidance on keeping a PSC register if your company’s ownership and control is not simple.
You must keep accounting records that include:
all money received and spent by the company, including grants and payments from coronavirus (COVID-19) support schemes
details of assets owned by the company
debts the company owes or is owed
stock the company owns at the end of the financial year
the stocktaking's you used to work out the stock figure
all goods bought and sold
who you bought and sold them to and from (unless you run a retail business)
You must also keep any other financial records, information and calculations you need to prepare and file your annual accounts and Company Tax Return. This includes records of:
all money spent by the company, for example receipts, petty cash books, orders and delivery notes
all money received by the company, for example invoices, contracts, sales books and till rolls
any other relevant documents, for example bank statements and correspondence
You can be fined £3,000 by HMRC or disqualified as a company director if you do not keep accounting records.
As a director of a limited company, you must:
follow the company’s rules, shown in its articles of association
keep company records and report changes
file your accounts and your Company Tax Return
tell other shareholders if you might personally benefit from a transaction the company makes
pay Corporation Tax
You can hire other people to manage some of these things day-to-day but you’re still legally responsible for your company’s records, accounts and performance.