When you’re starting out it can be hard to know which business structure to choose and know the real difference between being a sole trader or limited company so I thought it would be helpful to outline the main details on being a Sole Trader.
What is a Sole Trader?
A sole trader is a person who runs their own business , usually as an individual. They’re also known as being Self-Employed.
They’re usually trades people such as plumbers, carpenter, hairdressers and driving instructors.
As a sole trader you will be expected to complete a Self Assessment each year also known as your personal tax return. This informs HMRC what happened with you financially over 12 months. You can find our more guidance about Self Assessments here.
There is Government Support for sole traders but no company benefits such as a pension.
Highlights of being a sole trader;
- You can earn up to £1000 without registering as self employed
- Most simple business structure so good starting point
- Personally liable for any debts.
- Need to keep records of sales & expenses from the start
- If sales turnover reaches the threshold, need to register for VAT.
- You submit a Self Assessment Tax Return to HMRC every year
- Self Assessments can be submitted online but you must register in plenty of time to receive your details such as UTR & activation code for your first submission.
- You pay income tax on the profit generated
- Your responsibility to be honest with expenses claimed.
- You need to make separate NI contributions
- You can hire employees (advice/insurance advisable)
- No sick pay, pension etc
- As long as there is cash in the business, you can take it.
- When you take money out of the business, it’s known as Drawings.
- Sole Traders cannot use any version of ‘Limited’ in their business name
- You must keep your records for at least 5 years after the 31 January submission