So you want to become self-employed but you’re not sure how much it’s going to cost you… well, I’m sure you’re not the only one. According to Bloomberg Business, 8 out of 10 entrepreneurs fail within 18 months of starting so it’s no wonder you’re wanting to do this as cost-efficiently as possible.
Becoming a Sole Trader costs absolutely no money at all. All you have to do is register for tax and set up a system for record keeping and keep on top of your financial records. These aspects can cost you money but we’ve got a few options that mean you can get started without spending a penny.
With this being said, let’s take a look at everything you need to consider – not just the potential costs involved but also the advantages and disadvantages you should be aware of.
Options for becoming self employed
There are a couple of ways you can get started on your self-employed journey:
- Sole Trader;
- Private Limited Company; and
- Partnership.
However, as we’re looking at the best way to become self-employed if you had no money – we’ll be focusing on Sole Trader.
First of all, let’s look at what a Sole Trader actually is:
What is a Sole Trader
Sole Trader is just the term given to someone who has just woken up one day and decided they want to start working for themselves. This could be something as simple as mowing lawns in the neighbourhood for a few quid or running a big corporate company (however you don’t see many of big corporate sole traders for reasons highlighted when we go into the positives and negatives).
However, it’s worth noting that you don’t actually need to set up as Sole Trader if you’re earning less than £1,000 from self-employment during a tax year.
So let’s take a brief look at some advantages and disadvantages to becoming a Sole Trader.
Advantages of being a Sole Trader
Filing requirements
There are pretty much no filing requirements. Unlike Private Limited Companies, Sole Traders have no legal requirement to prepare or file any Year End accounts. This helps to save you money as you won’t need a firm of accountants to assist you.
Tax is simple
Although I would always recommend going to an accountant to assess your tax situation and prepare your tax returns, there isn’t too much to be aware of. You just pay tax on income you receive as an individual, this includes the money you make through trade!
Disadvantages of being a Sole Trader
No legal shelter
If trading as a Sole Trader, you are legally responsible for any debt you take on in the course of business. It’s not uncommon for small businesses to need loans to get off of their feet quicker – however, if you default as a Sole Trader, it’s YOU and YOUR assets that the bank will go after rather than that of the business.
How much does it cost to set up
So the million dollar question – how much does it cost to set up? Well, getting set up is pretty quick and easy but let’s take a look at areas you could potentially need to shell some money out for and at how we can reduce these costs to zero.
Registering for tax
All you need to do is notify HMRC that you’re now operating as a Sole Trader and therefore will be declaring your tax – HMRC have a pretty brief article on how to do this and they have the relevant links to where you need to go.
This is a super easy process, you just fill out a couple online tax forms and then you receive a UTR (Unique Taxpayer Reference) in the post which you can then use to submit tax returns.
Cost of registering for tax – £0
What else is going to cost you money?
Record keeping
HMRC requires you to keep ‘adequate records’ for a period of 5-6 years so you’re going to want to implement a pretty robust filing system to make sure you’re not in a pickle when HMRC asks to see a certain receipt to verify it’s legitimacy.
Record keeping doesn’t have to be fancy – back in the day, everyone used paper records and had rooms filled to the brim of folders. However, recently businesses are moving towards cloud record keeping through the likes of Microsoft OneDrive and GoogleDrive as it allows you to access your records for anywhere in the world.
Personally, I’m using GoogleDrive and they give you 15GB free storage before you need to pay anything. This is awesome because that is A LOT of space for documents so gives you time to earn money before you need to pay any costs for your record keeping.
Cost of record keeping – £0
Sole Trader accounts
As much as you’ll probably hate to hear this, you need to keep track of everything you’re spending and receiving in terms of finances. This is sooo important if you decide to have a company prepare finance reports for you so you can track areas of the business you may want to cut down costs in.
You have a fair few options – like with the record keeping systems, older businesses used to use Desktop based accounts (and physical books before that!). However, everything is moving to the cloud.
With the likes of Xero and QuickBooks Online, you can now access your records from anywhere in the world – however this is at a cost.
Personally, when I used to do a bit of tutoring in my spare time, I kept all of my records in a Google Sheets document. I’ve created Excel based accounts systems for clients before and they’re super handy – plus, as Google Sheets is free, you can utilise this option to keep costs SUPER low.
Cost of accounting – £0
Business costs
Now, obviously when you set up a business you’ll need to account for any sort of inventory you need and materials (if any) that are needed to start trading. Unfortunately that’s going to be outside the scope of the article so won’t contribute to our total costs.
TOTAL COST OF SETTING UP SOLE TRADER – £0
Summary
So there you have it – if you’ve got absolutely no money and want to become self-employed, Sole Trader is your best friend as there are no set up costs and you can cover all of your record keeping and accounting requirements for free too.
Just be aware of the potential downside of not having any legal protection that a Limited Company would provide.