Becoming a sole trader is the simplest way of setting up in business on your own. You are not required to register a formal business (although you will need to register as self employed), and there are no initial fees. Furthermore, you will generally be taxed according to the regular Income Tax schedule; you don’t ned to worry about corporation tax.

But there are significant downsides to this arrangement. As a sole trader, you are personally liable for any debts you incur. This is in contrast to, for example, a limited company arrangement, where the directors are shielded from personal liability.

What are a sole trader’s responsibilities?

Sole traders have a number of key legal and financial responsibilities. Sole traders must:

• register as self employed promptly. Failure to do so will result in a fine;
• complete and return an annual self assessment to HM Revenue and Customs;
• pay Class 2 and Class 4 National Insurance Contributions, at a fixed rate;
• accept personal liability for any debts accrued while running the business.

Sole traders and trading names

It is possible to assume a ‘trading name’ as a sole trader, meaning that you could do business under a name other than your own. For example, John Smith the widget salesman might want to trade as JS Widgets. However, different banks have different demands concerning trading names for sole proprietors; you should consider these demands when choosing a business bank.