When you start a business, it usually involves deciding whether you want to be a sole trader, form a partnership or form a limited company.
Each has advantages and disadvantages, which can make it much harder todecide what is best for your situation. A sole trader is in business alone. While they may still choose to have employees, the person who makes all the decisions is the sole trader.
A sole trader has relatively simple business records, with all income being taxable. Any eligible allowances, tax reliefs and expenses are deducted from the total income to leave profits, which will be liable to income tax at the appropriate rates. A sole trader has to submit an annual tax return through the self assessment system which will include all income, any employment and other types of income, such as untaxed interest and pensions. All expenses, allowances and tax relief should also be claimed on the tax return. If you file your self assessment tax return online, the system will calculate how much tax is owed for that year and you can pay the amount owed online.
If you file online, the deadline is 31st January, which is the date that any outstanding tax for the year has to be paid.
Unlike a limited company, a sole trader may keep all business information private and can run the business however they like. Starting a business as a sole trader is a quick process, using just a simple registration form which must be sent to HMRC or even online registration. There is no cost to register as a sole trader. If you decide at a later date that you want to become a limited company, this can be easily arranged. As a sole trader, any profit made is yours to keep without having to consider shareholders and partners.
Becoming a sole trader means that you make all decisions and can run the business in the way which best suits you. You don’t have to seek the opinions of others before making a decision. You also decide the hours which you work. This may be dictated by the type of work you do, but ultimately you can increase or reduce hours which may be dependent on the business profit at that time.
Sole trader and HMRC
Although you will have relatively simple accounting requirements as a sole trader, you will still have responsibilities. However, these are straightforward and include registering with HMRC as self-employed, which must be done as soon as possible, and filing an online tax return and accounts each year. A statement of income and expenditure will usually suffice for a sole trader, along with documentary evidence. A limited company has to register with Companies House and file company accounts and tax return each year, which is a complex procedure.
Aside from financial advantages, a sole trader can often develop a personalised approach to their business, improving customer service and building a dependable reputation. Although a limited company can often offer the security of a large corporation, a sole trader may be perceived as more reliable and likely to provide a first class service to customers.
Managing any business is a time consuming and arduous task which often results in dealing with administration tasks when you have finished work for the day. Although a sole trader has minimal accounting requirements, there are still deadlines and regulations to be adhered to. Missing a deadline for filing online or making a due payment can result in large penalties plus interest payments. Outsourcing to a professional may me be an option for a sole trader to consider.
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