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Becoming Your Own Boss - Sole Trader or Limited

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Starting Your Own Business

Student loans are putting off teenagers studying at University.  In a series of articles/blogs, I explore what those wanting to be their own boss involves

The possibility of becoming self-employed is a dream for many people.  It brings with it the burdens of tax returns, paperwork and responsibility, but also freedom.  This articles touches upon the general points to consider about becoming self-employed.  Future articles will feature other specific areas/professions

Becoming Your Own Boss
There is no magic wand for you to become your own boss. 

* If you make something and make a sale, whether at a loss or a gain, you are working for yourself. 
* If you make enough money to make all or part of your living you are your own boss.

You could be selling a box you made or a speech you wrote.  You could be selling a service or a packet of crisps on the stairs at school.  If you make a sale to someone, you are trading. 

Here are a couple of things to consider

* Records
* Bank Accounts
* Book-keeping
* Tax Returns

It is important to keep a list of your expenses and sales, even if you are making a loss.  You might need to prove what you have spent at any point in the tax year.  Do not be too busy to keep records, so consider creating a new gmail/AOL/Hotmail account and send yourself emails listing your expenses, with photos of receipts

Bank Accounts
When you start trading and receive money from third parties, move swiftly to open a new bank account for these receipts.
This is for money laundering and proof of how much you have made

If you plan to trade and make a living, you will need to prepare a set of accounts.  This is a list of incoming money and expenses, showing what profit you have made
There are various books and information available but you will need this information.  A book-keeper can help or you can do it yourself, but eventually a cheap book-keeper will be needed

Tax Returns
Once you start trading, either call the tax office to notify them you are trading or download a tax return and make a note of your start date.  You will then have to file a tax return during that financial year
If you are already working, you may need some advice from an accountant on how this trading will affect your Pay as You Earn Status.  Your employer will be notified if you get a new tax code, so make sure you can work for yourself in your contract

Even if you work for someone else, you can be a sole trader.  In this situation you are selling your time as services, either as yourself, or you use a company
If you provide services and invoice for your time, you make a sale.  When this happens, you are a consultant or an independent contractor
It might be more cost effective for you to sell your services using a company.  You still provide the work, but your company raises the invoice
Make sure you have a separate bank account to show your sales. 

Limited Company
A limited company is expensive.  You have to file regular accounts, usually engage an accountant and therefore spend more money
Consider a limited company when your sales get quite high, but first you need to check if there are tax advantages of doing so.

If you want to start working for yourself, plan what you are going to do.
A business plan can provide projections and show a bank that you are serious, but make sure you are honest with yourself.  The income has to be possible, otherwise you will fail.  A local chamber of commerce should have someone who can spare you some time to draft a plan, but do not sign up to anything with them until you have had 24 hours away from the office

Money does not grow on trees, so you need to find customers.  You should also plan against just one customer, because that customer can fail in business also and you can find yourself without an income, the Tsunami effect on your business

Keith Cutler
Solicitor Advocate
Hibberts LLP