What is a Sole Trader

From the word itself, a sole trader is someone who operates a business as an individual. When you are a sole trader, you and your business are one – there is no legal distinction between you, as the owner, and the business (also check out the difference of a sole trader vs a limited company).

A lone trader is a self-employed individual who owns and operates their own firm. Because a sole trader business has no legal status separate from its owner, many people believe that you are the business. We’ll look at what a sole trader is, how to get started, and your ongoing duties in this article.

You have complete control over your business, its assets, and income after taxes as a sole trader (also see our sole trader accounting services). Along with this level of control, this business model provides relative simplicity, versatility, and a variety of additional benefits.

A sole trader, unlike the owners of a limited company, is personally accountable for the debts of their firm, and their personal assets may be at risk if creditors are not paid. The burden of having to shoulder all of the responsibility, as well as the unrestricted liability, can be substantial obstacles.

Many types of businesses can employ the sole trader business model, but it is likely most prevalent among tradesmen who provide services to individuals and families. Sole traders are common among plumbers, decorators, plasterers, hairdressers, and other individual providers of specialised services. However, other sorts of businesses, such as small stores and manufacturers, as well as internet entrepreneurs and self-employed consultants, may operate as sole traders.

Sole trader accountant fees

Basic accounting services are normally performed for between £25 and £35 per hour by an accountant.

More specialised services, such as tax preparation and business planning assistance, can cost anything from £125 to £150 per hour.

In contrast to many other forms of businesses, a sole trader must:

• There is no necessity to register the business with Companies House or to file information with them on a regular basis.
• There are no directors in charge of the company; it is controlled solely by the sole trader.
• There are no investors since there are no shareholders. Instead, the sole trader’s ability to raise funds for the business is constrained.
• Because there aren’t other partners like there are in a general partnership, the sole trader model isn’t usually appropriate if you want to start a firm with someone else and share the risk and profits.

A lone trader, on the other hand, shares several traits with other types of businesses, including:

• HMRC still requires you to record and pay tax. Below, we look at how to register as a sole trader with HMRC, as well as your ongoing duties.
• While it’s true that as a sole trader, “you are the business,” it’s still a good idea to keep some items distinct, such as establishing a business bank account separate from your personal account.
• You must still follow certain requirements when naming your business if you choose to trade under a name other than your own. Your company name, for example, cannot be offensive, contain certain “sensitive terms,” or be a replica of another company’s name. On business documents such as invoices, letters, and receipts, you must include your own name and, if different, the name of the business.
• You can hire somebody to help you. Being a single trader implies that you are solely responsible for your business, not that you must work alone.

RELATED: Starting a Business

Starting off as a sole trader

If you want to operate for yourself as a sole trader, you must first register with HM Revenue and Customs (HMRC), which you may do online. While you cannot register in advance, you must notify HMRC as soon as you begin trading. If you haven’t done so already, this will include registration for self-assessment.

When it comes to launching a business, there are a few other factors to think about:

1. Whether you need authorization from your local council or another organisation before launching a business – this applies to jobs like driving a taxi, for example.
2. Setting up a bank account – It’s always a good idea to have a business bank account distinct from your personal bank account.
3. Finding adequate premises to operate from, depending on the type of business. If you decide to work from home, you’ll need to consider whether your rental agreement allows it, any necessary alterations (for which planning permission may be required), and whether you’ll have to pay business rates to your local authority for the use of a portion of your home for business purposes.
4. Determine whether you’ll need full VAT registration (or whether you’d choose to register voluntarily) and, if so, register for VAT.
5. If you plan to hire individuals, you should set up a Pay As You Earn (PAYE) payroll arrangement. You’ll also have to think about job contracts, statutory pension rights, and a variety of other work-related issues.
6. Insurance for your business that is either required or recommended. We’ll look at some of the different types of business insurance that may be necessary or useful in another article.
7. If you work in the construction sector as a contractor or subcontractor, you must register with the Construction Industry Scheme (CIS).
8. Any cash that may be accessible to the company, such as grants or loans.

Responsibilities regarding taxes

As a sole trader, your business revenue is combined with your personal income. This means that, regardless of whether you’ve had to do so previously, you’ll have to file a self-assessment tax return every year to describe your income and expenses. You’ll additionally have to pay the following to HMRC:

• Class 2 national insurance contributions (NICs) – at a set rate of £3.05 per week in the 2021/22 tax year, unless your yearly profits are less than £6,515; Class 4 NICs – in the 2021/22 tax year, these are 9% of profits between £9,569 and £50,270, and 2% on profits over £50,270.
• You must pay any tax due by the 31st of January following the end of the tax year in question. You can also have to make ‘payments on account’ twice a year, which are essentially advance payments for the current tax year.

If you hire people as part of your sole trader business, you must deduct the appropriate amount of income tax and national insurance payments from their pay and pay them to HMRC on a regular basis. As a result, you’ll need to implement a Pay As You Earn (PAYE) payroll system.

If you’re registered for VAT, you’ll have to submit VAT reports and payments to HMRC on a regular basis.

A sole trader’s other ongoing responsibilities

As a sole trader, you must keep accounting records that adhere to normal accounting procedures and present a true and fair image of your business. However, unlike most other forms of corporate entities, there is no requirement to keep accounts in a particular format or structure.

You’ll need to keep detailed records of your sales and expenses as part of this. When it comes time to file your annual self-assessment tax return, these will come in handy.

There is no requirement to file a confirmation statement or any other filings with Companies House, unlike a limited company. However, you’ll still need to meet criteria that apply to all types of businesses, such as having the appropriate insurance and staying on top of health and safety regulations.

Definition of a Sole Trader

Being a sole trader means that you are responsible for:

• any losses your business suffers
• all of your business’ payables
• diligently keeping track of your business’ income and expenses

A Sole Trader’s Tax Responsibilities

In terms of complying with HMRC, sole traders are required to:

• accomplish a Self-Assessment tax return every single year
• maintain a record of the business’ income and expenses
• make sure Income Tax and National Insurance on profits the business earns are paid
• complete VAT registration (provided that takings exceed the VAT threshold)
• keep digital copies of records in response to HMRC’s Making Tax Digital program

If a sole trader fails to accomplish the above-mentioned responsibilities, he may be fined, similar to what is done to limited companies that do not oblige.

The Advantages of Being a Sole Trader

There are advantages to being a sole trader, the reason why many freelancers choose to start with this business setup. These advantages include a fairly easy startup process, minimal administrative tasks, and lower startup and long-term costs.

Starting Out as a Sole Trader

Anyone can start as a sole trader by following these three easy steps:

1. Inform HMRC of your self-employment
2. Register for Self-Assessment as a Sole Trader
3. Choose a name for your business

After completing other licenses that may be required by their industry, sole traders may immediately start trading. A business operated by a sole trader is technically not considered a company and is, therefore, not required to register with Companies House.

Naming Your Sole Trader Business

As your business name will appear on invoices or other official documents, it is important for it to represent you well. Hence, business names of solo traders must abide by the following rules:

1. The business name must not include the following words, phrases, or abbreviations or acronyms: “limited”, “Ltd”, “limited liability partnership”, “LLP”, “public limited company”, or “plc”.
2. The business name must not sound or be foul or offensive.
3. The business name must not be identical to an already existing trademark.

Apart from the rules above, there are “sensitive” words and expressions that are not allowed to be part of the business name. Any name that associates your business with a government agency or local authority, especially without any permission is also prohibited. To check the list of “sensitive” words forbidden by law, you may access Gov.uk.

Advantage 1: Having Less Administrative Tasks

Operating a business as a sole trader is much easier than running a limited company. You will be able to do away with time-consuming administrative tasks such as records keeping and other paperwork like annual accounts and corporation tax returns. You will only mostly be required to work on closely monitoring your sales and expenses and making sure you submit a Self-Assessment and, in some cases, a VAT return.

Since a business run by a sole trader is not a company, there is no need to register with Companies House, nor file forms in case of changes in management or directorial positions, or if there is an allotment of new shares. Maintaining a list of statutory registers and submitting an IR35 are also not part of a sole trader’s obligations. There are certain responsibilities that sole traders are exempted from simply because they are not running a company. This means that sole traders will have more time focusing on how to grow their income instead of spending countless hours doing paperwork.

Advantage 2: Saving on Costs

Setting up as a sole trader allows you to save on professional fees because there won’t be a need to hire a company formation agent (usually needed when setting up limited companies) or a solicitor. Even accounting services are not compulsory until the need to file statutory documents and accounts reporting arise. Since the accounting workload is not as hectic as in company setups, accountancy costs are also not as high. As was previously mentioned, a sole trader’s business is not a company, so, registration with Companies House is not required, allowing the sole trader to save at least £13 on registration fee.

Advantage 3: Having More Privacy

Companies House keeps a record of limited companies’ details and accounts and makes them available online for public inspection. This means that competitors have access to company information, making it easy for them to contend with their business. Sole traders are spared from this because they are protected by HMRC’s taxpayer privacy policies. In other words, competition is not really a problem for sole traders because their information are kept confidential.

Easier setup process, more privacy, and less administrative burdens are only a few of the advantages of setting up as a sole trader. Sole traders also end up with more flexibility because there is no need for consultations with other business partners. However, it is still best to see where you stand and clearly define your goals and priorities in order to determine the right business structure to apply.

Advantage 4: Being in Control of Your Own Business

Having the freedom to make decisions and having complete control over your business is probably the best takeaway from being a sole trader. Unlike in other business structures where the course usually depends on the decision of shareholders, a sole trader only has himself, and probably an accountant, to consult in terms of making choices for the business. Profits are also solely yours to enjoy, too.

The Disadvantages of Being a Sole Trader

If there are advantages, so must there also be disadvantages. In the case of sole traders, this translates to unlimited liability. This means that if your business fails or suffers losses, creditors could take away your personal belongings and other properties. This is because a sole trader and his business are treated as one. If a business incurs debts, it is the responsibility of the sole trader to settle whatever amount is owed.

Another drawback to running a business as a sole trader is tax inefficiency. However, this can easily be assuaged by converting into a limited company once the business stabilises and a set earning standard has been met. This will allow you to make the most of your profits.

Some creditors and business magnates have a tendency to become more skeptical when they do business with sole traders. But if you incorporate, there is a greater potential to have more borrowing power and even have better employment opportunities.

Because of these disadvantages, operating as a sole trader is often recommended for those who are new to the freelancing business. Once they have learned the tricks of the trade, they can then start venturing into running limited companies. Speaking to an accountant will help you decide if you’re ready to go limited.

Is being a sole trader right for my business?

Because being a sole trader has both advantages and disadvantages, going for this kind of business structure will depend on several considerations. You may refer to our article on the pros and cons of running a limited company, an umbrella company, and operating as a sole trader. You may also seek personal advice from an accountant who can help assess your capabilities and make recommendations. If you need further assistance, you may book a free consultation with our dedicated financial advisers by calling 0161 804 0808. They can guide you through the decision process, get you oriented with different business models, and help you determine the best business structure for you.