How to Become Self-Employed

There are several reasons why a strong business plan will help with your self-employed business.

Whether you are based in the US or the UK, your business plan will be the starting point and something to refer to as your business grows and develops.

Your business plan might include the following:

• Market research – What are your competitors doing? How much are they charging and who are they targeting? Are there any areas in the market which they aren’t addressing that you could exploit as a unique selling point?
• Financial projections – Have a good idea about how much you can (realistically) make in the first year of business and beyond – with evidence where possible. This will help if you are looking for funding or approaching a bank for a business loan.
• Strengths and weaknesses – Where is your business particularly strong? What weaknesses do you have and how can you counteract these? For example, you may be highly skilled in your trade, but not be strong on the administration side, so you may consider employing an assistant.

Different business types may require further education and/or licensing to operate.

Licensing laws for businesses vary from country to country, and even from state to state, so make sure you understand the laws in your area.

For certain business types in the UK (like selling alcohol, offering healthcare or medical services, or offering childcare services) you might need to be licensed by a relevant authority.

It is usually simple to find out if you need a license for your business and whom you need to register by checking online.

Your business plan should include details of the licensing requirements that you need to meet. If you are unsure or unclear, it is always worth speaking to a local business in the same sector to find out.

You might need a specific business license if you have what is defined by the Small Business Authority (SBA) as a ‘professional business’.

These are often roles that need specific education and a license, such as accounting or legal services, real estate, anything agriculture-related or to do with fish or wildlife, as well as TV or radio broadcasting.

Licensing in the US can also be based on location – if you are licensed to perform a service or sell a certain product in one state, it does not immediately follow that you can do the same in other states.

You will need to let your government know that you are self-employed whether you are in the US or the UK, and the process is slightly different in each country:

Register as Self-Employed in the UK

Firstly, you need to decide which type of business you are running. If you are creating a limited company – which you will be the director of – you will need to register with HMRC and Companies House.

For most people beginning as self-employed in the UK, setting up as a sole trader is the best way to start a business.

Sole traders and their businesses have no financial distinction between the business and the owner. Owners can keep all the business profits after tax but are also personally responsible for the finances of the business.

Once you have decided on your business structure, you need to let HMRC know that you are self-employed.

After registering your business, you will receive a Unique Taxpayer Reference (UTR) that you will use to complete a self-assessment tax return.

You will then be responsible for paying any tax that is due, as well as Class 2 and 4 National Insurance contributions (if applicable).

You need to let HMRC know about your business by October 5 of the second tax year that the business is operating (the tax year runs from April 6 until April 5) or face a fine.

You can register via the HMRC website.

Register as Self-Employed in the US

In the US, a self-employed person is a sole proprietor by default. In other words, they alone are solely responsible for the business (no business partners).

If you are self-employed with additional co-owner(s), you are a partnership by default. No organizational documents need to be filed with the state, although you will still need to let the IRS know.

A sole proprietor or partnership might be the simplest form of business structure, with limited interaction with the government, but you will be financially responsible for the business as it is considered an extension of you.

Your business taxes will be filed as part of your personal tax return.

If you are looking for more protection, and a distinct separation of the financial aspect of you and your business, there are two business structures to consider:

• Corporation – A corporation is owned by shareholders and controlled by a board of directors. There are legal requirements regarding reporting of the business, including tax forms, employment documentation and minutes of board and shareholder meetings.

• LLC – The LLC offers a simpler version of a corporation, with fewer legal requirements, but with the valuable separation of personal and business financials. The best thing about starting a business as an LLC is that it can grow in complexity as the business develops, taking on more of the legal requirements of a corporation as more people are employed and so on.

Registering as a self-employed business is completed by applying for your EIN (Federal Employer Identification Number).

This number is used for the tax administration of your business and if you do not have one, your personal Social Security number will be used instead.

The key to effective business finances is definitely organization – whether you’re in the US or the UK.

Filing tax returns and ensuring that you are paying the correct amount of tax and other contributions is only possible with careful record-keeping.

Deciding how best to keep track of your business spending and income is a personal choice, but it is always a good idea to open a business bank account to make it simple.

If all your business-related transactions happen in one place, your financial year-end and the associated tax return will be much easier.

Some people prefer to keep a record of their business finances on a spreadsheet, and many business bank accounts offer help with bookkeeping – from estimating your tax liability to allowing you to snap and upload receipts.

In some cases, accounting software might be a good investment, and for others, employing an accountant is a great idea.

You must keep track of everything finance-related in your business, however you choose to do it.

In general, a sole trader needs to keep the following records for at least five years:

• All sales and income
• All business expenses
• VAT records – if you are registered for VAT – find out more
• PAYE records – if you have employees
• Any personal income

There are other financial considerations that are important for the self-employed, including insurance and pensions.

Businesses should consider professional indemnity insurance as well as public liability insurance, and if you are employing staff, you will need employer’s liability insurance.

You will no longer have a company pension or be receiving an employer’s pension contributions, so it might be worth finding a good personal pension and making contributions yourself.

Some pensions allow you to move your existing pension(s) over, and any payments you make into a pension will attract government funding in the form of tax relief.

As with the UK, good record-keeping is particularly important to remain compliant. This can be achieved using accounting software, through a business bank account or by employing an accountant.

The documentation that you need to keep records of – and for how long – is governed by the IRS.

The following records need to be kept:

• Business income
• Receipts
• Inventory
• Expenses
• Assets
• Employment records
• Tax returns from previous tax years

Tax reporting in the US depends on the way your business is structured.

A corporation is based on a ‘double taxation’ model – the business income is taxed, and the salaries and dividends paid to employees are also taxed – with separate tax returns completed.

For those who decide to be either a sole proprietor, a partnership or an LLC, tax returns are completed all at once with what is known as ‘pass through’ taxation.

In this case, the personal and business income is reported on the same tax return (in different sections).

The benefit of using pass-through taxation is that there is more of an opportunity for tax deductions.

There are several general business expenses that could be tax-deductible, including:

• Travel expenses
• Home-office expenses
• Business equipment
• Legal costs

A business cannot survive without customers, whether you are selling a product or a service.

Marketing a business in the US and the UK will look mostly the same and will depend on the type of business.

When you have a business name, you will also want to design a logo and your brand. This will be used on things like business cards, headed paper, social media and your website.

You want to be instantly recognizable, and unless you are a confident designer, you may consider outsourcing your logo creation to a specialist.

You can get out there virtually using social media, build a website to be found in online searches, and even consider creating physical promotional material (maybe a maildrop or posters in a local shop).

The launch of your business is an important time, but the way you orchestrate it will depend on the type of business.

You might want to offer an introductory discount, a loyalty scheme or just have a bit of a party.

This is easier if you have physical premises, but you can organize an online party instead.

That first client is perhaps the real start of your business.

Getting your first customer to sign on the dotted line might be a struggle, but there are a few things you can do to make it happen:

Word of Mouth

If you have already been performing the role that your self-employment is based on, personal recommendations can be a great way to find paying clients.

This might have been a customer when you were employed, or a friend or family member for whom you provided a service before you were self-employed.

Network

Being self-employed can be a lonely pursuit, especially if you are a sole trader or a sole proprietor.

You don’t have to work alone, though, and networking events are not only a great way to meet new people, but they can also provide warm leads for your business through qualified referrals.

Be Where Your Customers Are

Whether your customers are in Facebook groups or LinkedIn, or in a supermarket or a mall, being present with them and interesting where you can is important.

You might choose to put up posters in shops or to answer industry-related questions online.

Website and SEO

Customers will not choose you if they cannot find you – so ensuring that your website is completely up to date as well as being simple to navigate is important.

To be found in searches, it’s important to apply search engine optimization (SEO) techniques too.

An important consideration before you start working with your customers, especially in a service-based business, is a contract.

Make sure that you have a contract that details the work to be completed, the time frame it should be completed in (where relevant) and the payment schedule.

You can sometimes create a good contract from a template, but it is always worth asking a lawyer to check it to make sure it is legally binding and will protect you if there are any problems.