In simple terms, a sole trader is a business that is owned by one person, although you can also have people working for you. As a sole trader, you are personally trading as your business. It is different to operating as a limited company where the business is it’s own legal entity. As a sole trader, you and the business are treated as a single entity for tax and administrative purposes.
- You are self-employed and you must register your self-employed status with HMRC. You have complete control over your business and your finances – it is your responsibility.
- There is no distinction made between your personal and your business finances.
- Your business profits are subject to Income Tax and National Insurance rules.
- You are ultimately liable for any business losses in the event of anything going wrong.
- You must maintain accurate business accounts and records for HMRC. You must comply with legal requirements that concern the protection of the customer.
The sole trader route a popular way of starting up a business in the UK as it is often seen as the quickest and cheapest route. It is also a great way to try working for yourself for the first time if you want to test the water before deciding to set up a limited company. You can always choose to take this route at a later date.
Setting up your own business is a very exciting time, and, depending upon your circumstances, starting out as a sole trader may be a viable option. However, before you decide, there are some other important factors to bear in mind.
- Liability - Unlike limited companies, Sole Traders are not seen as a separate entity by law. This means they are subject to unlimited liability. In other words, if the business falls into debt, the business owner – ie the sole trader, is fully liable for those losses.
- Professional credibility - Whilst some businesses are open to the idea of doing business with a person as opposed to a company, there are also many businesses who choose to deal only with other registered companies. In some industries, operating as a Limited Company may even be mandatory as they will not deal at all with Sole Traders. It is worth researching your market and potential customer base thoroughly to see whether this is the case.
- Financial support - The process of securing financial support has become progressively difficult over recent years. However, Sole Traders may find it even more difficult to raise finance to help fund their business. The banks may consider the accounting transparency of a limited company as opposed to the more private status of a Sole Trader.
Whilst setting up a limited company may ultimately be a more tax efficient means of operating, setting up as a sole trader is much simpler, requires a lot less administration, and costs less to run. The ease with which a sole trader business can be set up presents a number of advantages.
- Total control - As a sole trader you are your business, and you are in full control. You are responsible for all decisions without having to consult other directors or shareholders, so you can develop the business exactly how you choose.
- No set up costs - There is no need to register your business at Companies House, so the paperwork is very simple, you do not require the services of a solicitor or a formation agent so there are no fees to pay. Simply inform HMRC that you are self-employed.
- Privacy - Unlike a limited company, where all information concerning the business, including directors details and annual accounts are made public, information about sole traders
is kept totally private.
- Capital allowances - If you need to purchase equipment for your business, for example vehicles, tools, IT equipment or business furniture, you may be able to claim tax relief on these purchases in the form of capital allowances.
- Flexibility - Because you are the sole decision maker, it is much simpler to adapt your business to the changing demands within the market you serve. You can change prices and vary services, making decisions quickly and acting on them swiftly, keeping you agile and competitive.
- Simple accounting - Although you must maintain detailed records of invoices, expenses and accounts and file an annual tax return, the actual accounting process is much simpler for a sole trader than that for a limited company.
- Profit retention - As a sole trader you retain all the profits of the business.
Whether you are a contractor, freelancer or self-employed professional, we believe that you, and we, should always know where your business is at. We have a great team of people who work closely with you, every step of the way to help you work more efficiently and to make more of your earnings potential.
Brookson offer a sole trader year-end service for those choosing to work this way and for those wanting a more all-inclusive service, our Limited Company Accountancy Service may better suit your needs and allow you to maximise your earnings.
Our accountancy, tax advice and friendly, proactive Customer Services Team take away as much of the administrative burden however you choose to work.