What is Sole Trader & How to Register?

Everyone dreams of at one point working for themselves. This has seen several people only working up to a certain age then venturing into private practice. Currently, the number of self-employed populations in the UK stands at approximately 5 million. This is quite an increase from the 3.1 million independent population in 2000. The growth has been considerably consistent in all the major economic sectors and both the genders.

A sole trader is one of the most popular forms of self-employment. This in-depth guide gives you all the information you need to know about the sole trader. You will learn what the business model entails, company registration, set up, and how it compares to a limited company.

Let’s get to it.

The main benefit that comes with working as a sole trader is the complete control over every other aspect of the business. Having the authority means that you don’t have to consult any other party hence faster decision making. The control also means you are responsible for the growth of the business to your liking.

A sole trader set up comes with a competitive advantage. The ease in effecting changes means you react faster to customer needs. You also interact with the customer directly to understand exactly what they want. The personalized service is also excellent for customer experience.

The other advantage that comes with running a sole trade is the ease of set up. Starting a sole trader generally requires a few registration forms and procedures compared to other business units. The ease in the setup also comes as a result of low set up and operational costs.

Running a sole trade comes with considerably lower tasks. It comes with lesser accounting and tax engagement that makes ideal for those who don’t want all the hustle of running a big company. Not only do you get to spend less time on the operations, but you also save money on the lesser tax obligations.

Lastly, given that you are the sole custodian of your company’s books and details, you can protect your privacy as much as you like.

As much as a sole trader comes with several advantages, it also has its fair share of cons that you need to understand. The primary concern is personal liability. The failure of your business puts your income and other assets at risk of covering for the liabilities. The responsibility is also unlimited, which means everything you own is at risk.

The other issue that comes with running a sole trader business in about limited financing as most financial institutions are unwilling to fund this business set up. You need to have a stellar credit history and income ratio to get a loan.

While it might seem all fun running the business by yourself, you cannot be an expert in all aspects. You might struggle to deal with the sides where you are less qualified, leading to business failure. Also, you are never assured of the business continuity in case you die or unable to operate the business anymore.

These disadvantages are some of the reasons why several entrepreneurs opt for limited companies.

Compared to any other business, registering as a sole trader in the UK is quite easy. Before you register your business as a sole trader, use the Employment Status Indicator to check if your work qualifies as self-employment. If it qualifies then proceed to register for a business account through the gov.uk.

The only concern that comes with registering as a sole trader understands if it is the best option for you. Sole trader business is excellent for anyone starting in the business world. It is an excellent option for anyone getting paid for offering services. You also need to register as a sole trader if you make and sell items for profits or earn commissions from your sales.

Now that you have you are ready for registration, inform the HMRC of your intention to form a sole trader outfit. For those who have filed returns before, you need your 10-digit Unique Taxpayer Reference (UTR) for the registration. Otherwise, if you have never filed tax previously, HMRC will send you the codes within ten days through the post. The registration does not come with any form of certification. You also don’t become a part of a database that people can look you up on.

The main benefit of registering as a sole trader is to align your tax assessment. A sole trader comes with a tax allowance that allows you not to pay taxes when you earn less than £1000. The registration is what demonstrates your intentions to send in your self-tax assessment report. You have to send in the assessment report before the 5^th October of the business’ second year.  For example, if you register your business in the tax year 2019-2020, you have to fill your tax assessment report in before the 5^th October 2020. Failure to submit your evaluation comes with consequences like possible fines.

Starting a sole trade is one of the easiest business options available for the self-employed. Unlike the other business entities that require you to have a unique name, a sole trader does not need any specific names. Given there is no public scrutiny or any other legal obligations allow you to choose any name of your choice. Selecting the name of your choice is time and money-saving. You what have to pay for the name search or wait for the approval.

Starting the operations as a sole trader is another crucial benefit that you accrue wit the business model. You don’t need any expertise or experience in your area or trade. The setup, therefore, is quite easy.

One of the most recurring concerns among sole traders is the possibility of employing. Well, as long as you need extra help in your business, you can always hire. The law allows you to hire based on your terms, and the number of employees depends on your business needs. Once you have employed anyone, you have to collect their national insurance contributions details from remitting all the payments on time. You also have to develop a Pay as You Earn payroll to ensure you remit the requisite taxes.

To ensure the proper operation of your firm, you need to keep detailed financial records. You must record all the income, expenses, and any financial transactions. These details come in handy when filing your tax returns. It determines your allowance, the contributions and the amount of tax you need to pay.

Even though you set up your business as a sole trader, the nature of your business can change fast due to increased income and other factors. The sole trade is quite flexible such that you can easily transform your business into a limited company.

Other than setting up as a sole trader, a limited company is the other popular small business structure in the UK. Unlike a sole trader where the owner is part of the business, a limited company is a different business entity with the owner. Setting up the limited company requires a board of directors and shareholders, even when you operate it by yourself.

Both of these business structures come with different pros and cons that you have to consider before settling on the most ideal one for you. Some of the most common differences between a sole trader and limited company are;

As a sole trader, you are responsible for National Insurance and submitting personal self-assessment returns every end of the tax year. Failure to submit these details comes with possible fines. Limited companies, on the other hand, are responsible for corporation tax charged on their profits. You have to pay the tax within the first nine months of the end of your financial year.

Apart from the corporation tax, the limited company also comes with obligations to submit the other company income details to HMRC by filling a CT600 form. The directors must fill a P11S that outlines the benefits and expenses provided by the company. Besides, the director must also include a personal assessment form detailing their income and allowance. For public information, the limited company has to keep detailed financial year-end income statement and VAT returns.

A sole trader is quite flexible when it comes to paying salaries. As a sole decision-maker and legal entity, you can easily withdraw money from the business as per need basis. Limited company, on the other hand, comes with a defined remuneration procedure. In most cases, directors are paid based on company earnings. The salary is subject to tax as set by HMRC.

For most cases, it provides for a personal allowance limit that determines the obligations and contributions based on different thresholds. In both the sole trader and limited company, you have to keep accurate records of all the withdrawal in salaries for proper record keeping.

If you are looking to keep your business information, then you are better off with a sole trader. It has no legal obligations to reveal the financial, leadership, accounts or any other information to the public. For limited companies, the law provides that they share the company’s detailed report with the public. Failure to submit these details can lead to a loss of operations.

Given the unlimited liability, sole trader is more like dealing with a person instead of a business. Most contractors and other agencies find it hard engaging with the sole traders due to the risk of failure to honour deals. Limited companies with comprehensive management and director information mean assured credibility. The available public records also ensure that one can assess the company before agreeing to partner.

Most people, therefore, prefer working with limited companies compared to sole traders.

With the unlimited liability, the business owner operating as a sole trader is responsible for any legal obligations facing the business. Your assets are also likely to get affected by offsetting liabilities. For limited companies, directors have the constitutional mandate to manage and control the industry. The directors are likely to be held accountable for the failures of the business.

Now that you understand all the significant differences between a sole trader and limited company, it might seem dreary settling on the best. Given that both come with their benefits and disadvantages, it all comes down to how you seek to run your business. If you are looking for complete control and small-scale operations, you are better off as a sole trader. Given the directors and public scrutiny, a limited company is excellent if you wish for large scale operations. The limited liability also makes it a great option if you are seeking security.

In most cases in the age restrictions is mostly 18 years. Well, this is different when it comes to paying taxes for the sole trader. Give that you can start operating as a sole trader at 16 years, you are also expected to begin remitting the fees at the same age. The only exemption that comes when you are younger than 18 years is the level 4 tax national insurance contributions. When filling the registration forms with the HMRC, you will tick the exemption.

The changes have been effected in recent updates, as before, most underage would receive waivers even on the level 2 national insurance contributions.

Running a sole trade as an individual means that you don’t have to create any new bank account when setting up your business. For the business good, you need to set up a separate bank account. Running that different account means that you can easily track company income and expenses.

Some times you might also get higher taxes than you have anticipated. With the separate bank account, you can easily have a fallback place. Once you have the bank account, consider putting away around 25% of your income for the needed security. Failure to meet any other company needs like the tax and other debts can be detrimental to your business.

A sole trader is one of the most popular business entities in the UK. The ease in ease set, registration and operations make it a variable option for anyone starting in the business world. You also don’t need any special skills or qualifications to start your trade.

Even though you have started as a sole trader, you can still opt for other business options after some time. Once you have the required initial amount, the board of directors and other provisions, feel free to change your sole trade into a limited company.