One of the first decisions most new business owners make is around what type of business structure they should use. Each option has its pros and cons depending on your personal circumstances and how you want to do business, so what’s special about being a sole trader? To help you weigh up your options as a self-employed sole trader, we’ll go over the potential advantages and disadvantages.
Sole traders are self-employed people who own and run their business without any legal distinction between themselves and the business. As a sole trader you ‘are’ the business, and this has an impact on your responsibilities and the way you pay tax.
What are the advantages of registering as a sole trader?
Lots of people decide to run their self-employed business as a sole trader, and it’s one of the most popular structures in the UK for several reasons.
It’s easy to register as a sole trader
One of the benefits of being a sole trader is that registering the business is incredibly straightforward. You’ll need to register as a sole trader for Self Assessment so that HMRC know you’re self-employed, but beyond that you’re ready to go.
You won’t need to register with Companies House like a limited company does. Sole traders don’t even need a separate business bank account, though it’s good practice to have a separate account for your business transactions.
You’ll be registered under your own name because you are the business, but you can choose a different name to trade under. Just remember that you’ll still need to include both names on anything official, such as customer invoices.
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There isn’t quite so much admin
One of the benefits of operating as a sole trader is that you’ll normally only need to submit Self Assessment tax returns so that HMRC can work out how much tax you owe (or if you’ve paid too much!).
Limited companies can be a bit more complicated, with shares to issue, directors to appoint, and extra reporting requirements to think about.
Just remember that like any type of business, sole traders still need to have robust bookkeeping processes in place. It’s an essential part of submitting accurate tax returns, and you can use your financial data to help you make plans and more effective decisions.
Sole traders don’t have to share information publicly
As a sole trader you don’t need to register your business with Companies House like a limited company does, so you won’t appear on the public register. Your personal details and business information are kept private – which might be particularly good news if you’re running a side-hustle in your spare time and don’t want your boss to know!
It’s easier for sole traders to pay themselves
There’s no separation between you and your sole trader business, so you can simply keep any profits for yourself. This can have its downsides though, because you’ll pay tax on your profits whether or not you take them out the business. There might also come a point where it’s more tax efficient to switch your business over and operate as a limited company instead.
Just because you’re a sole trader, it doesn’t mean that you need to do everything yourself. Sole traders can still employ other people if they want to (and of course, you can still ask for professional help from your accountant when you need it!).
What are the drawbacks of being a sole trader?
Some aspects of being a sole trader might be a disadvantage depending on your circumstances, or even on the nature of your business.
You’ll be personally liable for any debts
Without that legal separation between you and your sole trader business, you’ll be personally liable for any debts or other issues that come up. If the type of work that you’re doing is particularly high-risk in terms of finances, then operating as a limited company will help to protect your personal assets if things do go wrong.
It might be less tax efficient
Sole traders pay tax on the profits that they make, whether or not they actually take money out of the business for themselves. Whilst this does mean that it’s simpler to pay yourself, it also means you’ll need to pay income tax on everything.
In a limited company the business pays Corporation Tax on its profits, and then you can choose to take a combination of a salary and dividends if you want to. Paying yourself like this can actually be far more tax efficient, because dividends are subject to a lower rate of tax than other types of income.
You may find it more difficult to get finance or funding
Sole traders are just as entitled as anyone else to apply for business loans, start a crowdfunding campaign, or look for other forms of financial input. It can be a bit trickier if you’re looking for investment though.
As a sole trader you can’t offer shares in your business like a limited company can, so it’s more difficult to attract potential investors.
It might be harder to pitch for particular jobs
Operating as a limited company can give the impression of a more stable and established business. There’s also more accountability because your information and business records are available through Companies House, where any interested (or simply nosy) party can take a look at you. This means that you might find some clients and suppliers will only work with limited companies, particularly if you’re applying for tenders.
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A creative content writer specialising across business, finance and software topics. I have a love for all things writing, and creating engaging, easy to understand content that helps everyday people! Learn more about Rachael.