Become a sole trader

The vast majority of new businesses are essentially one-man bands. As such they are free to choose the simplest legal structure. They are known by terms such as sole trader or sole proprietor. This structure has the merit of being relatively formality-free and there are few rules about the records you have to keep. There is no requirement for your accounts to be audited, or for financial information on your business to be filed.

As a sole trader there is no legal distinction between you and your business. Your business is one of your assets, in the same way that your house or car is an asset. It follows from this that if your business should fail your creditors have a right not only to the assets of the business, but also to your personal assets, subject only to standard bankruptcy provisions (these often allow you to keep only a few absolutely basic essentials for yourself and family).

The capital to start and run the business must come from you or from loans. There is no access to equity capital, which has the attraction of being risk-free. Offsetting the drawbacks is the fact that you can be your own boss immediately subject only to declaring your profits on your tax return and, if necessary, applying for a trade licence if your chosen line of business requires it.

Consider the following before deciding to trade as a sole proprietor:

• As a sole proprietor you must be prepared to take on all the potential liabilities of the business personally.
• The business has no life after you decide to stop working unlike, for example, a company, which continues irrespective of ownership until it is wound up. So you have no trading vehicle to pass on to your family.
• Some customers may not be comfortable dealing with a one-man band. They may be concerned about who will deal with them if you are ill or absent. A partnership or company gives the appearance of substance, which can overcome this problem.

Action Checklist

• Review the other legal forms of trading, Companies House is a useful point of contact
• Check out how others including your competitors trade in this market.
• Consider carefully the implications of unlimited liability and talk them over with your family since they will share the burden if things go wrong