Company Formation

What is a sole trader?

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If you're intending to go it alone, one of the most critical decisions you'll need to make is how to structure/set up your business. You've come to the right place if you need help or advice in learning how to start or form a sole trader business.

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Cora Samantha
Sep 11, 22 · 4 min read
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In this article, we will discuss the fundamentals of operating your own incorporated business, from the definition of a sole trader to the benefits, considerations, and tax obligations. To begin, you must have a firm grasp on the fundamentals – which is where our guide comes in.

What is a Sole trader?

A sole trader/sole proprietor is a self-employed individual who is the sole owner of a business. A sole proprietorship lacks a legal entity distinct from its owner.

You are entitled to any profits earned by your business after taxes are deducted, and you are responsible for all losses. It is critical to remember, however, that the term 'sole trader' relates to the business structure, not the number of employees. While a sole trader operates independently and is self-employed, this does not indicate that he or she manages the business on their own without recruiting employees.

What are a Sole Trader's Responsibilities?

Apart from conducting the business on a day-to-day basis, sole traders are responsible for maintaining records of their sales, expenses, profits, and tax responsibilities, as well as payroll records if they hire employees.

As a sole proprietor, you must maintain copies of critical papers such as receipts, bank accounts, and invoices. These include the annual Self-Assessment tax return, class 2 and class 4 national insurance returns, and quarterly VAT returns if you register for VAT. Apart from the annual Self-Assessment tax return, sole traders are not obliged to register with Companies House or file accounts or other papers. As a sole proprietor, you pay income tax on taxable business profits, not corporation tax.

After you file your tax return for a particular year, you must retain all pertinent papers for five years. That is because HMRC may request to review these, and failure to maintain records may result in a fine.

As sole traders, you are legally responsible for all business debts, and as such, your personal assets may be confiscated to cover business losses.

As a sole proprietor, you must ensure that you have the appropriate insurance in place; this may vary based on the nature of your business and the risks you encounter. For sole traders, the essential insurance coverages include public liability, professional indemnity, and employers' liability (if you have employees).

As a sole proprietor, you are responsible for adhering to health and safety regulations. This can be accomplished by developing a health and safety strategy, getting business insurance, and providing adequate workplace facilities.

If you discover that some of these responsibilities are onerous and you feel the need for help, you can engage an accountant to advise you on how to make sound financial decisions for your company.

When to Register as a Sole Trader?

Even if you work a full-time job and freelance on the side, you may need to register as a sole trader. Carry out this action if the following applies:

  • You earned more than £1,000 in the previous tax year through self-employment.
  • To qualify for tax-free daycare or anything equivalent, you must establish that you are self-employed.
  • You wish to make voluntary contributions to Class 2 National Insurance in order to qualify for benefits.

If you've already made the decision to become self-employed and wish to work as a sole trader, you should register as soon as possible.

Who Can Work as a Sole Trader?

Everyone and anyone. The sole trader business model is applicable to a wide variety of industries, but is likely most prevalent among entrepreneurs who provide services to people and families. As a result, it is not uncommon for providers of specialized services to operate as sole traders. However, different types of businesses, ranging from small stores and manufacturers to online entrepreneurs and self-employed consultants, may operate as sole traders.

Several examples of sole traders include the following:

  • Independent contractors (designers, copywriters, marketers, photographers, and social media consultants).
  • Self-employed artisans (builders, plumbers, electricians, gardeners, and carpenters).
  • Workers in the gig economy (couriers, taxi drivers, delivery drivers, tutors, and nannies).

How to start working as a sole trader?

Operating as a sole trader requires little documentation
HowTo step image

1. To register as a sole trader with HMRC online, you must first register as self-employed and then choose a business name

Note that you need to have earned more than £1,000 in the previous tax year

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