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Operate as a sole trader FAQs
Becoming a sole trader is often the first step to starting your own business. Ensure that you are fully prepared with all the relevant documents.
If you decide to operate as a sole trader, the initial things to do include choosing a business name (or simply trade under your own name), registering for self-assessment (and VAT if your earnings are likely to be substantial) and taking out any relevant business insurance. You should then consider if you're going to need any legal documents to protect your interests or facilitate business deals. If you're primarily providing consultancy services, you might need a Consultancy agreement. When trying to save costs in terms of office space, an Office sharing agreement can prove valuable. Finally, remember to protect any commercially sensitive information with a Confidentiality agreement.
A sole trader operates a business as an individual. If you decide to set up as a sole trader, remember that you will be personally liable for paying bills and ultimately responsible if the business makes a loss. You must send a self-assessment tax return every year and pay income tax on the profits you make.
Becoming a sole trader involves minimal steps. You can either trade using your own name, or you can choose a business/trading name. You don't need to register this name but you should make sure that it's not already being used, particularly by another company in the same industry. Your business name and your personal name should be identifiable on any correspondence you use and people should be able to identify that your name is associated with your business/trading name.
After choosing a business name (or if you decide to trade under your own name), you'll need to register for self-assessment with HMRC as soon as possible after starting your business. Note that you may be charged a penalty if you register later than 5th October in your second year of business. You'll also need to pay National Insurance and register for VAT if you expect your turnover to be over the current threshold. You can view the current thresholds which are subject to change annually.
Also, remember to take out any relevant business insurance to control and minimise various risks. If your business involves advising or providing professional information, the most likely insurance you will need is professional indemnity insurance. Product liability insurance may be necessary if you design, manufacture or supply products. You'll need car insurance if you use a vehicle. As your business expands you may also need employer's liability insurance, if you hire employees, and public or environmental liability insurance, if you decide to perform services or provide goods in a public space. For further information, read Business insurance.
Many sole traders will be undertaking consultancy work, either as their principal business activity or to supplement their income. If you're being engaged as a consultant, it's a good idea to put things on a formal footing with a professionally written Consultancy agreement. This type of contract will ensure that both you and your client are clear on the services to be provided, as well as payment obligations. It also deals with issues such as ownership of intellectual property and data protection matters. If you're using the services of a consultant yourself, rather than providing them, this type of agreement is equally important to put in place.
Renting office premises as a sole trader can be extremely expensive, although it's often a necessary expense. You may be able to share the cost with another small business, either by renting out spare office space offered by another company or by sharing your own space for a fee. An Office sharing agreement can be used to provide the relevant formality to such an arrangement. It should include a range of details such as workstations to be used, the period for which they are available and the licence fee payable for the specific shared office. For further information, read Sharing space.
Standard terms and conditions for the sale of goods or supply of services help to make your customers aware of their rights and obligations from the outset and allow you and your customers to focus energy on agreeing on the specifics of a particular order. If you are selling or supplying goods or services on a business-to-business basis, you should consider different terms and conditions than when selling to consumers. There is more legislation aimed at protecting consumers, which must be taken into account when drafting T&Cs. For further information read, Terms and conditions and How to choose the right terms and conditions to help you choose which T&Cs are right for you.
If you have a website you should consider having Website terms and conditions. These govern the use of your website by others. Providing an effective set of website T&Cs can help to fulfil some of your legal obligations such as including full business details. It'll also illustrate that you've made every effort to discourage any undesirable activity by users in the case of a legal dispute.
If your website handles personal electronic data or uses cookies you should consider publishing a Website privacy policy that can help you to gain cookie consent and generally make your internet business compliant with UK data privacy laws. You can either have an integrated cookie policy in your Privacy policy or have a separate Cookie policy.
If you need to share commercially sensitive information with another business, particularly where intellectual property is at stake, it's vital that you preserve confidentiality with a legally binding agreement. Sole traders often feel exposed in this area and would prefer to avoid legal costs so take chances, which can sometimes prove fatal to their business. A legally watertight Confidentiality agreement can avoid expensive lawyers whilst providing you with the protection you need. Also called a non-disclosure agreement (or NDA), this type of contract allows two businesses to freely negotiate terms of an agreement and to understand the proposal of a deal more thoroughly, without the risk of any confidential information being leaked.
You can alternatively use a One-way NDA if you're the only party disclosing confidential information.
Some businesses will need to hire employees to help with the day-to-day function of the business and to provide expertise or labour. Having a written contract of employment when you hire employees will ensure that both you and the employee understand from the outset the responsibilities and obligations the role needs. Create your Employment contract to protect your business and give certainty to you and your employees.