If you’re interested in learning about starting a sole trader business you’ve come to the right place. On this page, we explore the basics of running your own incorporated business – from the definition of a sole trader, to the advantages, considerations and your tax responsibilities, should you choose to work this way.
Sole trader definition
A sole trader is a self-employed person who owns their entire business, which is not legally separate from its owner. As a sole trader, it’s often said that you are the business, unlike people who work through their own limited company, which is legally separate to its owners. With 3.5m sole traders in the UK, working this way is very popular and offers plenty of advantages.
What do we mean by not legally separate?
Sole traders are personally liable for losses made by their business or debts owed, whether to suppliers or even HMRC. With unlimited liability, as a sole trader your assets are at risk. For example, if your business is in trouble, your personal assets, such as your home, are not protected. But that’s not to say you shouldn’t become a sole trader. With less paperwork to do and fewer tax responsibilities, running a sole trader business is widely considered the simplest way to work self-employed.
What are a sole trader’s responsibilities?
Aside from the day-to-day running of your business, sole traders are responsible for keeping a record of their sales, expenses, profits and in turn, their personal tax liabilities. These include the annual Self-Assessment tax return, class 2 and class 4 National Insurance and if you register for VAT, quarterly VAT returns too.
How do you start working as a sole trader?
It’s simple. You need to register for the Self-Assessment tax return and class 2 National Insurance by 5th October in your second year of business, at the latest. You could be fined if you don’t, so it’s worth doing this sooner, not later. For more, please visit the government website. For more information, read our guide on how to set up as a sole trader. If you’re confused and would like an expert to take care of this on your behalf, don’t hesitate to get in touch with one of our friendly sole trader accountants.
When should you register as a sole trader?
Even if you freelance on the side while also working a full-time job you might need to register as a sole trader. Do this if the following applies:
- 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 made the decision to go self-employed and want to work as a sole trader, then you should register sooner rather than later.
What are the advantages and disadvantages of running a sole trader business?
Let’s take a quick look at the most obvious ones: 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 sole proprietorship
- 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, which is why there are millions of sole traders in the UK today. Some popular sole trader examples include:
- 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?
Confused if you’re a sole trader or self-employed? No need to worry, it’s easily cleared up. Technically, as a sole trader you are self-employed, because you work for yourself. So put simply, you fall into both categories.
Should you become a sole trader?
The choice is yours, but with self-employment fast becoming the new way of working, operating as a sole trader is a viable, fast and simple structure through which you can start to provide your services. For more information on our accounting services for sole traders, take a look at our sole trader packages. If you need any advice on setting up your own limited company, our specialists are available to help you – simply request a callback.