What is a Sole Trader Business?
Sole trader definition
A sole trader is a self-employed individual who owns their whole business and is not legally separated from it. Unlike persons who work through their own limited company, which is legally separate from its owners, it’s commonly claimed that you are the business as a sole trader. Working as a sole trader is quite popular in the UK, with 3.5 million people doing so. It has a lot of benefits.
What do we mean by not legally separate?
Sole traders are personally liable for any losses or obligations owing by their company, whether to suppliers or HMRC. As a sole trader, your assets are at danger due to unlimited liability. If your company is in difficulties, for example, your personal assets, such as your home, are not secured. That isn’t to imply you shouldn’t start your own business.
What are a sole trader’s responsibilities?
Aside from running your firm on a day-to-day basis, sole traders must keep track of their sales, expenses, profits, and, as a result, their personal tax liabilities. These include the annual Self-Assessment tax return, class 2 and class 4 National Insurance returns, and quarterly VAT returns if you are registered for VAT.
How do you start working as a sole trader?
It’s straightforward. By the 5th of October in your second year of operation, you must have registered for the Self-Assessment tax return and class 2 National Insurance. You could get penalised if you don’t, so it’s better to do it now than later. Please check the government’s website for further information.
Read our guide to becoming a sole trader for more details. If you’re unsure and would prefer an expert to handle it for you, don’t hesitate to contact one of our knowledgeable sole trader accountants.
When should you register as a sole trader?
Even if you work a full-time job and freelance on the side, you may need to register as a sole trader. If any of the following apply, do so:
- You earned over £1,000 from self-employment in the previous tax year.
- You need to prove you’re self-employed, to claim tax-free childcare or similar.
- You want to make voluntary class 2 National Insurance contributions to qualify for benefits.
If you’ve already decided to work for yourself and wish to work as a sole trader, you should register as soon as possible.
What are the advantages and disadvantages of running a sole trader business?
Let’s look at the most obvious ones first:
Advantages of being a sole trader
- As the sole owner, you have total control over the business
- As the business is not incorporated there are fewer filing requirements. There is no need to file accounts with Companies House and fewer tax returns to file. Setting up as a sole trader is seen as the most simple way to work self-employed.
- A sole trader business offers owners great flexibility and incorporating your business further down the line is fairly straightforward.
- Your financial information isn’t published on Companies House, meaning you have total privacy when it comes to your affairs.
Disadvantages of being a sole trader
- Due to unlimited liability, you are personally liable for any debt the business incurs.
- Sole traders have fewer tax planning opportunities because all the profit you earn is subject to income tax in the year in which it’s earned.
- Due to the fact that you will be engaged personally, rather than through an intermediary (like a limited company), recruitment agencies may be reluctant to engage you as a sole trader.
Who can work as a sole trader?
Anyone and everyone can be a sole trader, which is why there are millions of them in the UK today. Here are a few examples of well-known solo traders:
- Freelancers (designers, copywriters, marketeers, photographers and social media consultants)
- Self-employed tradespeople (builders, plumbers, electricians, gardeners and carpenters)
- Gig economy workers (couriers, taxi drivers, delivery drivers, tutors and nannies)
Am I self-employed or a sole trader?
Are you unsure whether you’re a sole trader or self-employed? There’s no need to be concerned; it’ll be resolved quickly. Because you work for yourself, a sole trader is technically self-employed. To put it another way, you fit into both groups.
Should I become a sole trader?
The choice is yours, but with self-employment quickly becoming the new normal, operating as a sole trader is a feasible, quick, and simple way to begin offering your services.
If you need any advice on setting up as a sole trader, our specialists are available to help you – simply contact us at TJ Whiffin below.