How to Register as a Sole Trader

How to Register as a Sole Trader

How to Register as a Sole Trader

31 August, 2021

Many people setting up as their own boss will choose to work from home initially, so registering a sole trader business is often done using a virtual business address. As a leading UK provider of flexible virtual office solutions, we’re frequently asked ‘how do I register as a sole trader?’.

How to register as a sole trader

In this handy guide, we’ll cover all the key basics of how to register as a sole trader, including a quick overview of some potential alternative approaches during your initial company formation and business registration with Companies House and/or HMRC.

Who should register a sole trader company?

For new business startups where you’ll effectively be working on a self-employed basis, the simplest approach is often to register a sole trader company. For small operations (commonly single-person, although this isn’t necessarily always the case), establishing yourself as a sole trader offers a good degree of flexibility and control.

One key advantage of this setup is that, when you register as a sole trader, Companies House does not need to log and list your business (or your company financial statements) as part of the publicly accessible UK record. You’ll need to submit all your relevant financial paperwork to HMRC on an annual basis in the form of a Self Assessment tax return, but this isn’t part of the public record - more on this later.

Sole trader vs self-employed: what’s the difference?

Before you proceed with any form of new business formation, you should be clear on the precise definition of a sole trader, and the distinction between sole trader and other forms of company registration.

It’s especially important to understand that, while all sole traders are essentially self-employed, not all self-employed people are technically sole traders. In short:

  • If you’re working for yourself and you’re the only owner of your business, then you’re technically a sole trader. This doesn’t necessarily mean you can’t employ anyone else, but you do need to be the sole owner and shareholder at all times.
  • If you’re acting as a limited company, operating under an umbrella company (for example while working as a contractor), or you’re in a business partnership with someone else, then you’re not operating as a sole trader even if you do work entirely for yourself.

Benefits vs. drawbacks of registering as a sole trader

Understandably, most people like to weigh up potential pros and cons when you register as a sole trader in the UK. There are both advantages and disadvantages to choosing this type of company formation, depending on the specifics of your business and personal circumstances. Let’s explore both angles briefly.

Sole trader - the pros

Fast, easy setup - registration is simple, with less paperwork to worry about.

You don’t need to formally register your business name with Companies House, as limited companies do. This means you won’t need to submit annual forms like the Confirmation Statement, a time-consuming process in which you provide an obligatory overview of the current management and running of your business, and which costs a fee to file.

All trading profits go directly to you.

Limited companies are obliged to distribute profits among all their shareholders, but as a sole trader you’ll be the only financial beneficiary (after any relevant deductions for taxes payable, employee wages, and so on). Furthermore, any material assets used in the running of your business will belong directly and personally to you, rather than to ‘the company’.

Increased flexibility to make changes as you grow.

As a sole trader, it’s pretty easy to switch to being registered as a limited company later on if you feel you need to. On the other hand, trying to shift away from being a limited company and back to being a sole trader is a far more complex and convoluted process. If you’re still figuring out exactly how the self-employment world might work for you and your business, registering as a sole trader is a convenient place to start.

Enhanced privacy - no obligation to share personal or financial details publicly.

Because the ins and outs of your balance sheet don’t need to be submitted through Companies House, they don’t appear on the public record; nobody except you and HMRC will have access to any of that potentially sensitive information. You can also operate privately from home, or another remote location, using a virtual business address and a suitable virtual MailRoom client or mail forwarding service.

More straightforward accounting and financial filing.

Unlike limited companies, you don’t need to factor in an annual corporation tax and balance sheet submission - instead, you’ll just log invoices, expenses and overall profits in your Self Assessment tax return to HMRC. (If you use an accountant to perform any of these services, this will significantly reduce their annual charges.)

Sole trader - the cons

Personal liability sits with you as a sole trader.

Other types of company are often classed as a separate legal entity from the owner(s) themselves, meaning debts and liabilities aren’t necessarily tethered entirely to an individual’s personal finances. This isn’t the case if you’re a sole trader. Business arrears will need to be paid off using your own assets if that’s all you have to put up against them, and such liabilities are technically unlimited.

Fewer tax benefits than limited companies.

You’ll typically be taxed a more severe flat rate on all profits than a limited company would, and you’re unable to draw company dividends as a lower-rate income booster. You can still claim deductions and allowances for certain types of business expenses, but on the whole it’s a far more limited range of tax options for sole traders. Check out our company formation services to set up your limited company today.

Some clients and customers aren’t as accepting of sole traders.

You may find that, on occasion, you struggle to compete with limited companies due to a perceived lack of security, credibility or prestige as a sole trader. Some other client companies may be hesitant about working with you as a sole trader in a contracting scenario, due to heightened wariness around the IR35 ‘employee for tax purposes’ rules.

Register as a sole trader UK

When it comes to knowing precisely how to register as a sole trader, it couldn’t be much more straightforward in terms of the minimal paperwork required. You’ll need to inform HMRC that you’re switching to Self Assessment tax status and fill in a tax return annually, with a personal allowance of £12,500 before taxable income kicks in.

You’ll also need to register for VAT if you have an annual turnover of £85k or more, and a National Insurance number in the UK if you’re registering from abroad with approval to live and work here. Again, you won’t need to register your trading or business name with Companies House, so you can call your business anything you like (provided it doesn’t fall foul of anything on the government’s trade mark register).

For more detail on our company formation services with full London-based virtual office solutions for your new business, contact a member of The Hoxton Mix team today.