What is a Sole Trader Business?
What is a sole trader? As the term suggests, when operating as a sole trader you’re running your business as an individual. Being a sole trader merely means that there’s no legal distinction between the owner and the business.
Sole Trader definition
As a sole trader, you’ll be –
- Personally responsible for any losses your business makes
- Personally responsible for any of your business’ bills
- Personally responsible for keeping accurate records of your business’ sales and spending.
The tax responsibilities
To keep HMRC happy, sole traders need to do the following things –
- Send a Self Assessment tax return every year
- Keep a record of all income and expenses
- Pay Income Tax and National Insurance on any profits their business makes
- Register for VAT – although only if their takings are over the VAT threshold (or will be soon)
- From April 2019 you might need to keep records digitally as part of HMRC’s Making Tax Digital (MTD) roll out.
As is the case for limited companies, failure to meet these obligations could mean hefty penalties.
What are the main advantages of being a sole trader?
Many freelancers begin as sole traders, due to the relative ease of setting up and the comparatively small administrative burden involved, and lower costs.
Setting up as a sole trader is simple
There’s a simple three-step process to starting out as a sole trader:
- Let HMRC know you’re self-employed
- Register for Self Assessment as a sole trader
- Pick a business name.
Subject to obtaining any industry-specific licenses you may need, you’re free to start trading immediately after that. There’s no need to register with Companies House because, although you have a bona fide business, it isn’t a company.
Naming your sole trader business
Your business name will need to be featured on any official paperwork, such as invoices. Sole traders are also subject to certain rules when it comes to naming your business. Sole trader names aren’t allowed to:
- Include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
- Be offensive
- Be the same as an existing trademark.
There’s also a list of ‘sensitive’ words and expressions that can’t feature in your company’s name, and you can’t pick a name that suggests a link to any government or local authority without permission. Gov.uk provides a helpful list of what constitutes a ‘sensitive’ word, what names you can use and which ones you should steer clear of.
Sole traders have less admin
As mentioned above it’s simple to get started as a sole trader. You can avoid all the extra paperwork involved in setting up as a limited company (Annual Accounts, Corporation Tax Return, etc.) if you follow the sole trader path.
As a sole trader, you’ll have to keep accurate records of sales and expenses, but operating in this manner is much simpler thanks to the fact that you’re only submitting a Self-assessment (and perhaps a VAT return).
Filing forms at Companies House – for example, to appoint or remove directors, allot new shares and suchlike – are irrelevant to a sole trader, as is the requirement to maintain a list of statutory registers. You’ll avoid the constant menace of IR35 too, as these HMRC rules only apply to those operating as a limited company.
So, you’ll spend less time doing paperwork and hopefully more time earning money.
Sole traders have fewer costs
When setting up as a sole trader, you won’t need to employ the services of a solicitor or company formation agent (as some people do when they form a limited company) so, unless you hire an accountant from day one, there are no professional fees to pay at the outset. Accountancy costs can also be cheaper as there are far fewer statutory filings and reporting deadlines.
You also won’t have to pay a registration fee to Companies House, which will make you a tidy saving of about £13.
