One of the first questions you need to ask yourself when starting your own business is how you want to run it – what is a sole trader compared to a private or public limited company anyway?
What is a sole trader? It is the simplest business structure in the UK as there is no difference between the person and the company. This means that there is little extra paperwork and regulations, but also that the sole trader is personally liable for any losses in the company.
It’s a good idea to weigh up early on whether you’d be better off setting up as a sole trader or if your business will benefit from being a limited company.
Benefits of being a sole trader
You might be wondering how to register as a sole trader, and here is the good news: you just need to tell HMRC that you’re setting up as a sole trader so that they can list you for Self-Assessment and you are ready to go.
This means that there’s less paperwork to think about when you’re becoming a sole trader than there would be when you set up a limited company.
Because a sole trader and their business is one and there are no partners or investors, you have higher control to make your business decisions more confidently and quickly. You can also choose exactly where you want the business to go into the future. However, you can also be the only owner of a limited company, which gives you the same control as sole trading.
As a sole trader, you get to keep all profits after tax. You could channel some back into the business, but equally, you could choose to take it home. This is not very tax efficient though, as you’ll have to pay tax in all your profits even if they are reinvested in the business.
You can make your customer service and business more personal being a sole trader, as you don’t need to rely on others to keep your customers happy.
Being a sole trader and the challenges ahead
Let’s review what is a sole trader: it is a business structure where there is no separation between you as a person and you as a business. What this means is that if your business hits hard times, you will too. You’ll be liable for 100% of the debt of your business and, if your business fails, you could also lose your personal assets. This isn’t an issue with a limited company – still easy to set up but with your personal risk limited to your investment in the company.
You may also find that the challenges faced every day by new business owners may be better shared. As a sole trader, you’re responsible for the good times and the bad, and you’ll need to put the hours in to make sure your business works.
As a sole trader, you may also find you put in longer hours or that you just can’t switch off from work. Plus, if you’re off sick or you’d like to go on holiday your business will need to go on hold while you’re off too.
Regulations – what does a sole trader need to do?
You don’t need to register as a sole trader, just let HMRC know you are planning to start trading and you are good to go, but you do still need to keep records of your business finances, including income, expenses and profits.
When it comes to tax you’ll need to register with the HMRC and pay National Insurance contributions (NICs) and income tax. These will be checked via your Self Assessment tax return each year. It is recommended to set up a different bank account to keep your personal and professional finances separately.
Being a limited company requires extra paperwork to stay compliant, but this does not need to be too hard either. Need to know more about limited companies and their benefits before setting up?
Check out our Help Centre for information and tips on starting your business, staying compliant, and running your small business in the UK.
Formation bundles for sole traders
Perfect for sole trader who wants to register as a limited company
Go limited for sole traders
Form a limited company and let us take care of all your regulator annual accounts, make any changes you need to your company directors, PSCs or share allocations.
- Digital Certificates
- PSC Online Register
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- Business bank account
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- Business phone Number
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- Lifetime support
- Business hub manager
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- Accountant consultation
£29.99
+ VAT | PER YEAR
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