Deciding to become self employed usually involves deciding whether to become a sole trader, set up a limited company or form a partnership. The type and size of your business will be factors in the decision you make.
Becoming a sole trader means that you are in business on your own, and responsible for your business accounts and administration. However, there are numerous benefits to becoming a sole trader, especially if you are not likely to require large amounts of investment or incur huge debts, as you will be personally liable for these.
There are fewer accounting requirements as a sole trader, as you notify HM Revenue & Customs immediately to avoid a penalty charge. You will be required to submit a self assessment tax return on a yearly basis and be responsible for paying your tax bill in a timely manner.
The requirement for yearly accounts is a relatively simple procedure for a sole trader, as a statement of income and expenditure which has documentary evidence provided will be sufficient in a large number of cases. There is no legal requirement for a balance sheet for a sole trader, and minimum accounting knowledge is required. A sole trader has minimum statutory requirements, like not having to register at Companies House, which a limited company has to do. Company accounts have to be completed and filed with Companies House annually, which is time consuming and can be a complex procedure.
A sole trader is much cheaper and easier to set up, with far less paperwork and legal requirements than a limited company in addition to not having registration fees to pay. A sole trader will also keep all the profits, which is the amount left from income after the deduction of all business expenses. Decisions are much easier to make, as you are the person responsible rather than having to consult others about any decisions. A sole trader will have fewer regulations than a limited company, which can make it easier to deal with administration.
The details of a sole trader are kept confidential, in comparison to a limited company which are made public. With less paperwork, fewer statutory requirements and easier administration, becoming a sole trader is often the preferred option. However, there are still legal obligations and relevant deadlines to be met for filing and submission of documents and payment of tax. Discussing the type of business you have with a professional will help you decide whether a sole trader or limited company is preferable.
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