What is a sole trader?
It simply means being self-employed. Being a sole trader business involves some personal financial risk. Sole traders must pay their debts if their business fails. If you're thinking of starting up a low-cost business (i.e. one that is unlikely by its nature to build up big debts), you probably needn't worry too much.
However, if you're likely to build up significant business debts, it might be more advisable to have the personal financial protection offered by forming a limited company (i.e. 'incorporation').
Advantages of becoming a sole trader
Setting up and running a limited company requires slightly more administrative effort than being a sole trader, plus you (or a formation agent) must register your new company at Companies House. Setting up as a sole trader is quick, easy and involves no cost, while preparing sole trader accounts can be simpler. Sole traders can employ people and become a limited company (‘incorporate') later on, should they wish.
Although anyone can become a sole trader, you might need a licence or permit from your local authority for the type of business you plan to set up.
Becoming a sole trader
You must register your sole trader/self employed business with HM Revenue & Customs (HMRC) as soon as possible otherwise you could be fined up to 100% of the tax due in addition to the amount of tax unpaid. This is true even if you are only running your sole trader business on a part-time or casual basis.
Many entrepreneurs start their business off on a part-time basis - to test the water or while the business grows sufficiently to generate enough income to support themselves and their families. Some continue working in an employed capacity during these early days so that they have a salary to fall back on. In these cases, it is still necessary to register with HMRC if your employment status indicates that you are self employed for some or all of your work.
The easiest way to register is to use the HMRC Online Service or to call the HMRC ‘Newly Self-Employed Helpline' on 0300 200 3504.