What is a sole trader?

'A sole trader is a person who sets up and owns their own business. They may decide to employ other people but they are the only owner. A sole trader has unlimited liability'

As a sole trader, your business is owned entirely by you, grown by you and ultimately succeeds or fails by you. This also means you are entitled to all profit that the business makes.

Becoming a sole trader is simple. All you have to do is register your business name and you can start trading.

There are huge incentives to becoming a sole trader but with them come terrifying or - depending on your personality - gratifying, side effects.

Some of the most famous entrepreneurs in the UK started out as sole traders. From Lord Sugar, who launched his first business with £100 selling aerials out of the back of a van, to Duncan Bannatyne, who started his entrepreneurial career with an ice cream van back in the eighties.

The benefits of being a sole trader

• Any profit after tax that the business makes is yours to keep

That's right. You are the sole owner and any money you make whether it's £10m or 10p will land squarely in your pocket.

• You have full control over your business

Forget pushy investors. As a sole trader, no one can tell you what to do. Your business and your future are in your hands. This not only makes decision making faster but also means if it goes wrong there'll be no one breathing fire down your neck. Plus you set your own targets for growth.

• Improved customer service

Sole traders can offer a more personalised approach to their customers. You are the only person the customer interacts with. This can result in strong relationships that can turn one-off customers into loyal repeat buyers of your products or services.

• Less red tape

To register yourself as a sole trader all you need to do is inform HRMC that you intend to be self-employed and you can start trading straight away.

• Accountants charge less

Accountants generally charge lower rates for sole trader accounts as there is less work for them to do. As a sole trader all you're required to complete is a profit and loss account.

• If you feel like taking a day off, you can

PR consultant Michelle Bayliss has been a sole trader for 19 years. She believes that, "Having the freedom to strike a perfect balance between work and social life is the best thing about being a sole trader."

The challenges of being a sole trader

• Liability is all yours

As a sole trader the law sees you and your business as one. This means should your business fall on hard times and find itself in debt, you as the business owner will be liable. If the business is declared bankrupt, your personal assets are on the line. This also applies if a customer sues your business. In the eyes of the law, they're suing you.

• Pressure adds up

As a sole trader responsibility for everything comes down to you. You make the decisions. The success or failure of the business rests on one person's shoulders: yours.

• You must be a self-starter

You have to do every job required from sales to web development. There's no one there to help you out when you're busy. It's down to you to stay on top of everything, which inevitably means working longer hours to make sure everything's in order.

Sole trader Jane Lee owns Dexterity.com and is a technology pr consultant. She confesses, " I can get lonely and it's hard to maintain morale when work isn't going smoothly."

• If you don't work, you don't get paid

Although you can book holidays or have a day off sick without anyone having to seek approval, it also means that your business is shut down when you do so.

How to get a grant as a sole trader

There are over 6,000 grants available for UK businesses and many of them specifically target sole traders. Grants are a great way of funding your business as they can provide capital for specific projects. Most importantly, the money doesn't have to be paid back.

Qualifying for a grant can also give banks confidence in you and your business, which could lead to extra funding.

To find out more information and apply for a grant click here.

The sole trader small print

• Remember, as a sole trader, your profits are taxed as income you must keep records showing your business income and expenses.
• You have to pay fixed-rate Class 2 National Insurance Contributions (NICs) regardless of any profits you make.
• Although, if your earnings are below £5,315 per year (2011-2012) you might not nee to pay.
• You will pay Class 4 NICs (7% on annual profits between £7,225 and £42,475 (2011-12) and 2 per cent on any profit over that amount) on any profits.
• You need to register for Self Assessment and complete a tax return each year (link to the register for self-assessment article.