What kind of business set-up? 1; sole trader

When you decide to set up in business, one thing you need to work out is whether you're going to be a sole trader, go into partnership, go into a Limited Liability Partnership, or form a limited company.

Eh?

Sorry. I'll explain those terms a bit more fully, starting with a sole trader.

A "sole trader" is a business that just consists of you, your computer and your cat. As Wendy Pascoe puts it:

You wake up one morning and decide to start selling cut flowers from the bottom of your garden. That's it: you're now a sole trader.

It's the simplest business structure there is. You don't have to make any agreements with yourself (or your cat, apart from agreeing to feed it and house it, but I guess you'd do that even if you weren't in business).

And compared to the other business set-ups I mentioned, there are very few legal formalities.

One of them is that you have to register with HM Revenue as self-employed. I can help you with that if you're going to be a client of mine, and it's all included in my prices. Or to find the form to register yourself, click here. You must register within 3 months of starting your business (you can't do it before you start). And you must register even if you're still employed, or already have another business.

You'll then have to fill in a tax return every year. I can help you with that, too.

Don't be tempted to keep your business quiet and trade only for cash, or over eBay. HM Revenue have spies everywhere and if they catch you then they'll charge interest and penalties. And they've ramped up their powers lately and the fines have got higher. Keep it clean!

You are allowed to employ staff as a sole trader, though again you'd have to register with HM Revenue, this time as a new employer. "Staff" of a sole trader doesn't include you. Legally you are the business.

You must keep a full record of your income and expenses. If you're a client of mine, I'll show you how to do that.

The big drawback of being a sole trader is that if the business makes losses, or runs up debts it can't pay, then you'll be personally liable for them. Legally there's no difference between you and the business when you're a sole trader. So if you don't pay your business's bills, then your suppliers can sue you. You could end up losing your home, your car, your furniture...

When you're deciding what set-up to choose for your business, have a good think about all the options and decide which one suits you best.

Next topic; partnerships.