A person who does self-employed work is not automatically a self employed business. If you work for yourself, do your own invoicing and pay your own taxes, HM Revenue & Customs (HMRC) thinks of you as a sole trader. Sole traders don’t need to register as a business, or do anything other than tell HMRC that they are working for themselves.
So if I’m a sole trader, does that mean I can’t run a business?
Not at all. If you’re a business like a hairdresser, for example, you can still trade as a sole trader, and have your shop and all your equipment. The difference is one of liability (liability means the money and assets that your creditors can come after, if you become unable to pay what you owe. It can also mean your financial liability if one of your customers fails to pay you or decides to sue you). A sole trader is liable for everything that his or her business does, and there’s no separation financially between what he or she owns and what his or her business owns. So if you’re running a shop as a sole trader and the shop goes under, your creditors can come after your house: that doesn’t mean you ever had to register as a self employed business to run the shop, but it does mean that if you didn’t and you get into trouble, you could lose everything.
Should I become a registered business, then?
So do you have to register a business to be self employed and safe? That depends on how worried you are about personal liability; and on your intentions for growing what you do. Registering as a business means becoming a Limited Liability Company (LLC) – which can give you tax breaks (your first £10k profit is not taxed, though you do pay PAYE through your wages), and which may also make banks and other investors more likely to give you a loan. There’s a lot of extra admin to do, though. You’ll need to register at Companies House (which costs money, not a lot but there is a charge); and send a set of annual accounts to them as well. You’ll also have to set up a Board, with Directors and shareholders.
Are there other reasons for forming a business?
There are different ways to set up a self employed business, which can give you the benefits of working with others, and even co-owning with others, without the extra hassle of being a full-blown Company. The most common alternative to sole trading is known as a “traditional partnership”. This is where two sole traders band together to form their own business. Behind the name, being partners is no different to being two sole traders – you still do Self Assessment, and submit two sets of returns to HMRC. Your self employed business operations change, and that can give you some advantages over sole trading.
So what’s so good about a partnership?
If you work in an area where acting like a company might give you a better chance of making money, then a partnership gives you a shortcut to growing what you do. The key benefit to a partnership is that there are two or more heads (partners) involved – which means you can build your business by using each partner’s skills to best advantage. Say one of you is good with figures and one is good with customers. As a partnership, that naturally translates to one of you in the back office, dealing with accounts and orders – and the other one out front, making the clientele feel welcome. At the end of the day, it’s worth bearing in mind that what you do, and why you do it, dictates the best kind of business arrangement for you personally. A carpenter, for instance, is almost certainly going to work as a sole trader because that’s the nature of his or her business.
image source: flickr