If you’re going to become self-employed, it’s important to be prepared. Staying on the right side of the law is of course essential. You should also ensure that you have the right skills to succeed as a self-employed person. Managing finances when you get started can be difficult, but you can apply for grants to help you get set up.
Sole trader or limited company?
You need to decide if you’re going to be running your business as a sole trader or as a limited company:
As a sole trader you and your business are the same for tax and legal purposes. You will be liable personally for any debts or legal claims. Setting up as a sole trader is simple. It's suitable if you are contracting out your services.
A limited company is a legal entity in its own right. As a company director, your personal assets are protected against debts or legal claims. Being a limited company is more complicated, but you’ll have more legal protection if something goes wrong.
Choosing whether to be a sole trader or a limited company is a personal choice. The right choice will depend on your circumstances and the nature of your business. It’s important to spend some time considering what will work best for you.
As a sole trader you can set yourself up in business with little paperwork or complexity. But you will have less protection if things go wrong, so make sure that you have adequate insurance. You can always form a limited company if your business grows.
A limited company will protect your own finances and assets to a greater degree. You may pay less tax. But you will have more paperwork and responsibilities as a company director. By law, you will have to make your company’s earnings and details of yourself and other directors public.
Managing risk and finances
Being self-employed can be empowering, but it can also be stressful. Think about how much work you can take on.
It's usual not to make much money for the first year, so you'll need to manage when you do not have much business.
When deciding whether to be a sole trader or establish a limited company, you should consider the risks involved. If you fail as a limited company, it’s just the company that fails. But sole traders are personally liable if something goes wrong. As a sole trader. you could become personally bankrupt. This could affect your credit rating over 6 years.
You’ll need to set up your own company pension. If you’re employing people you’ll need to set up theirs too.
Get ready to claim VAT on stock (if you are registered) and plan what expenses you can deduct from your taxable profit. You may end up operating at a loss in the first couple of years, but being able to claim back expenses can help.
Writing a business plan
You do not have to write a business plan but it can help you ensure that your business stays on track. You will need one to applying for a business loan or other forms of funding.
There are grants available for starting up your own business. If you’re over 18 and you or your partner receive Universal Credit, Jobseeker’s Allowance or Employment and Support Allowance, you may be eligible for the Government’s New Enterprise Allowance. This can provide up to £1,274 paid over 26 weeks. You'll also get a mentor and can apply for a loan to help with starting your business.
Starting your business: resources
There are many online resources which can help you prepare for becoming self-employed, including: