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Legal requirements for setting up and trading for sole traders

Sole traders can take on more risk than other business structures, but with the promise of greater reward.

Running a business as a sole trader means that you will be the sole stakeholder in the business. This can give you more freedom in running the business than you would have in a limited company, as it means that you alone are responsible for controlling the company, and you aren’t responsible to other shareholders. You also get to keep all of the profits from your work.

The downside to working as a sole trader is that all of the responsibility is on you – you will need to pay forany equipment, stock, or services that the business needs. You will also be responsible for any debts accrued by the business – if the business gets too far into debt, you could be forced to declare bankruptcy.

On the other hand, if your business is a limited company, the responsibility for any debts will generally fall onto the company, rather than you personally. This includes any loans you have taken out for the business and any claims brought against you which are not covered by your insurance.

Running your business as a sole trader is simpler, and can reap greater financial rewards for you personally. You will not need to register your business with Companies House, and can start trading as soon as you are ready. However, bear in mind that it also comes with a lot more personal risk to you.

Depending on your line of work, you may also find that potential clients will be unwilling to work with a sole trader.

You should consider this when starting your business, and ask yourself if launching your business as a limited company would be a preferable option.


As a sole trader, you will not need to pay corporation tax on any of your business earnings. However, you will need to pay income tax and National Insurance, just as you would if you were working for another business.

You can pay these taxes by registering for self-assessment with HMRC. Note that you must register with them even if your earnings from the business are very small, or you are still working for another employer.

If you are just starting your business, you can register for self-assessment on the HMRC website. If you have been self-employed before and need to re-register, you should use this form instead.

Depending on how much your business makes and the nature of its goods or services, you may also need to pay VAT.

Taking on staff

Being a sole trader does not mean that you need to work alone on your business – you can hire staff. Hiring staff means that you will need to set up a Pay-As-You-Earn (PAYE) payroll scheme to collect income tax and National Insurance contributions from your employees.

Becoming a limited company

As your business develops and gets bigger, it may be a good idea to change your business’s structure to become a limited company. This may be appropriate for your company if it has expanded considerably, as you may be able to hire more staff to take on the added responsibilities that running a limited company would require. However, all situations will vary, and it would be wise to seek legal advice first.

You can get more information about running a limited company and the advantages and disadvantages in our Limited Companies section.