Sole Trader : There are many types of legal structures to suit different types of businesses.
If you want to become your own boss, you might have heard the terms like a sole trader, limited company and partnerships.
Here we’ll have a closer look at the term: sole trader.
This Blog Post Is Divided Into The Following Sections:
- Definition of a Sole Trader
- Example of Sole Trader
- How to Get Started With Sole Trading
- What Are The Tax Liabilities Of Sole Trader?
- Advantages of Sole Trading Business
- Disadvantages of a Sole Trading Business
- Do Sole Traders Need An Accountant?
Definition of a Sole Trader
In the normal term, a sole trader is a self-employed individual who works for themselves.
As a sole trader, you can sell products and offer services to other individuals or businesses, but you are not contracted as employees by another business.
You can also have contract agreements as a sole trader to provide work regularly.
Yet, that contract differs from an employment contract.
The employer only pays the sole trader for their work and not for an employee’s benefits, which includes pensions, paid leaves, bonus, and other perks.
All that means is that sole traders must deal with the HMRC directly, manage their own finances, taxes, business affairs, and hold any legal liability for their business’s actions.
To know the difference about both the business structure, sole trader and limited company, visit our blog, Sole trader Vs Limited Company.
Example of Sole Trader
Some common examples of sole trader include freelance workers, electricians, plumbers, gardeners and so on.
This list of sole trader business types is endless because anyone can set themselves up as a sole trader and offer their service or sell their products.
However, here is a specific example of what a sole trader business is.
- John designs t-shirts. He set up an online store and sells his designs over the internet to customers around the globe.
The most crucial distinction to make here is that John is the primary entity of this business.
As a sole trader, you can establish your own brand, but legally, you as a person are the business.
For example, you must file self-assessment tax under your own name.
How to Get Started With Sole Trading
If you have decided to start working for yourself, one of your first responsibilities as a business owner is to register for the Self Assessment to HMRC.
To register online, you will need your National Insurance number, personal and business details such as your address, the date you started the business etc.
And once you are registered, you will receive your own UTR (Unique Taxpayer Reference number) which you will need when you submit your annual tax return. See here our guide to getting your first UTR.
When you register for Self Assessment for the first time, you will also set up a Government Gateway account, so that you can submit your return online.
You can register using GOV.UK.
What are The Tax Liabilities of a Sole Trader?
As a sole trader, you will submit a Self Assessment tax return to HMRC each year. The tax year runs from 06 April to 05 April of the following year.
You must keep records of all your income and expenses to work out business profit or loss for the tax return.
You will need to submit all those records if HMRC asks to see your records.
Make sure to keep all your receipts, invoices and bank slips for at least five years.
Check HMRC’s Income Tax rates and bands for the current sole trader tax rates.
You only have to register for the VAT if your business turnover is over £85,000 in any 12-month of the rolling period.
Also, there are some situations where you may want to register despite not meeting this threshold, such as if you want to reclaim the VAT from selling to VAT-registered businesses.
Advantages of Sole Trading Business
As a sole trader, you can maintain full control of your business.
- Profit retention
Yes! As a sole trader, you can retain all the profits of your business.
- Private data
All the information about your sole trading business is kept private, unlike limited companies that are necessarily made public after registration with the Companies House.
As a sole trader, you can offer a more personal service with local roots and ties, and this can be more appealing to potential customers of the local community.
As a sole trader, you can make decisions quickly and act on them swiftly, providing for the needs of their customers because there is no need to confer with other decision-makers.
Disadvantages of a Sole Trading Business
As a sole trader, you are subject to unlimited liability because sole traders are not seen as separate entities by the law.
This means if a business gets into debt, the business owner is liable.
And In the worst case, this may also mean a person risks their personal savings, home and any other assets they have in and outside of their business.
Generally, sole traders find it difficult to raise finance to fund their business and may struggle with business expansion in the future.
- Reverse economies of scale
As a sole trader, you will be unable to take advantage of economies of scale in the same way as larger corporations and limited companies who can afford to buy in bulk.
This might mean that you have to charge higher prices for your products or services in order to cover all the costs.
- Decision making
In the case of sole trading, all decisions must be made by the sole trader, and there is no room for help from others.
So the success or failure of the business rests on one person.
Do Sole Traders Need An Accountant?
Although you do not need to submit as many documents as a limited company, hiring an accountant can be beneficial. An accountant can help you navigate your self-assessment each year, claim all deductions, keep track of your expenses/invoices, and calculate how much tax you need to pay.
Working out what you owe can be complicated with personal allowances and tax-deductibles.
Staying on top of the tax and accounts is very important for sole traders since you are personally liable for any debts.
And accountants can help you save money, making sure your business is as tax efficient as possible.