What is a sole trader? Things to consider and how to get started
September 28, 2021
What is a sole trader? If you’re thinking about starting up a business, there can be many tax implications that can arise if you are not aware of the relevant information. In this article, we are going to be explaining what a sole trader is and the benefits it can have.
Setting up a business can be one of the scariest decisions you ever make, however, if done correctly, it could turn out to be the best decision ever made. To maximise your chances of success for your business a number of decisions have to be made; the main one being the business structure.
What is a sole trader?
A sole trader is seen as the simplest structure for a business, it comes with the least regulatory and accounting responsibility. With no need to register to Companies House, you won’t have to pay corporation tax which can be a huge saving for many, especially if you are a one-man band, it can be a huge positive. Depending on your business size, payroll, paperwork and red tape will also be massively reduced.
Who can work as a sole trader?
Anyone who works for themselves can trade as a sole trader. However, when deciding whether to be a sole trader or a limited company, it’s important to see which structure works best for your business. For example, sole trader structure is often best suited to single business owners who offer a tailored, individual service, such as hairdressers, plumbers, nail artists, electricians, and graphic designers, among many, many others.
Should you become a sole trader?
The sole trader structure usually works best for anyone who works alone and doesn’t currently have the intentions to scale their business, employ more staff, or partner with somebody else to share ownership of the company. If this sounds right for you, then setting up as a sole trader would be the best option for you!
What are the key elements of being a sole trader?
Being a self-employed sole trader can be summarised by the following 10 key elements:
- You run an easy-to-form business;
- You are an individual owner;
- You are in total control of your business;
- You are responsible for your liabilities;
- Your company is easy to dissolve;
- You are not legally separate from your business (more on this below);
- You have flexibility in operation;
- You need to pay tax and national insurance;
- You do not need to display your records on Companies House;
- You work closely and communicate directly with customers.
What do you have to do as a sole trader?
While trading as a sole trader you have few responsibilities. Your biggest responsibilities require you to make national insurance contributions and to pay income tax on the profits your business makes.
You will still need to register with HMRC and pay your tax accurately and on time, and similar to if you trade as a limited company, you may also need to register for VAT if your turnover exceeds £85,000.
In preparation for your taxes, you will be responsible for managing all your monthly accounts and logging all the information correctly. Many sole traders will outsource this to a specialist accountant, such as Pomegranate Consulting. We can take all the stress of taxes off your shoulders so you can deal with what you’re good at.
How do you start trading as a sole trader?
This is easy, to start trading as a sole trader you just need to register with HMRC as the sole owner of your business. You won’t have to go through the stress of registering your company on Companies House as this is just a requirement for Limited Companies.
When you have registered with HMRC as a sole trader, HMRC will send you a unique tax reference code (UTR) which you will then use for your self-assessment tax return. A UTR number can take up to 10 working days to be delivered, in the meantime, you can still work as you only need this for submitting and paying your income tax.
Registering as a sole trader can be daunting, but it doesn’t need to be. Pomegranate Consulting is here to help you through this and give you a helping hand. We can manage your monthly bookkeeping and offer free advice along the way. Additionally, we can submit your tax and VAT returns for you to avoid last-minute panicking or late-night spreadsheet organizing. Get in touch with us on 0161 974 0735.