Sole trader, how does it work?

LurkerTurnedPoster

If I set up a business and start making money, I provide a service and invoice customers. What happens, do I get all the profit as a wage, or do I draw a wage from the business.

This would not be a Ltd company to start with, just trading with a company name and I would register as self-employed.

Is there a difference between sole trader and self employed?

I would like to do everything right before I even get started.

HappyMJ

You can't trade with a company name unless you are a Ltd. company. You can trade with a business name if you want to. Self employed people are sole traders. You could be an employee and a director of a Ltd. company and not be self employed but that really is just a technicality as you really are self employed by the company you own.

You draw the profit from the business as drawings remembering to put one third of the money aside for tax and national insurance when it falls due.

First thing is speak to the jobcentre about self employment. Even if you are not registered with them they will refer you to organisations that can help you. Then register as self employed with your HMRC office. Then go for it.

LurkerTurnedPoster

Thank you.

Savvy_Sue

Plenty more advice about all aspects of starting a new business / being self-employed over on the Small Biz board. After all, there's no tax to pay if you don't make a profit!

LurkerTurnedPoster

Thank you Savvy Sue!

Dal_Whinnie

There is also some useful guidance on the Professional Contractors Group website http://www.pcg.org.uk

LurkerTurnedPoster

I just found this, but think I would still need a separate business account?
Or do I do it all through personal banking and keep strict records of what amounts going in and out are to do with trading?

http://www.contracteye.co.uk/sole_trading_contractors.shtml wrote:

Sole trading is the most popular, and simplest way to set up in business in the UK. There are nearly 3 million sole traders in the UK compared to just over a million limited companies.

Once you have told HMRC that you have started out as a sole trader, you are in business. Unlike the limited company structure, your business and personal finances are combined, and you will be taxed under the self assessment system.

Scarpacci

HMRC won't necessarily have a problem with you using your personal bank account, providing your record-keeping is up to scratch, but your bank may well object. Personal accounts usually have terms against use for business and could close your account or request you move to their business account.

In reality, it would depend how obvious your business account activity is. If, for example, you were an eBay trader and only emptied your PayPal account into your bank account once a month, and paid for all stock through PayPal, then you're really not using the account much differently to anybody who gets paid a monthly wage. After all, even with a business account you'll still presumably be sending a "wage" to your current account. However, if you were receiving payments from lots of people into your personal account, buying lots of stock and churning lots of money then it would likely flag up.

I would go for a business account for peace of mind, personally. Have a look around and it should be possible to find one that doesn't charge much (if anything) for what you need. I have one with HSBC and as I'm mostly paid electronically, I don't really encounter much in the way of charges. Certainly no more than I would if I used my personal account.

busiscoming2

DH has been a sole trader for the past six years.

All his earnings and business outgoings go through our personal account (Lloyds) with no problems. Just make sure you keep strict accounts. I use an Accounts book D which is very easy to use. Make sure you put aside money for the tax bill. He doesn't draw a wage, anything left is spent as 'earnings'.

LurkerTurnedPoster

Thank you Scarpacci and Busiscoming2.