What is a sole trader?
Setting yourself up as a sole trader will mean you are self-employed and will run your own business. You are responsible for any losses your business makes but you also have total control over your business and its profits once you’ve paid tax on them. So how do you decide whether to set up as a sole trader or a limited company? Our simple guide covers some of the key points to consider:
What are the accounting responsibilities of a sole trader?
- Maintain accounting records of all income and expenses.
- Submit a self-assessment tax return.
- Pay income tax on profits.
- Pay class 2 National Insurance contributions of £3 per week if profits are £6,365 or more.
- Pay class 4 National Insurance contributions of 9% of profits between £8,632 and £50,000 and 2% on profits above £50,000.
- Register for VAT if your turnover is over £85,000.
What are the advantages of setting up as a sole trader?
Many freelancers start out as sole traders as it is often the simplest way to structure a new business. You have total control and can make quick decisions without having to consult directors or shareholders. There is a relatively low level of administration involved as you are only obligated to submit a yearly tax return and possibly a VAT return. You do not need to register with Companies House, unlike setting up as a Limited Company, meaning you can maintain your privacy. Your accounts do not have to be audited or made public and you won’t need to submit an IR35. You are also able to withdraw money from your bank account freely.
What are the disadvantages of setting up as a sole trader?
As you are the sole owner you are also responsible for any losses. Unlike a limited company there is no separation between the business and owner. This means that if the business fails and there is debt owed then the money can be recovered from your personal assets, regardless of whether they are connected to the business. Sole traders can also be viewed as higher risk in comparison to limited companies making it more difficult to secure loans from banks and lenders and you cannot sell shares for investment. Running your business through a limited company can also be more tax efficient, especially if your profit goes over a certain threshold.
How do I get started as a sole trader?
To get started you will need to register with HMRC for self-assessment and choose a business name. You can trade under your own name or another name but you must not:
- include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
- be offensive
- be the same as an existing trademark.
There is also a list of “sensitive” words which imply a specific connection or qualification which you should try to avoid unless you have permission to use them. Read more here.
The decision of whether to set up as a sole trader will depend on what is right for your business. At HD Contractor Accountants we have a team of experts happy to help – contact us today.