What is a sole trader? Our key considerations
With more than 60 per cent of UK businesses identified as sole traders, there are many more around than you might think. So, what is a sole trader and what does it mean? If you are a sole trader, you run your own business as an individual and are self-employed, according to HM Revenue and Customs.
You can keep all profits from your business after you have paid tax on them, you are personally responsible for any losses your business makes and you must also follow certain rules on running and naming your business.
How do you get started as a sole trader?
One of the first things you must do is to choose a name to trade as (checking that it is not currently being used). You may decide, instead, to trade under your own name. The choice is yours.
Writing a business plan, including producing a forecast, is very important. All good businesses should have one – it is a written document with a description and overview of your company’s future. It should include your objectives and goals and how and when you want to achieve them.
Your next step should be to register as self-employed with HMRC and you will need to file a tax return each year. You will also need to think about registering for VAT – the current threshold of turnover is £85,000 a year.
With the recent changes to Making Tax Digital (MTD), it is a good idea to get expert advice from your accountant. All VAT registered businesses must comply with the new rules, not just those with a turnover above the threshold. From April next year, all businesses including landlords with a turnover above £10,000 must also comply.
What are the pros of being a sole trader?
One of the pros of being a sole trader is that you can keep all profits that you earn after tax. Setting up a sole trade business is relatively easy compared to setting up a limited company and the capital investment to set up as a sole trader is potentially relatively small.
A sole trader is also free to make all their own decisions and as a sole trader, the details of your business can be kept private. While your tax returns are filed with HMRC, if you decide to form a limited company, your accounts are filed with Companies House and are in the public domain, for anyone to see.
What are the cons of being a sole trader?
As a sole trader, you have unlimited liability as an individual. This means that unlike the owners of a limited company, a sole trader is personally liable for their business’ debts and losses. There is no separate legal identity for the business – the sole trader is their business.
You will also have to consider the number of hours you are prepared to put into the business as a sole trader – it is up to you, as the business owner, to work as much or as little as you want. You might see this as an advantage rather than a ‘con’ of being a sole trader.
Finally, another disadvantage is the potential you may have to pay tax at higher rates than if you were registered as a limited company. Of course, this all depends on your profit levels and how much money you make.
Other key points to consider
It is important that you keep all your financial records in a safe place. It stands to reason that the more organised you are from day one, the easier it is to compile a list of documents and information for your accountant when you need to.
Whether you decide to register as self-employed, in a partnership or set yourself up as a limited company, each option has their own implications on how you pay tax, so it is important that you get the right advice at the earliest opportunity to avoid getting caught out.
For advice on setting up as a sole trader, helping to grow your business or for any tax and accountancy advice, contact your local Westcotts office.