Without a doubt, setting up as a “self-employed” is the simplest and most popular way to structure a business. Sole traders account for over 60% of all businesses in the UK, with partnerships making up a further 9%. In this article we’ll explore the definition of a sole trader, with a focus on some considerations before choosing this business structure.
- Being self-employed and operating as a sole trader are one and the same
- You operate as an individual
- A Partnership is the the formation of two (or more) sole traders setting up a business together
- Your business can be your own name, or a business name (there are rules to consider)
- It is recommended that you set up a business bank account (though you don’t have to) in order to keep your business expenditure separate
- You must register for self assessment. If you operate as a partnership, you must also submit a separate tax return.
- After you’ve paid HMRC the tax you owe, you can keep all of the profits.
- You absolutely must pay the tax and NI that you owe on time, or you will be subject to penalties.
- Sole traders pay both Class 4 (annual) and Class 2 (weekly) NI contributions
- If you take on employees, you must set up a payroll scheme and collect their taxes on behalf of HMRC.
- If your turnover exceeds £83,000 for the year, you will need to register for VAT.
- You must maintain up-to-date records for all sales, expenditure and bank records, and keep these records for a minimum of 6 years.
- Unlike the limited company structure, you will be personally liable for any debt.
- If operating as a partnership, make sure that you set up a contract detailing responsibilities and a plan for if anything goes wrong.
Sole Trader or Limited Company?
Becoming a sole trader is the simplest, most hassle free way of setting up a business. Once you’ve registered for self employment with HMRC, you can start trading straight away (be aware of trade specific rules which may affect this).
There is much less administration and “red-tape” involved in operating as a sole trader, in comparison to a limited company. So long as you play by the rules i.e. file for and return your self-assessment, pay the tax you owe on time, and comply with business and employment law.
However, the main downside, compared to operating as a limited company, is that as a sole trader you and your business are one and the same, operating as a single entity. This means that you as an individual are personally liable should anything go wrong, so be careful.