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What are your legal obligations when becoming a sole trader?

Dec 23, 2022 | Uncategorised

Are you going into business as a sole trader? Then there are several legal requirements you need to meet.

Some of these overlap with the legal obligations of other types of companies – especially those surrounding workplace standards and behaviour. But some are the sole preserve of the sole trader.

But first, a word about terminology. The phrase “sole trader” may conjure up the image of a lone employee – perhaps a freelance teacher, electrician or artist. In fact, the “soleness” of the trader isn’t part of its definition.

No, the defining feature of sole trading is that the business is owned by one person who retains 100% of the profits that it generates. There are no partners or shareholders – but there can be employees.

Before we dive into the legal obligations of sole trading, let’s take a look at the advantages and disadvantages of it as a business structure.

What are the pros and cons of working as a sole trader?

Pros

  • It’s relatively quick and easy to set up as a sole trader.
  • Taxation is comparatively straightforward, being in line with income tax.
  • You don’t have to publish your accounts, so your finances are unavailable to competitors.
  • All profits are yours – you don’t have to share the pie with shareholders or partners.
  • You’re behind the wheel with 100% decision-making power.

Cons

  • There’s always a risk with sole trading that you’ll have to dip into your personal assets if your company’s in financial danger. This is a key difference between sole trading and running a limited company, where you’re only liable for your share in the business – not your personal assets.
  • Sole traders are often hydra-headed, having to manage production, marketing and distribution all at once.
  • It can be difficult to take time off – when you do, the business is essentially inoperative, so it calls for careful planning.
  • It can be hard to expand – the lack of shareholders means you might not have the sources of finance needed to grow.

What’s in a name?

The first thing you have to do when setting up as a sole trader is to pick a name. Simple? Well, yes and no.

There are some restrictions on picking a company name. It can’t be misleading, derivative or offensive.

Because you’re a sole trader, you can’t hoodwink customers by including “limited”, “LLP”, “plc” or any similar phrase in your business name. Likewise, you can’t use puff words like “accredited” without permission from the BEIS.

Your name can’t be derivative – it mustn’t step on the toes of an existing company or trademark.

Government guidelines are vague on notions of “offence”, but you’ll soon find out if your name is deemed insensitive or hurtful.

Getting started

One of your key obligations as a sole trader is to register for self-assessment with HMRC. This differs from partnerships and limited companies that register with Companies House.

By registering for self-assessment, you’re committing yourself to completing an annual tax return. In order to do this, you’ll need to keep accurate records of your income and expenditure throughout the financial year. Once your tax return is submitted, your tax bill must be paid by midnight on January 31.

When you start your sole-trading journey, you may find that free software like Excel or Google Sheets is enough to record what’s coming in and going out. But as you grow and your transactions become more complex, you may want to look into accounting software.

There’s a range of such software available, from Sage to QuickBooks, from Xero to Freshbooks.

As well as paying income tax, you may have to pay class 2 or 4 National Insurance contributions. If you don’t know your number, you’ll need to register.

Do I need to register for VAT?

You only need to register for VAT when your annual turnover exceeds £85,000. Once registered, you have to charge your customers VAT on your goods or services. You also have to submit a separate VAT return to HMRC.

Do I need any licences or permits?

This depends entirely on the nature of your business. It might be the case if you sell food or alcohol or play music on your company premises.

The best thing is to check the government’s licence finder and make sure.

I’m a construction worker

If you work in the construction industry, you’ll need to register with HMRC for the Construction Industry Scheme (CIS). You can read more about this here.

What are my legal obligations as an employer?

Some legal obligations for sole traders overlap with those of limited companies and partnerships. These would include essential activities like managing payroll and issuing contracts. Others are perhaps less obvious, and include:

  • Checking that your staff have the right to work in the UK.
  • If your work involves children or vulnerable adults, staff need to undergo DBS checks.
  • Keeping in line with health and safety regulations.
  • Paying National Minimum Wage or above.
  • No matter how big or small you are, you’ll need to comply with the Data Protection Act 2018. This applies both to employees’ and ex-employees’ data as well as that of clients and suppliers.
  • Running your company in line with the Equality Act 2010. Any discrimination against a person with a protected characteristic reflects badly on you and can lead to legal repercussions.

Setting up as a sole trader is a relatively straightforward affair. It’s important, however, to keep on top of your legal obligations so as not to run into trouble.

Are you looking for commercial legal advice? At Milners Law, we have a range of expert solicitors who can help you with commercial and employment disputes. We pride ourselves on providing jargon-free advice so you know where you stand.

Interested? Then please don’t hesitate to contact us for a free, no-obligation consultation.

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