Sole traders – legal requirements for setting up and trading

Sole traders can take on more risk than other business structures, but with the promise of greater reward.

11th May 2018

Running a business as a sole trader means that you will be the sole stakeholder in the business. This can give you more freedom in running the business than you would have in a limited company, as it means that you alone are responsible for controlling the company, and you aren’t responsible to other shareholders. You also get to keep all of the profits from your work.

The downside to working as a sole trader is that all of the responsibility is on you – you will need to pay for any equipment, stock, or services that the business needs. You will also be responsible for any debts accrued by the business – if the business gets too far into debt, you could be forced to declare bankruptcy.

On the other hand, if your business is a limited company, the responsibility for any debts will generally fall onto the company, rather than you personally. This includes any loans you have taken out for the business and any claims brought against you which are not covered by your insurance.

Running your business as a sole trader is simpler, and can reap greater financial rewards for you personally. You will not need to register your business with Companies House, and can start trading as soon as you are ready. However, bear in mind that it also comes with a lot more personal risk to you.

Depending on your line of work, you may also find that potential clients will be unwilling to work with a sole trader.

You should consider this when starting your business, and ask yourself if launching your business as a limited company would be a preferable option.

Tax

As a sole trader, you will not need to pay corporation tax on any of your business earnings. However, you will need to pay income tax and National Insurance, just as you would if you were working for another business.

You can pay these taxes by registering for self-assessment with HMRC. Note that you must register with them even if your earnings from the business are very small, or you are still working for another employer.

If you are just starting your business, you can register for self-assessment on the HMRC website. If you have been self-employed before and need to re-register, you should use this form instead.

Depending on how much your business makes and the nature of its goods or services, you may also need to pay VAT.

GDPR

The new General Data Protection Regulations (GDPR) came into effect in May 2018.  These regulations govern how businesses collect, store and handle an individual’s data, and determine the penalties for those who fail to comply.

Any business that holds personal information about an individual/customer, whether electronic or on paper, will need to ensure that they can prove that they have obtained consent to hold/use that persons data.

Unlike large businesses, sole traders and the self- employed don’t need to appoint a Data Protection Officer. However, they could be fined up to 4% of their annual turnover for failing to get sufficient consent to collect, hold and use a persons data.

They will have to get clear and unambiguous consent; have to keep a secure record of how and when that consent was granted, what it was granted for and for how long it will be held.

Consent must be positively given so the use of tick boxes to presume that consent has been given, unless an individual opts out will no longer be an appropriate means of proving consent to hold/use data has been given. Under the regulations, customers will have the right to withdraw consent that was given and the right to be forgotten and for their data held to be deleted.

Useful guidance on the new regulations has been published by the Information Commissioners Office and can be found on their website at ico.org.uk.

Taking on staff

Being a sole trader does not mean that you need to work alone on your business – you can hire staff. Hiring staff means that you will need to set up a Pay-As-You-Earn (PAYE) payroll scheme to collect income tax and National Insurance contributions from your employees.

Insurance

You may need some sort of insurance and in some cases this will be a legal requirement.

The type of insurance you need depends on your type of business. Here are a few common examples.

Car or vehicle insurance

If you need to drive your vehicle for your businesses, you will need to make sure it is insured for business use. You can do this by checking with your insurer.

Public Liability Insurance

This protects you if a member of the public comes to harm or has their property damaged due to something careless you or one of your employees has done, for example, if someone trips and injures themselves in the premises of your business. This is particularly important if you run a shop or another sort of business that has customers or other members of the public.

Public liability insurance often comes with product liability insurance included. This works similarly, except that it covers you if someone sustains harm or property damage from a product your business has created. This is particularly important for those working in the food industry, making toys or other things intended for children, or anything which could easily cause harm if it malfunctioned.

Please note the public liability insurance does not cover your employees. For this you will need employers’ liability insurance.

Employers’ Liability Insurance

This insurance will give you cover to continue paying employees who are injured working for you. It only applies to injuries sustained on the job, for example, if they tripped and fell in your workplace. This insurance is mandatory for any business with employees.

Professional Indemnity Insurance

This cover protects you if you are sued by a client over specific technical services you have rendered to them. This sort of insurance is important if the consequences of a mistake by you could be particularly damaging and costly, for example, accountants are legally required to have professional indemnity insurance. Other professions which benefit from professional indemnity insurance include solicitors, doctors and architects.

Even if your line of work does not legally require this insurance, it can be of great benefit to you, even if you never need to claim under it, as you may find business partners will be unwilling to work with you without any indemnity insurance.

Professional indemnity insurance can protect you if you are sued for reasons other than financial loss, for example, if you are a hairdresser you could be sued for giving a customer a hair style that did not meet their approval on their wedding day.

For more specific advice on whether you should get professional indemnity insurance, you should talk to your trade association or regulator for your profession.

Building and Contents Insurance

This will cover you if something happens to damage the premises and contents of your work such as a fire or flood

Business interruption insurance could also protect you if a major incident has caused extensive damage to your building. This insurance will help you cover expenses and lost revenue if you are forced to stop trading temporarily by a major incident.

Business Assets and Equipment Cover

This will cover you if any equipment or assets that you use for your business are stolen or damaged (excluding normal wear and tear).

Goods-in-Transit Insurance

This covers you if any goods you have sent are lost or damaged. This is particularly important if you are running an online shop and need to post your products to your customers.

This will generally only cover you for things being sent domestically. International shipping will require separate insurance.

Health and Safety

You will need to make sure your working premises are compliant with health and safety standards, particularly if you have employees working there or you have clients and customers who enter the premises.

Becoming a limited company

As your business develops and gets bigger, it may be a good idea to change your business’s structure to become a limited company. This may be appropriate for your company if it has expanded considerably, as you may be able to hire more staff to take on the added responsibilities that running a limited company would require. However, all situations will vary, and it would be wise to seek legal advice first.

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