You might have heard about this term at least once, there might be someone in your family with a shop or a small business. Anyone with a business owned and run by one person in which there is no legal distinction between the owner and the business entity. It doesn’t mean that a sole trader works alone, it is possible to employ others but the ownership of the liabilities and assets rests with one person.
A sole trader is the simplest type of business structure defined in UK law. It refers to an individual who owns their own business and retains all the profits from it. Certain responsibilities come with the title.
As a sole trader, you would have to bear the losses incurred by your company. You are personally responsible for the business bills and you are responsible for keeping accurate records of your business sales and expenses.
What are the main advantages of a sole trader?
Just think of it no one likes to spend hours in any government office getting all the required paper sorted. If you choose to be a sole-trader then you don’t need to spend long hours in the queue. The law has made the procedure to be a sole trader is very simple and smooth allowing the business to commence trading soon. Another privilege of being a sole trader is that you don’t need to consult others before making a decision. Having the freedom to make decisions allows you to make better decisions that you feel right.
What are the disadvantages of being a sole trader?
Every coin has two sides and being a sole trader also has its own limitations and disadvantages. It lacks a clear distinction between personal and business income and also has unlimited liability. Every aspirational entrepreneur will want to grow but by registering as a sole trader it restricts the growth as business lenders prefer to co-operate with a limited company.
The following are needed to be done by a sole trader,
- Send a Self-Assessment tax return every year
- Keep a well-organized record of all income and expenses.
- Pay Income Tax and National Insurance on any profits their business makes
- Register for VAT – only if revenue is expected to be above £85,000
Do you know the other great thing being a sole trader?
You won’t need to hire the services of a solicitor or company formation agent. Which means you can save a ton of money which you can use productively. Unless you need to hire an accountant from day one to do your taxes and maintain your accounts there are no other professional fees. You also save another £13 as you don’t need to pay a registration fee to the company’s house.
A limited companies accounts and details about the directors are accessible through a few clicks on the company’s house website easily, as you are a sole trader you are protected by the HMRC’s taxpayer confidentiality rules.
What does that mean, well your details are not accessible by your competitors and they have less information about you. Every business keeps an eye on the competitor and acts according to their plans. Since your competitors know less about you it’s going to be hard to knock you down.
Sole trader status offers such advantages but you must choose your business structure carefully and considering your long term goals.
Should I register myself as a sole trader?
It really depends on your personal preference, but whichever you choose would decide how you pay your taxes to HMRC. If you are a sole trader like we discussed you pay your tax to HMRC by a self-assessment. If you form a limited company, on the other hand, you’ll have a company that your clients will pay and your company will pay you by way of salary and dividends. As a sole trader, you depend on your own credit rating to borrow money. A limited company can establish its own credit rating, which can support borrowing to invest in the business.
Both have their own advantages and disadvantages it really depends upon what you want. We have discussed in detail in an article where we compare both sole traders and limited companies.