You may be surprised to learn that freelancers, sole traders, consultants, contractors, and partnerships can all fall under the broad heading of a small business.
It’s a generic term often used for businesses with relatively few employees – and very often just one!
- A freelancer typically works for more than one client at the same time
- A sole trader is a person who is self-employed and runs their business as an individual
- A consultant provides specialist services, usually for a specific project or to resolve particular business issues
- A contractor usually works under contract to provide specific services to a client
- A partnership is where two or more people run a business together and share responsibility for it
Usually, how you refer to yourself depends on the industry you are in and how you want to present yourself to clients.
It’s worth remembering that terms such as freelancer, consultant and contractor describe the type of work you do rather than your legal business structure. You might operate as a sole trader, through a partnership or through your own limited company.
Definition of a small business
There isn’t one definition of a small business that applies in every situation.
For limited companies, however, the Companies Act sets specific thresholds that determine whether a company qualifies as small for accounting and reporting purposes.
For accounting periods beginning on or after 6 April 2025, a company will generally qualify as small if it meets at least two of the following:
- 50 or fewer employees
- A turnover of £15 million or less
- £7.5 million or less on its balance sheet
Those figures are high, so most owner-managed companies fall comfortably within the small company limits.
Small and medium-sized enterprises also make up the overwhelming majority of businesses in the UK.
Does it matter if you are self-employed or a limited company?
As a small business owner, you can be self-employed or operate through a limited company. Here’s a reminder of the differences:
- If you are self-employed, you might operate as a sole trader or as part of a partnership. The business does not have a separate legal identity from you in the same way that a limited company does.
- If you are a limited company, your business is a separate legal entity from you and has its own finances, assets and liabilities.
A freelancer, consultant or contractor can potentially operate under either structure, depending on their circumstances.
Legal requirements of a small business
When setting up your small business – in whatever form it takes – there are a number of legal and administrative requirements to consider.
Registering your business
This will depend on the type of business you are running.
A sole trader may need to register with HMRC for Self Assessment, while an ordinary business partnership will also need to register with HMRC.
If you set up a limited company or limited liability partnership, you must register it with Companies House.
Rules also cover which business names you can use, particularly for limited companies.
Understand your tax obligations
As a sole trader, you will normally need to register for Self Assessment if your gross trading income is more than £1,000 in a tax year. You will pay Income Tax on your taxable profits and, depending on your profit level, Class 4 National Insurance.
Most self-employed people no longer have to pay compulsory Class 2 National Insurance. If your profits are above the relevant Small Profits Threshold, Class 2 contributions are generally treated as having been paid to protect your National Insurance record.
If you operate through a partnership, the partnership will normally need to submit a partnership tax return and the individual partners will report their share of the profits through their own tax returns.
As a limited company, the company must prepare annual accounts, file the required information with Companies House and submit a Company Tax Return to HMRC. Corporation Tax is payable on the company’s taxable profits.
Company directors may also need to submit a personal Self Assessment return, depending on their individual tax circumstances.
Sole traders should also be aware of Making Tax Digital for Income Tax. From 6 April 2026, it applies to individuals with qualifying self-employment and property income over £50,000. The threshold falls to more than £30,000 from April 2027 and more than £20,000 from April 2028.
For more detail, see our guide to Making Tax Digital for Income Tax.
Understand relevant business laws and regulations
Very often there won’t be a long list of industry-specific rules to deal with, but you do need to be aware of any laws and regulations that apply to the work you do.
These might cover areas such as data protection, health and safety, consumer rights or professional regulation, depending on the nature of your business.
Obtain any relevant permits and licences
Again, this will only apply to certain industries, but you don’t want to jeopardise your business by overlooking the correct procedures.
Be aware of what is required in your industry and make sure any necessary permits, licences or registrations are in place.
Why does it matter what category I fall into?
Because it can affect how you run your business and what is expected of you. It can also benefit you in a number of ways.
Not least, many small business grants are available, depending on the nature and location of your business. Unlike business loans, grants generally don’t need to be repaid provided you fulfil the conditions attached to them.
In addition, when it comes to paying business rates, it can be beneficial to qualify for Small Business Rate Relief.
In England, you may qualify if your property has a rateable value of less than £15,000 and your business uses only one property, although some businesses with more than one property can still qualify.
If the rateable value is £12,000 or less, you can usually receive 100% relief. Between £12,001 and £15,000, the relief gradually reduces.
Your business structure and size can also affect access to finance, reporting requirements, and the type of accounts you need to prepare.
What tax will I need to pay?
This depends on what kind of business you run and the business model you have chosen, whether you’re a sole trader, partnership, or limited company.
To reiterate, here are some of the main taxes and obligations relevant to different types of business:
- Corporation Tax – payable by limited companies on their taxable profits.
- Self Assessment – commonly applies to sole traders, individual partners and others who need to report income or gains personally to HMRC. Being a limited company director does not, by itself, mean that you have to submit a Self Assessment return.
- VAT – you generally need to register if your VAT-taxable turnover for the previous 12 months goes over £90,000, or if you expect it to go over £90,000 in the next 30 days. You can also register voluntarily below the threshold.
- National Insurance – self-employed people may pay Class 4 National Insurance depending on their profits. Limited companies may also have employee and employer National Insurance liabilities when they pay salaries.
- Income Tax – sole traders and partners pay Income Tax on taxable business profits. Company directors may pay Income Tax on salary, dividends and other personal income.
- Business rates – these may apply if you use business premises. If you run your business from home, you will not normally have to pay business rates, although there are exceptions.
Sole traders and landlords who fall within the relevant income thresholds will also have to follow the Making Tax Digital for Income Tax rules, including keeping digital records and using compatible software to send information to HMRC.
Pros and cons of being a small business owner
Some of the benefits of being a small business owner include:
- You’ll have more independence and can manage your time in the way that best suits you.
- You can potentially make more money – how much you want to work and expand is up to you. What’s more, running your own business lets you claim legitimate business expenses, such as travel costs, office equipment, and certain utility costs, subject to the normal tax rules.
- The satisfaction that comes with working for yourself – simple but true!
Some of the downsides of being a small business owner include:
- Financial risk, as you’ll no longer necessarily have a fixed pay cheque at the end of the month. How much you earn and how successful the business is will depend on you and, if you have any, your employees.
- There’s no denying it can be stressful at times – and there is a certain amount of necessary admin that goes with doing your chosen work.
Here at Integro, we offer small businesses a comprehensive, bespoke service. You can find all the details in our services section: Small Business & SME Accountancy packages.
Talk to us about how we can help you make your small business a success and take some of the admin off your hands on 0207 096 2659 or book a call back request for your convenience.
