Being a sole trader is the simplest way to get started in business. Once you have informed the government agencies of your intentions to go self-employed, you can start trading right away (subject to any specific licences you might require in your line of work).

As a sole trader, you can quickly adapt to changes in your business with minimal bureaucratic changes required and you have complete control over your business and accounting affairs. However, a sole trader is also ultimately responsible for any liabilities should anything go wrong. It is worth spending time considering which set-up company format is best for you.

Setting Up

As a sole trader, you will not need to notify Companies House, nor deal with any administrative or accounting requirements which are required of limited companies.

If you start working for yourself, you must register with HMRC as self-employed, even if you already send in a tax return. There are some exceptions and special rules for particular industries, like the construction industry.

• Setting up: Just need to register as self employed
• Liability: If the business fails, then the owner is fully responsible for all the business’s debts
• Management: The owner’s word is final
• Profits: All profits belong to the owner
• Taxes etc: Self employed status. Even if the owner doesn't draw on his profits they are still taxed. Losses can be offset against tax on other income.
• Continuity: If the owner dies or retires, the company may crumble.

Further Details

Unlike other business formats, sole traders (and partnerships) can start trading straight away, although certain types of businesses may need a license to trade.

If trading under a name other than that of the owner, one must display the name and the address of the owner at the premises and on the stationary.

Seek advice from professionals such as solicitors or accountants and business support organisations...

As a sole trader you have to keep track of monthly income and expenditure, which means holding on to all invoices and receipts. You'll also have to talk to HMRC about National Insurance contributions; the easiest way to handle these is by setting up a Direct Debit. The amounts involved are quite small.

You could manage your accounts by hand, but it's easier to do it using a computer. A spreadsheet will suffice, containing columns for income, expenditure and VAT (if you're VAT-registered).

This means keeping track of all invoices (along with the dates they were issued and the dates they were paid) and all receipts for work-related transactions, including any ground rent, telephone bills, heating and electricity bills and so on. If you work from home, some of your household expenditure may be tax-deductible.

This is all the information you'll need to fill in the Tax Return form each year. You can then either attempt to calculate the amount of tax owed yourself or send the form to HMRC and have them do it for you. It's all quite painless and should take no more than a couple of hours each month.

Tax & National Insurance

Essentially, your business income is counted alongside your existing personal income, so the accounting side of your business will be very straightforward. As the name suggests, you will be personally liable for any debts you incur in the running of your business which you wouldn’t be under the limited company route.

In terms of accounting, you will need to submit an annual self assessment form to HMRC and keep accurate and up-to-date records of all business transactions and accounts. You will also pay income tax on all profits and pay national insurance contributions on those profits. Losses can be offset against tax on other income.

In the April after your business starts, HMRC will send you a self assessment tax return to fill in. HMRC will also use the return to assess any profit-related (Class 4) NI contributions you may need to pay.

Self employed people are also liable for Class 2 NI contributions (currently £2.40 per week: 2009/10 Tax Year).