What is a sole trader?
A lone trader is a self-employed individual who owns and operates their own firm. Because a sole trader business has no legal status separate from its owner, many people believe that you are the business. We’ll look at what a sole trader is, how to get started, and your ongoing duties in this article.
You have complete control over your business, its assets, and income after taxes as a sole trader. Along with this level of control, this business model provides relative simplicity, versatility, and a variety of additional benefits.
A sole trader, unlike the owners of a limited company, is personally accountable for the debts of their firm, and their personal assets may be at risk if creditors are not paid. The burden of having to shoulder all of the responsibility, as well as the unrestricted liability, can be substantial obstacles.
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Many types of businesses can employ the sole trader business model, but it is likely most prevalent among tradesmen who provide services to individuals and families. Sole traders are common among plumbers, decorators, plasterers, hairdressers, and other individual providers of specialised services. However, other sorts of businesses, such as small stores and manufacturers, as well as internet entrepreneurs and self-employed consultants, may operate as sole traders.
Basic accounting services are normally performed for between £25 and £35 per hour by an accountant.
More specialised services, such as tax preparation and business planning assistance, can cost anything from £125 to £150 per hour.
In contrast to many other forms of businesses, a sole trader must:
- There is no necessity to register the business with Companies House or to file information with them on a regular basis.
- There are no directors in charge of the company; it is controlled solely by the sole trader.
- There are no investors since there are no shareholders. Instead, the sole trader’s ability to raise funds for the business is constrained.
- Because there aren’t other partners like there are in a general partnership, the sole trader model isn’t usually appropriate if you want to start a firm with someone else and share the risk and profits.
A lone trader, on the other hand, shares several traits with other types of businesses, including:
- HMRC still requires you to record and pay tax. Below, we look at how to register as a sole trader with HMRC, as well as your ongoing duties.
- While it’s true that as a sole trader, “you are the business,” it’s still a good idea to keep some items distinct, such as establishing a business bank account separate from your personal account.
- You must still follow certain requirements when naming your business if you choose to trade under a name other than your own. Your company name, for example, cannot be offensive, contain certain “sensitive terms,” or be a replica of another company’s name. On business documents such as invoices, letters, and receipts, you must include your own name and, if different, the name of the business.
- You can hire somebody to help you. Being a single trader implies that you are solely responsible for your business, not that you must work alone.
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Starting off as a sole trader
If you want to operate for yourself as a sole trader, you must first register with HM Revenue and Customs (HMRC), which you may do online. While you cannot register in advance, you must notify HMRC as soon as you begin trading. If you haven’t done so already, this will include registration for self-assessment.
When it comes to launching a business, there are a few other factors to think about:
- Whether you need authorization from your local council or another organisation before launching a business – this applies to jobs like driving a taxi, for example.
- Setting up a bank account – It’s always a good idea to have a business bank account distinct from your personal bank account.
- Finding adequate premises to operate from, depending on the type of business. If you decide to work from home, you’ll need to consider whether your rental agreement allows it, any necessary alterations (for which planning permission may be required), and whether you’ll have to pay business rates to your local authority for the use of a portion of your home for business purposes.
- Determine whether you’ll need full VAT registration (or whether you’d choose to register voluntarily) and, if so, register for VAT.
- If you plan to hire individuals, you should set up a Pay As You Earn (PAYE) payroll arrangement. You’ll also have to think about job contracts, statutory pension rights, and a variety of other work-related issues.
- Insurance for your business that is either required or recommended. We’ll look at some of the different types of business insurance that may be necessary or useful in another article.
- If you work in the construction sector as a contractor or subcontractor, you must register with the Construction Industry Scheme (CIS).
- Any cash that may be accessible to the company, such as grants or loans.
Responsibilities regarding taxes
As a sole trader, your business revenue is combined with your personal income. This means that, regardless of whether you’ve had to do so previously, you’ll have to file a self-assessment tax return every year to describe your income and expenses. You’ll additionally have to pay the following to HMRC:
- Class 2 national insurance contributions (NICs) – at a set rate of £3.05 per week in the 2021/22 tax year, unless your yearly profits are less than £6,515; Class 4 NICs – in the 2021/22 tax year, these are 9% of profits between £9,569 and £50,270, and 2% on profits over £50,270.
- You must pay any tax due by the 31st of January following the end of the tax year in question. You can also have to make ‘payments on account’ twice a year, which are essentially advance payments for the current tax year.
If you hire people as part of your sole trader business, you must deduct the appropriate amount of income tax and national insurance payments from their pay and pay them to HMRC on a regular basis. As a result, you’ll need to implement a Pay As You Earn (PAYE) payroll system.
If you’re registered for VAT, you’ll have to submit VAT reports and payments to HMRC on a regular basis.
A sole trader’s other ongoing responsibilities
As a sole trader, you must keep accounting records that adhere to normal accounting procedures and present a true and fair image of your business. However, unlike most other forms of corporate entities, there is no requirement to keep accounts in a particular format or structure.
You’ll need to keep detailed records of your sales and expenses as part of this. When it comes time to file your annual self-assessment tax return, these will come in handy.
There is no requirement to file a confirmation statement or any other filings with Companies House, unlike a limited company. However, you’ll still need to meet criteria that apply to all types of businesses, such as having the appropriate insurance and staying on top of health and safety regulations.