Entrepreneurship has rocketed in the past 50 years, even more so when the digital age came into play; giving people the freedom to not only work for themselves but to also work remotely online. Thanks to the internet, it is easy to advertise your services through social media and various free platforms, consistently reaching markets without borders like never before. Digital platforms and technology make it easier for business owners to communicate with their customers, with little need to do business face to face.
Setting up on your own has never been easier and many who do this, register as a Sole Trader.
There are approximately 2.5 million Sole Traders in the UK today, it is a popular avenue for budding entrepreneurs wanting to start on their own as it gives them complete control of their business.
A Sole Trader is someone running a business as an individual, there is no legal distinction between the owner and the business.
As a Sole Trader, you will be personally responsible for any bills, losses, sales, and spending within your business. It is your responsibility to keep records of everything related to the business and pay your tax on time through self-assessment.
The obvious advantages of ‘being your own boss’ aside, setting up as a Sole Trader is easier and more cost-effective than setting up a limited company. Many freelancers or one-man bands begin as Sole Traders due to the ease of setting up and managing the admin that comes with it. It is also beneficial because you don’t have to rely on anyone else but yourself to make it a success.
Some advantages of being a Sole Trader are:
As a Sole Trader, you avoid all the extra paperwork you would have if you were setting up as a limited company. You don’t need to register at Companies House, appoint directors or shareholders, or keep a paper trail of annual accounts for corporation tax. You do need to keep a record of what sales and expenses your business has, however it’s much simpler than operating as a limited business as it’s only for a tax self-assessment.
Another benefit is you can avoid having to deal with IR35, as these HMRC rules don’t apply to Sole Traders, only Limited Companies.
As a director of a limited company, your details will be stored and accessible at Companies House; such as your address, date of birth and any other businesses you are connected to (including previous business ventures). However, if you are a Sole Trader you do not need to state any information and are protected by HMRC’s taxpayer confidentiality rules.
This gives your competition less to know about you which makes it difficult for them to compete with you in your marketplace.
Unlike a limited company, you will not need to appoint any solicitors or formation agents to help you set up. You also don’t have to register and maintain your business name at Companies House at an annual fee. There are many tools out there to invoice and upload receipts to a system automatically from accounting software such as Xero, helping you to calculate your tax ready for your self-assessment as a Sole Trader, therefore you could also cut costs in hiring an accountant if finances aren’t your strong point.
Another advantage of being a Sole Trader is all post-tax profits will be yours, as well as all the decision making. As a Limited Business, you may need to consult shareholders of any changes before making them and give them a cut of the earnings, however as a Sole Trader you have the freedom to do what you want to earn the money for yourself.
Setting up as a Sole Trader is fairly simple unless you need industry-specific licenses to run your business, all you have to worry about in legalities is HMRC.
You need to:
As soon as you’ve done this and registered your business name you are good to go and can start trading as a Sole Trader right away. It is worth noting that there are a few rules to follow when naming your business, you can see advice here.
You are taxed as an individual and will have to complete a self-assessment form. To aid you in doing this, keep your invoices, receipts and all documentation regarding money coming in and out of your business. This will make it easier when it comes to telling HMRC how much you have earned to be taxed on and claiming back any expenses you are entitled to.
For everything, you need to know about tax dates, read our important tax dates article.